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Steve Cook on Disciplined Investing

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Economics

   This Week’s Data

    Weekly mortgage applications fell 7.6%, the second decline in a row.

    Weekly jobless claims rose 11,000 versus expectations of 1,000 increase.
    http://www.calculatedriskblog.com/2009/10/weekly-unemployment-claims-increase.html

    Summary of yesterday’s release of the Fed’s Beige Book (short):
    http://www.calculatedriskblog.com/2009/10/feds-beige-book-stabilization.html

   Other

Politics

  Domestic

  International War Against Radical Islam

The Market
    
    Technical

    The indices (DJIA 9949, S&P 1081) remain within their March to present up trend (9722-11659, 1060-1300).  Volume picked up a bit.  The VIX spiked up and closed above the recent low (support level); however, it is still well within the down trend off the October 2008 high.

    Comparing past rallies to the one we are in (charts):
    http://www.ritholtz.com/blog/2009/10/comparing-1974-75-and-1938-39-vs-2009/

    Thoughts from TraderFeed (short):
    http://traderfeed.blogspot.com/2009/10/price-levels-and-market-breakouts.html

    And Trader Mike:
    http://tradermike.net/2009/10/october_21_recap_a_key_reversal_day
   
   Fundamental
   
    October’s Welsh Investment Letter (long):
    http://www.ritholtz.com/blog/2009/10/welsh-october-letter/

    Sector ‘beat’ rates (chart):
    http://bespokeinvest.typepad.com/bespoke/2009/10/sector-beat-rate-this-earnings-season.html

       Headlines

    Yesterday’s revenue scoreboard: US Bancorp reported better than expected EPS and revenues, as did Wells Fargo, as did Altria, as did Eli Lilly, as did Morgan Stanley, as did Northrop Grumman, as did Amgen, as did eBay; Freeport McMoran beat profit estimates but not sales forecasts; Boeing had both disappointing earnings and revenues, as did Air Products.

    So we had day number two in which the majority of reporting companies had both profits and sales better than expected but their stock prices were down; and as we did on Tuesday night, we have to again challenge the revenues-are-key (to sustaining the upward momentum of the Market) thesis.  In yesterday’s Morning Call, I deflected the challenge to that thesis on the grounds that (1) there was some poor economic news [housing starts] and (2) the dollar rallied and, at least for the last couple of months, there has been a pretty tight inverse correlation between the dollar and stock prices [dollar down, stocks up and visa versa]. 

Now Wednesday morning’s rationalization doesn’t work so well because while there was some bad political news (pay czar is going to limit pay for executives of firms receiving TARP funds), (1) there wasn’t any economic news that I would interpret as negative [oil was up which is potentially a negative; but to date, investors seemed to have liked rising oil prices] and (2) the dollar was down [which should have meant that stocks would be up].

  However, I wasn’t willing to accept that dramatic late day sell off as random, so I went looking for some other explanation; and I found one among my trader friends--it had nothing to do with fundamentals of any sort, they said; rather there were some large program trades that drove stock prices down.  And they all predicted a rebound today.

So my choices are to accept my buddies’ explanation at face value and go on my merry way or ratchet up by nervousness level.  I choose the latter, which leaves me noodling over questions like: will revenues-are-key, if they continue to be positive, drive the Market higher?  or have I been joking myself about the revenues-are-key thesis when it really has been, is and will continue to be the (declining) dollar that will drive stock prices up? or are revenues-are-key and dollar weakness complementing each other? or have I been really joking myself--random walk is alive and well and I am wasting my time worrying about revenue ‘beats’ and the dollar?

    I, of course, don’t have a clue as the answers to any of the above.  But it is the asking that keeps us alert and hopefully keeps us from getting blindsided.  For the moment, my concerns are assuaged by the fact that there has only been two days of cognitive dissonance and the Averages are still in a clear up trend.  Nevertheless, I hate cognitive dissonance; it worries me when my hypothesis about what is driving the Market keeps getting invalidated by the Market, even if it is for only two days.  Time to be very alert. 

    Doug Kass’ take (long):
    http://www.thestreet.com/story/10614831/1/kass-the-earnings-season-racket.html





Posted 10-22-2009 8:27 AM by Steve Cook