Ben, you are getting your inflation wish, now back off
Steve Cook on Disciplined Investing


Have You Seen This?


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Have You Seen This?

The Market

    Yesterday’s pin action (down big at the open, closing flat for the day) was a mirror image of Monday’s (up big on the open, closing flat on the day).  The Averages (DJIA 11169, S&P 1185) remain within their current trading ranges (9645-11257, 1042-1220) and my hypothetical re-setting up trend (10417-13709, 1090-1494).

    Volume was low; breadth weak; and while the VIX was up again, it is still well within the boundaries of its down trend. 

I observed in last week’s Closing Bell that we had started to see some churning in the Market over the last week or so.  Clearly, Monday and Tuesday were more of the same; and as I also noted, that is not an encouraging sign that prices are heading higher.  That probably means that stocks are just as likely to test support (10725/1149) as they are is resistance (11257/1220).

    Bottom line: the question is, is the directionless volatility of the last two weeks a pause in which buyers regroup before an assault on 10725/1220 or a sign that they have simply run out of steam?  I won’t repeat all the technical factors (see last Saturday’s Closing Bell) that argue for the former, but they do weigh in favor of higher prices.  That said, I am taking no action until I see the proof.

    Corporate insiders continue to cash out (medium):

    A great chart for the bears:


    Yesterday’s economic data was generally up beat (see below) and was supportive of our current economic forecast; though none of those indicators were ones that investors have been particularly focused on. 

However, at the moment, I don’t think that the economic data means diddily.  I do think that the uncertainty surrounding (1) the outcome of the elections, (2) what changes in economic policies that could or could not occur as a result, (3) the magnitude of QE2, (4) its potential impact on the economy and (5) the possible problems embedded in foreclosure-gate, is palpable.  I suspect that explains the recent churning pin action.  That, in turn, probably means that, barring some major exogenous event, the Market will remain in limbo until late next week.  

    More on foreclosure-gate (medium):

    Pursuant to items (3) and (4) above, there are a couple of very telling developments this week that speak directly to the QE2 issue.  Number one is the Treasury TIPS financing yesterday.  In yesterday’s Morning Call, I linked to an article on the meaning of why investors would accept a negative real yield.  The short answer is concern about future inflation.  Number two, in the last couple of days several companies have reported earnings below expectations due to escalating raw material costs (Starbucks, General Mills, Kimberly Clark). 

My recollection is that the primary justification for QE2 was to stimulate inflationary expectations.  Well, it appears that the recent obvious spike in commodity prices is starting to show up in the real economy.  In other words, (not to be repetitious), we don’t need QE2.  We already have rising inflationary expectations.  If Bernanke goes full steam ahead with quantitative easing, in my opinion, it will end badly.

    Jeremy Grantham on QE2 (medium):

    And Scott Gannis (medium):

    Finally, lest we get too focused on our own issues, Greek interest rates have soared this week suggesting that another round of sovereign debt worries are about to surface.

    Bottom line: nothing in the economics or the politics argues for any meaningfully higher Valuations for equities.  That said, there is a prospect for sufficient change in the next 7 to 10 days to alter this conclusion.  We just have to wait to see how powerful the forces of change are.  In the meantime, my cognitive dissonance remains that stocks spike up on technical factors and in the absence any positive fundamentals.

    The latest from David Rosenberg (medium):

    Buffett’s favorite valuation metric (short):

    Update on revenue ‘beat’ rate:


   This Week’s Data

    The International Council of Shopping Centers reported weekly sales of major retailers rose 0.3% versus the prior week and 1.9% versus the comparable period lat year; Redbook Research reported month to date retail chain store sales up 0.3% versus the similar timeframe in September and up 2.8% on a year over year basis.

    October consumer confidence came in at 50.2 versus estimates of 51.0 and 48.5 recorded in September.

    The August Case Shiller home price index was off 0.2% versus unchanged in July.

    Weekly mortgage applications rose 3.2%.

    September durable goods orders were reported up 3.3% versus expectations of a 1.0% gain; however, ex transportation, the index fell 0.8%.


    The UK GDP came in almost twice expectations.

    ASA staffing index holds steady:

    International air traffic was mixed in September:

    Paul Tudor Jones gives a well reasoned argument for protectionist measures against China (long but today’s must read):

    And this much shorter version (medium):


The bias of bureaucrats (medium):

Posted 10-27-2010 8:21 AM by Steve Cook