We held off posting recently because the more things changed, the more they stayed the same. I could have simply reposted the November 11th musing and been done. Another European country lost its leader (welcome to the club Spain. Silvio, scoot over.), which for some reason the various parliaments seem to think is a good idea. (For our thoughts, see our November 9th post “The Devils We Know”.) We are of the opposite opinion – confidence votes, new technocrat Prime Ministers, new governments, etc. are not what Europe needs at the moment. What it needs are leaders who are able to act and “do the right thing” (more on that later) without worrying about a confidence vote every other week. How can you run a country on week-to-week polls? It makes the current US system look functional by comparison. And that’s hard to do. While European governments play musical chairs, European bond markets don’t like the changes. Spain had to pay a Euro-era record 5.11% today for 3-month money. See this Wall Street Journal article for a concise recap of the current stress in the Euro sovereign markets.
If you come to a fork in the road, take it. - Yogi Berra
On October 27th we said “This is a big move and the markets are working off of a big oversold condition last month. Our long call starting October 5th was about as good as it gets, but it’s nearing time to tip the man and go home.” That call wasn’t too bad. Since the close on 10/27/11, the S&P 500 has dropped 7.5%. That’s not a huge loss, but something to avoid if you can. Interestingly, the Financial Select Spider (XLF) has dropped nearly 14% in the same time frame, while Citigroup (C) and Bank of America (BAC) have gotten crushed, down 28.4% and 25.6% respectively. So the feel good rally on bank earnings and Greek crisis “resolution” that drove the nice min-rally in October is clearly over, and playing defense was the right move. What's next?
We are right in the middle of a trading range defined by the lows of early October and the resistance from 1265 to 1285. (In our post from 11/11/11 we said resistance was 1265 followed by 1285. The high since was 1264.25. Good enough for government work). For tomorrow, November 23, the levels look like: Support at 1175, 1160/1162, then a nice little drop to 1120/1122.
Resistance at 1222/1225, with 1260/1265 a very tough level to break through (it was support in June, resistance in October/November).
An interesting part of trading today was the strength in consumer stocks. While the S&P 500 dipped 0.41%, Apple (AAPL) was up 2.03%, Amazon (AMZN) was up 1.63%, Estee Lauder (EL) rose 1.87% and Mead Johnson (MJN) was up 2.61%. Other strong consumer stocks were Autonation (AN) and Whole Foods (WFM). Energy, financials and utilities were the worst performing sectors. While one day doesn’t a trend make, it was notable for the divergence in sector performance.
If You Don’t Know Where You are Going, You Might Wind up Someplace Else. - Yogi Berra
We continue to hold a nearly maximum allowed cash position in the accounts we manage. Since those playing the home game aren’t subject to limits on cash (a topic for a future rant about the mutual fund industry), more is better right now. Markets on are on edge over Europe. In my mind, they should more worried long-term about China, the topic of our upcoming note this weekend. When in doubt, play defense and live to fight another day. There are times to be aggressive in the markets – this is not one of those times. The markets for now are intently focused on Europe to the exclusion of almost anything else. The crisis can only end in 3 ways, 2 of which are bad, the other of which is bad for the Euro. First is default via Greek-style “haircuts” (translation: default), which are now being openly discussed for other countries. Second is the ECB prints Euro and monetizes the debt of all the weaker countries (aka, the good option) – Germany vehemently opposes this option (see this article from the WSJ). It prefers option 1, and then rescuing its own banks with its own money. Third is the European Monetary Union breaks up, the weak countries get their own currencies, and they repay their debts in the new, debased currencies. If you can short Euro, I don’t see much downside in that trade. If anyone has a fourth option, one that "fixes" the problem, please pass it along…
Disclosure: Accounts managed by Jeffrey Miller have positions in AAPL, AMZN, EL, MJN, and the financial and energy sectors. Positions may change at any time, and mention of the securities above is in no way a recommendation to purchase any securities nor is it investment advice. See our Disclaimer Page for more disclosures.