Ireland and China overshadow everything
Steve Cook on Disciplined Investing

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The Market
    
    Technical

    That was fun.  The indices (DJIA 11023, S&P 1178) cleared up any questions that there may have been about the current Market trend.  The size of yesterday’s decline results in the confirmation by our time and distance discipline that stocks have broken their short term up trend, are clearly in a 9645-11257, 1041-1220 trading range and raises the question of the validity of the March 2009 to present up trend (10576-14041, 1108-1525).  For the moment, I think we assume that stocks have returned to their trading range.  Areas to watch short term are the upper boundary of the trading range (11257, 1220) on the upside and the 10725, 1149 support level on the downside.

    Volume rose; breadth as you might imagine was horrible; the VIX was up again and like the Averages, the time and distance discipline on its recent down trend has run its course.  That means the VIX is back in a trading range which is less positive than being in a down trend.

    GLD was also off again.  Our time and distance discipline is still operative in gold’s case.  But given everything else is busting their trend lines, it is probably not unreasonable to assume that it too will successfully challenge its current short term up trend. 

    Finally, I checked our internal indicator.  In a Universe of 162 stocks: 68 remain well within an up trend beginning in March 2009; 94 are not.  However, of the 94, 9 really fit in the ‘too close to call’ category and 7 are stocks that had been in an up trend but broke that trend in the last couple of days.  All in all, that suggests that this Market remains decently strong.  So while it may not be ready to quickly reverse and attack 11257, 1220, there is nothing here to indicate big down side.

    Bottom line: I stated repeatedly over the last couple of weeks that if stocks broke out of their existing trading range to the up side that it would cause me considerable cognitive dissonance.  In the end clearly that didn’t happen.  While nothing has really changed with respect to all those  positive technical factors that I have listed on previous occasions, they obviously don’t sufficient power to drive prices beyond the upper boundary of  a seven month trading range--at least not yet.  The technicals are now back in sync with the  fundamentals; and prices are in the top quartile of their trading range--so I see little need for action.  However, I am concerned about our position in gold because of its size; if we get further weakness, I may trim it for the sake of being overly prudent.
  
    The latest from Trader Mike:
    http://tradermike.net/2010/11/november-16-2010-stock-market-recap/

   Fundamental
      
    Headlines

    Once again the economic news was decent (PPI better than expected, retail OK) but no one cared.  Investors continue to focus on:

(1)    the EU sovereign debt problem: Angel the entire continent seems to be arguing about whether or not Ireland needs to accept a bailout, Beer the world is speculating about which EU country will be the next to need help and Coffee the Austrians are now saying that they won’t pony up for their share of the Greek bail out.  Not to be repetitious, but this is not going to end well.  That said, investors are delivering to the Europeans the same message that the US electorate just delivered to its illustrious leadership--you don’t have a credit card with no spending limit.  In the end, this will hopefully lead to more responsible government; but in the interim, there will  be some pain.  That said as I noted earlier, I have attempted to factor this into our Models.  I may be way off in my assumptions; but until we get additional clarity, there is really nothing to do but watch.

For the pessimists (medium):
http://www.bloomberg.com/news/2010-11-16/euro-dominos-will-fall-until-currency-is-split-commentary-by-matthew-lynn.html

      And (medium):
      http://www.minyanville.com/businessmarkets/articles/ireland-economy-ireland-government-government-bailout/11/10/2010/id/31053?camp=featuredslidealso&medium=home&from=minyanville

(2)    the prospect for tighter Chinese monetary policy: there probably will be policy moves; however, as I understand it, most of the Chinese inflation is in Angel real estate--which the government has already taken steps to slow down.  So there is no new news here, and Beer food which can be dealt with through targeted measures versus a macro policy that will kick the entire economy in the teeth.  In other words if my understanding is correct, this more apt to be a hiccup than a stomach ache.

There are several other issues that need to be mentioned:

(1)    foreclosure-gate.  I still have no idea regarding the magnitude of this problem; but it is getting increasing attention.  And the more we know, the worse it seems to get.

Don’t underestimate the foreclosure-gate problem (medium):
http://www.ritholtz.com/blog/2010/11/dont-underestimate-fraudclosure/

     And (medium):
     http://www.zerohedge.com/article/state-ags-and-banks-prepare-fraudclosure-settlement

(2)    Tiny Tim [jerk off] and Dick Durbin [moron] said yesterday that the administration doesn’t support extension of the Bush tax cuts.  This is likely nothing more than bobbing and weaving to appease the progressive base.  But the headlines bring anxiety; and at this moment, investors could do with less of that.

I laughed at this, but it is not funny (medium):
http://www.zerohedge.com/article/bush-tax-cut-extension-doa

(3)    the one bright spot was another move by republicans toward monetary/fiscal sanity.  They are now floating the idea of reducing the Fed’s mandate from insuring both full employment and low inflation to simply low inflation.  Like so much of what is going on in Washington these days, this notion is in its infancy.  But it is a start.

Bottom line: stocks are near Fair Value.  The good news is that the globe is trashing QE2, the Chinese are acting like adults and attempting to control domestic inflation,  the bond vigilantes are slowly but surely imposing fiscal discipline on a soft and profligate Eurobureaucracy and the tea party republicans are forcing the hand of the Washington elite.  Any and/or all of these may be pain inducing short term but our Economic Model already assumes a miserably slow recovery; but long term they offer the prospect of returning to higher rates of secular economic growth--and that would prove a huge positive that would in turn influence the discount factor that investors apply to otherwise disappointing earnings.

    The bad news is that Obama, Tim, Nancy, Harry and Ben still apparently don’t get it; and the question is how much damage will they do before epiphany or termination occurs?  We also still don’t know the scope of foreclosure-gate; so it will cast a shadow of uncertainty until we get some clarity.

    None of the above induces me to alter our Valuation Model.

Economics

   This Week’s Data

    The International Council of Shopping Centers reported weekly sales of major retailers down 0.1% versus the prior week but up 3.4% versus the comparable period a year ago; Redbook Research reported month tot date retail chain store sales up 0.1% versus the similar time frame last month and up 2.7% on a year over year basis.

    The October producer price index (PPI) came in up 0.4% versus expectations of up 0.9%; core PPI was reported down 0.1% versus estimates of up 0.2%.
    http://scottgrannis.blogspot.com/2010/11/inflation-still-alive-and-well-at.html

    October industrial production was unchanged versus forecasts of +0.3%: capacity utilization came in at 74.8 versus an anticipated 74.9.
    http://scottgrannis.blogspot.com/2010/11/manufacturing-output-continues-to.html

    Weekly mortgage applications fell 14.4%.
    http://www.calculatedriskblog.com/2010/11/mba-mortgage-purchase-activity.html

    The October consumer price index (CPI) rose 0.2% versus expectations of +0.3%; core CPI was unchanged versus estimates of up 0.1%.
    http://econompicdata.blogspot.com/2010/11/cpi-tame-in-october.html

    October housing starts plunged 11.7% versus forecasts of a 1.6% decline’ building permits were up very slightly (0.05%) versus an anticipated increase of 2.3%.
    http://www.calculatedriskblog.com/2010/11/housing-starts-decline-in-october.html











Posted 11-17-2010 8:19 AM by Steve Cook
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