Waiting for direction
Steve Cook on Disciplined Investing

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Have You Seen This?


The Market
    
    Technical

    Despite some volatility, the indices (DJIA 10298, S&P 1092) closed basically unchanged (DJIA +5 points, S&P -3 points) leaving them solidly within their trading range (9830-11257, 1042-1220).  Both approached the 10210, 1084 support level but bounced.

    Volume picked up a bit and breadth improved slightly.  The VIX rose fractionally, leaving it below the support turned resistance level and the short term down trend off the May high.

    Bottom line: I continue to wait for the level that investors are prepared to step in and buy.  Yesterday’s pin action was a positive sign that the 10210, 1084 level may well provide that necessary support.

    For the bulls amongst you (short):
    http://tickersense.typepad.com/ticker_sense/2010/06/this-market-is-stronger-than-you-think.html

   Fundamental
        
    Headlines

    A horrendous May new home sales number (see below) got the day off on a sour note.  Later in the day following the conclusion of its regular FOMC meeting, the Fed left rates unchanged and altered the language of the accompanying release to read a bit more soberly.
    http://scottgrannis.blogspot.com/2010/06/fed-remains-in-reactive-mode-which-is.html

    In the end, the Market took both news events with equanimity.  With respect to the housing data, investors have known for some time that the expiration of the home buyers’ tax credit would negatively impact sales; and after the poor May existing home sales reported earlier this week, you would have had to be blind, deaf and dumb not to expect lousy new home sales.   

    As far as the Fed statement goes, I have been stewing over the lack of consistency in the economic data for the past couple of weeks.  So again, a more guarded assessment of economic activity is not a surprise.

    Bottom line: the evidence continues to suggest that either I jumped the gun in raising the near term growth rate of the economy or the economy has bumped up against the secular restraints to long term growth sooner than I expected.  Before I concede the point, I would like another month’s worth of data.  After all with the multitude of stimulus packages running out in April/May, there was sure to be a hiccup.  Nevertheless, as I stated in yesterday’s Morning Call, that is focus now with respect to changing or sticking with our 2010 forecast. 

That said, my forecast for the long term secular growth rate of the economy never changed; it was only about  how fast the economy got there.  So the closer we get to discounting 2011 results, the less it matters if or how I was wrong.  To be sure, I altered the assumptions for 2010 in our Valuation Model which resulted in a change of about 5% in Year End Fair Value.  I may have to adjust that again; but given the volatility of late, that may be more mental masturbation than anything else.

The important thing to focus on is whether or not the economic headwinds that we have been discussing ad nauseum for that last month have had a sufficient impact to push the economy into a double dip.  At the moment, I don’t think that has occurred; but if it has, then it will almost surely be reflected in stock prices sooner rather than later.  Indeed, it would appear that Market forces are grappling with that issue presently.  As I noted in the technical section, I await Mr. Market’s judgment.

    The impact of high frequency on the recent 1000 point DJIA ‘flash crash’ (this is a long piece; but all you need to read is the summary at the beginning):
    http://www.zerohedge.com/article/how-hft-quote-stuffing-caused-market-crash-may-6-and-threatens-destroy-entire-market-any-mom

Economics

   This Week’s Data

    May new home sales plunged 40% versus expectations of a 20% decrease.
    http://www.nakedcapitalism.com/2010/06/worst-home-sales-numbers-ever.html

    Barry Ridholtz on housing (medium):
    http://www.ritholtz.com/blog/2010/06/2nd-leg-down-in-housing/

    Weekly jobless claims fell 19,000 versus expectations of a 7,000 decline.
    http://www.calculatedriskblog.com/2010/06/weekly-initial-unemployment-claims_24.html

    May durable goods orders dropped 1.1% versus estimates of a decrease of 1.5%,
   
   Other
 
    Nouriel Roubini on the Chinese floating the yuan (medium):
    http://allamericaninvestor.blogspot.com/2010/06/roubini-what-flexible-yuan-means-for.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+AllAmericanInvestor+%28All+American+Investor%29&utm_content=Yahoo!+Mail

    The latest on EU sovereign debt problems (short):
    http://www.zerohedge.com/article/portuguese-bank-borrowings-ecb-more-double-may-hit-all-time-record-%E2%82%AC358-billion

    The index for temporary staffing/contract work (short):
    http://mjperry.blogspot.com/2010/06/asa-staffing-index-at-82-week-high.html

    The Europeans are following through with their promises of fiscal reform (short):
    http://scottgrannis.blogspot.com/2010/06/its-about-time-austerity-is-new-fashion.html

    A great analysis of why banks aren’t lending (medium and today’s must read):
    http://www.ritholtz.com/blog/2010/06/failure-to-understand-the-issues-leads-to-misguided-legislation/

Politics

  Domestic

    Another jim dandy proposal from our elected representatives (short):
    http://www.zerohedge.com/article/barney-frank-wants-have-banks-and-hedge-funds-pay-assistance-homeless-jobless-fund-next-stim

    Columbia’s economy is booming; its citizens are buying lots of ‘stuff’.  Where is the US/Columbia free trade agreement? (medium)
    http://mjperry.blogspot.com/2010/06/colombias-rags-to-riches-success-story.html

  International War Against Radical Islam

    Is the US becoming more isolationist? (long):
    http://townhall.com/columnists/TonyBlankley/2010/06/23/obama_the_isolationist









Posted 06-24-2010 8:11 AM by Steve Cook