Excerpt from Stock World Weekly, September 25, 2011, The Week Ahead section. ~ Ilene
On Saturday, the International Monetary and Financial Committee (IMFC) of the International Monetary Fund (IMF) released a communique stating, “The global economy has entered a dangerous phase, calling for exceptional vigilance, coordination and readiness to take bold action from members and the IMF alike. We are encouraged by the determination of our euro-area colleagues to do what is needed to resolve the euro-area crisis. We welcome that the IMF stands ready to strongly support this effort as part of its global role.”
The Telegraph UK reported “German and French authorities have begun work on a three-pronged strategy behind the scenes amid escalating fears that the eurozone’s sovereign debt crisis is spiraling out of control. Their aim is to build a “firebreak” around Greece, Portugal and Ireland to prevent the crisis spreading to Italy and Spain, countries considered ‘too big to bail.’
“According to sources, progress has been made at the G20 meeting in Washington, where global leaders piled pressure on the eurozone to fix its problems before plunging the world back into recession. In a G20 communique issued on Friday, the world’s leading economies set themselves a six-week deadline to resolve the crisis – to unveil a solution by the G20 summit in Cannes on November 4. Sources said the plan would have to be released as a whole, as the elements would not work in isolation.” (Multi-trillion plan to save the eurozone being prepared)
Phil’s overarching premise is that the eurozone will not collapse, and the financial crisis will not result in the breakup of the EU. Others are less optimistic. Mish Shedlock is sceptical: “The number of arrogant, unbelievable lies from the EU and ECB are flying so fast I do not have time to report on them all… There is no method, and there is no strategy. There is only talk of producing a strategy by November. Good luck with that given all the EU infighting. At this juncture, I doubt the market will wait until November even if the EU could come up with a viable alternative to default (which it can’t).” (EU Synopsis: No Method, No Strategy, No Calendar; Blatant Lies by French Finance Minister) Zero Hedge reported on Saturday night “G20 is now preparing itself for Greek default after October – all efforts behind the scenes (by G20 members) are now going into recapitalising banks, preparing economies for default. (Lehman Weekend Redux)
Phil wrote in Friday’s article “We HOPE (not a valid investing strategy) 20% off from here is the worst-case scenario, but the markets have gone much lower than that in 2008-9 and, while we don’t feel this situation is the same as back then, one thing we learned 3 years ago was that you should never underestimate the ability of your fellow investors to FREAK OUT. Our job is, very simply, to have as much cash as possible when the market bottoms, and that’s what hedges are great for…
“There’s a huge difference between the PRICE of stocks and the VALUE of stocks, but there are very few of us Value Investors left in the World. TradeBots are not value investors – they look at price and that’s all. If gold, for example, breaks $2,000 – a TradeBot is perfectly happy to buy it because of momentum and if gold breaks below $1,000 – the same TradeBot is happy to short it on momentum. Gold has no value whatsoever to the machines that are doing 85% of all the trading, and neither do stocks – not AAPL or IBM or JPM or VLO or BA or CAT – NOTHING!”
In the meantime, the stock market is largely being driven by rumours and negative sentiment, with daunting words like “default” and “bankrupt” regularly adorning the headlines. An investor’s task is to keep his head while everyone else is losing theirs, do his homework to determine the VALUE of a company (versus its price).
We reviewed Lee Adler’s Wall Street Examiner Professional Edition to see Lee’s technical analysis for next week. According to Lee, “Cycle screening measures have reached a level consistent with a short term low. A 6-7 week cycle low is due, and the market low on Thursday is within 5 points of the projection. At the same time, the 13 week cycle sideways up phase appears to be in a top phase. Any bounce here should be short lived…
Many sector charts have already broken down, creating setups where rallies back to resistance should be shorting opportunities. A short term rally should be in that context, with lower lows to follow within the next few weeks.” (The Yeah But Market)
Phil wrote on Friday: “Still all rumours and madness driving the markets, and I still favour neutrality, but if you are neutral and you have 3x plays going both ways, then you can only lose 100% on one side while hopefully you make 300% on the other side! That’s what we did with the Qs ahead of the Fed on Wednesday and that went very well (p. 7)… Cash remains king into the weekend. I’d love to say BUYBUYBUY but it’s a crap shoot, and we have 10% up to run if we’re going to stage a comeback. We won’t miss much by remaining cashy and cautious, but it’s fine to deploy a little cash to trade ideas like BCS*.”
[BCS – We went long on BCS at $10 (hedged) and it is at $8.70 now. There is no bottom limit to panic but I looked over the books (as best I could) and decided $10 was a good PRICE while my VALUE is around $15. If the PRICE goes to $5, my VALUE will still be $15, and at $2, my VALUE will still be $15.]
We have a trade idea this week, courtesy of Pharmboy: “GlaxoSmithKline (GSK, $40.67) has a good revenue stream, pipeline, and pays a hefty 5% dividend. I like GSK to hold its lows of the year ($36.28). If we can pick it up cheaper by year’s end, then we will take a good company. I would sell 2 January 2012 $35 Puts for $1.10 or better.”
Better opportunities may arise as the markets sort out the facts and fictions of the day. In the meantime, once again, we remain cashy and cautious.
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