Brooksie’s Daily Stock Market blog – an edge before the open
Friday, November 18, 2011 9:16 am EST
DJIA: 11,770.73 S&P 500: 1216.13
The European “situation” is masking a renewal of growth in the U.S. economy per improving data for jobless claims, industrial production, and retail sales.
A 10 o’clock report for the index of leading economic indicators for October is expected to show a continued pick up in the economy’s growth rate. Economists at JPMorgan Chase, Macroeconomic Advisers, Morgan Stanley, and State Street Global Markets have raised Q4 GDP projections, the biggest revision coming from State Street which raised Q4’s rate to 3.3% from 2.4%.
Stocks are historically attractive, there is nowhere else to invest money, there is a lot of cash on the sidelines and we are now in the early months of the “Best Six Months” for owning stocks (Nov. 1 to May 1)*.
So why a two-day, 4.4% plunge in the broad based S&P 500 Index ?
That’s not a trick question – It’s Europe !
Far be it that certain members of the European Union (Greece, Italy) are on the verge of default, what’s worse is the stronger nations (France and Germany) are odds of what to do about it.
One school of thought is that the European Central Bank (ECB) is the only institution that can intervene to establish credibility. The French position is for a bigger role by the ECB. Germany rejects this idea, as does the ECB.
Greek P.M. Licas Papademos has gained approval for his 2012 budget, which may facilitate the receipt of international funding to avoid default. Italian P.M., Mario Monti, faces a vote of confidence today for his new government which will try to reduce debt levels and spur economic growth.
CONCLUSION: I believe this stock market wants to run. It’s a coiling spring. It will take years for the European problems to be somewhat resolved. WHAT IS NEEDED IS FOR THE POTENTIAL OF CONTAGION, A MELTDOWN THAT SETS FALLING DOMINOS IN MOTION ACROSS THE GLOBE, INCLUDING U.S. BANKS. A key step in establishing a foundation was achieved on October 26 with the euro-rescue plan. One more huge step must now be taken, and unfortunately I am not euro-savvy enough to say what it is. So far no one else has demonstrated they are either. My experience has been over 47 years in this business is that crises attract people who have solutions and the guts to get the job done to avoid disaster. I do not think this time will be an exception.
THE SUPERCOMMITTEE: 5-Days to a deadline !
With a key deadline looming on November 23, the actions of the SuperCommittee will soon come to the forefront, the press has begun to hype it.
The big roadblock is increased taxes. Reportedly, the committee is now considering a two-step process, small increases to be followed by larger ones to be debated by Congress – hmmmmm. Now who’s kicking the American citizen down the road ?
Parts of President Obama’s “American Jobs Act” may be used as a bargaining chip.
I have been publishing the following info on the SuperCommittee for weeks in an effort to highlight its importance, because it will gain traction on Page One as Europe’ s crisis eases.
The deadline for the SuperCommittee to vote on a plan that addresses a 10-year deficit reduction of $1.5 trillion is 9 days away, and it is uncertain how much progress has been made.
Credit that to a “don’t ask, don’t tell” policy of the committee, which is designed to take the pressures of the press and lobbies out of the decision process.
But get ready, this issue will shortly hog center stage and dominate the TV, print, and radio media, and political blogs.
If the “committee” reminds us after more than a month of silence just how dysfunctional it is, it will have a negative effect on the U.S. markets.
If it surprises us, and demonstrates the ability to craft a balanced approach to revenue raising/deficit reduction, it could add another arrow to the Bull’s rapidly filling quiver.
According to Huffington Post.com, Democrats have proposed a $3 trillion deficit reduction plan, including $1.3 trillion in new tax revenues; the Republicans are proposing a $2.2 trillion plan but with no new taxes.
Failure to agree on a plan triggers autonomic cuts a year hence in domestic and military budgets. In addition to the Nov. deadline there are two other key dates. The full Congress must vote on the bill by Dec. 23 and the bill must be enacted into law by Jan. 15, 2012. Have a good one !
The press will start talking about a budget “sequestration” if the SuperCommittee can’t agree to a bill. This is another term for automatic cuts to make up the difference between the “net” cuts that are made and the $1.3 trillion target. But “automatic cuts” are not cast in steel, Congress can (and has) altered laws to reduce the cuts as it did in 1990.**
The sticking point here is revenue raising.
Most House Republicans have signed a public pledge not to raise taxes, however a Nov. 3 Bloomberg News report noted 40 Republicans have indicated support for revenue increases.
O.K., my point here is to alert you to yet another hurdle for investor and consumer sentiment, as we get a groundswell of debate as the proposals becomes available, or is leaked in advance of the deadlines.
What the committee does can have a huge impact. Everyone knows deficit reduction must be achieved or there will be serious consequences to pay.
The SuperCommittee has been lost in the shuffle, upstaged by international financial worries and the state of our economy here at home. Nevertheless, it will raise its ugly head to remind us whether our government is, or is not, dysfunctional.
12-member SuperCommittee timeline:***
Oct. 1- Dec. 31: Both houses of Congress must vote on a Balanced Budget Amendment.
Oct.: 14: Deadline for House and Senate Standing Committees to submit recommendations.
Nov. 23: Deadline for both houses to vote on a plan with a 10-year deficit reduction goal of $1.5 trillion Dec. 2: Deadline for committee to submit report and legislative language to President Obama andCongress.
Dec. 23: Deadline for both houses to vote on committee bill.
Jan. 15, 2012: Date that the “trigger” leading to $1.2 trillion of future spending cuts goes into effect if
the committee’s legislation has not been enacted.
Feb. 2012: Approximate time when first $900 bn of debt ceiling runs out.
Feb./Mar.2012: Deadline for Congress to consider a resolution of disapproval for the second tranche
($1.2 – $1.5 trillion) of debt limit increase.
Fall/Winter 2012: When additional $2.1 – $2.4 trillion of borrowing authority from this law runs out.
Jan.2, 2013: OMB orders sequestrations for defense and non-defense categories of spending necessary
to meet spending cuts required by the “trigger.”
Recent blog headlines:
Oct. 21, DJIA 11,541, “DJIA 12,000 “IF” the Europeans Can Get It Right”
Oct. 24, DJIA 11,808, “Euro-Solution Announcement After Wednesday’s Meeting”
Oct. 25, DJIA 11,913, “Short-Term Euro-Solution Doesn’t Cut It”
Oct. 26, DJIA 11,706, “Ball’s in Europe’s Court”
Oct. 31 DJIA 12,208, “Buyers on Dips. Euro-Deal to Hit Some Snags
“Doomsters and Shorts Out in Force”
Nov. 2 DJIA: 11,637, “Risk-Taker’s Buy Shaping Up”
Nov.3 DJIA: 11,836, “Again – It’s All About Europe”
Nov.4 DJIA: 12,044, “Easy Does It ! Traders to Take Some Profits”
Nov. 7 DJIA: 11,983, “SuperCommittee Will Soon Take Center Stage”
Nov. 8 DJIA: 12,068, “Stock Market Hanging Tough – Would Love to Run…. but…”
Nov. 9 DJIA: 12,170 “Italy’s Turn to Crunch Prices, But the SuperCommittee is in the On-Deck Circle”
Nov. 10, DJIA: 11,780, “ OK Greece and Italy – Cut the Crap – Decision Time !”
Nov. 11, DJIA: 11,893, “Potential for an Upside Breakout Looms, Absent New Negatives”
Nov. 14, DJIA: 12,053, “SuperCommittee and Economy Taking Center Stage”
Nov. 15, DJIA: 12,078, “European Outlook Tentative – U.S. Outlook Picking Up”
Nov. 16, DJIA: 12,096, “Europe – Surprise Us for a Change – Get the Job Done !”
George Brooks
*Stock Trader’s Almanac
**Council for Foreign Relations (www.cfr.org): “Defense Spending and the Deficit Debate”
***National Journal
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The writer of Brooksie’s Daily Stock Market blog, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.
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