9/19/08

Economics

Recent Data

August leading economic indicators fell .5% versus expectations of a .2% decline and -.7% reported in July.

The September Philadelphia Fed manufacturing index came in at 3.8 versus estimates of -10.7 and the August report of -12.7. Even though this is a secondary indicator, it is first good news out of the industrial sector in a couple of weeks.

Other

AIG and ‘mark to market’ accounting:

http://online.wsj.com/article/SB122169320421449849.html

Politics

Domestic

More on the mischief currently going on in the Senate:

http://www.cato.org/people/jeff-patch

International War Against Radical Islam

The Market

Technical

Chart porn on yesterday’s turnaround:

http://traderfeed.blogspot.com/2008/09/anatomy-of-market-turnaround-tracking.html

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Well, it looks like yesterday was the day for me to be wrong for being too defensive. Both the DJIA and S&P bounced hard yesterday afternoon following the news that the Treasury was presenting a plan to Congress (last night) for the creation of a Resolution Trust type entity. Both indices closed above their July 2008 lows. As you know I am not a strict technician and I believe that trading one day below a support level no matter dramatic (Wednesday) followed by a bounce back above it (Thursday) doesn’t count as a break below it. This kind of pin action looks an awful lot like a selling climax. In addition, both volume and the volatility index spiked, providing additional evidence that Wednesday and Thursday marked a selling climax.

I hasten to add that doesn’t mean that we are in bull market, Indeed both indices are still well within the two downtrends about which I constantly talk. At the moment, I am assuming the stocks have made the technical bottom but will still struggle to establish a simple trading range. As I note below, maintaining a healthy cash position (15-20%) still seems reasonable; but our Portfolios posture are less defensive.

Fundamental

I begin with a quote from yesterday’s Morning Call: ‘But necessity is the mother of invention; and just like we saw no way out of an AIG bankruptcy on Tuesday, it took a day for a solution to arrive--the point being that there are a lot of very smart people working on solving the problems we are facing.’

It looks like there are several plans in the works involving a comprehensive solution to the credit crisis, the most talked about being a Treasury plan to revive a Resolution Trust type entity. While it is not clear how depressed assets on financial firms balances sheets will be transferred to the proposed government entity or how they will be valued, the objective here is to have the government implement a sweeping plan to re-instill confidence and liquidity in the financial system. Clearly, at this point, without knowing details of the plan, it is impossible to know whether or not it will work. But, not to be repetitious, there are a lot of smart people working to try and make it work.

Two other steps were taken: (1) the Treasury will provide FDIC type protection to money market funds If they meet certain conditions and (2) the SEC is suspending short sales of financial companies temporarily [I know that I have railed against the naked short sale {selling stock that you can’t deliver}; but short selling provide a useful function to the Market. So I think that this step is one too far.]

Are happy days here again? No. But as the outline of the Treasury’s RTC-redux plan becomes clear, it will at the least allow equities to find a valuation level absent the fear of financial collapse but commensurate with an economy with a crippled but in tact financial system that is likely to grow at a below average pace for some time. Hence, it doesn’t solve all our economic problems nor does it bring any clarity to the long term issue of the impact of a potential shift in the political landscape and what that shift might mean economically. But based on our Valuation Model, those problems were in the price of stocks at higher levels.

Bottom line: I am going to move back toward the strategy of managing our Portfolios’ cash position between 15--20%. Going into the game changing development, our Portfolios were approximately 34% in cash. In the Subscriber Alert yesterday, I noted that our Portfolios, as a first step, were moving toward a 17% cash position. The purchases yesterday took cash from about 34% to about 20%. It is clear that the Market is going to open up big. Before moving further towards a 17% cash position, I am going to wait for stocks to take a breathe and settle a bit.

News on Stocks in Our Portfolios

More Cash in Investors’ Hands