Delay in Fiscal Cliff Deadline?

George Brooks |

Delay in Fiscal Cliff Deadline?Investor’s first read   - Brooksie’s edge before the open

Tuesday, June 26, 2012        9:11 a.m. ET

DJIA:  12,502.61

S&P 500:  1313.72

Nasdaq Comp.: 2836.16

Russell 2000:  761.90

TODAY:  A drop in the DJIA below 12,305 (S&P 500: 1300) is possible this week as the market attempts to discount uncertainties out of  reports on the U.S. economy, Europe, and the looming “fiscal cliff.”

Failure or unwillingness late last year of Congress’ SuperCommittee to agree on the  budget cuts needed to address the nation’s spiraling deficits has given birth to the ominous term – “fiscal cliff,” over which the U.S. is expected to plunge when $1.3 trillion in budget cuts become automatic after January 1, 2013.

Adding to the angst is the expiration of the Bush-era tax cuts at year-end.

Congress is not expected to address the issue before the November 6 elections, but  between th elections and year-end.

The uncertainty of which programs will get hit and for how much and the fate of the tax cuts  is a major contributor to the current slowdown in our economy.

Now leaders in both parties are considering  a delay in the  automatic spending cuts and tax cuts until March 2013.

A 2011  agreement in Congress to raise the debt limit is tied to execution of the spending cuts.

Only politicians could create a mess this big, only an uninformed voter could put them in office.

As a rule, by the time when all appears hopeless, the market has usually found a comfort level and is set to rebound. Unfortunately, conditions at these junctures is so dire, few investors have the stomach to step in when stock prices are at their most attractive.

CONCLUSION: Talk is cheap and that is all we have been getting. IMHO, it is all we will get until the November elections and probably beyond.

Congress and Europe will work something out in time.

The problem for our economy and stock market is uncertainty and fear will foster  volatility in the interim.

Corporate earnings have managed to prop the stock market up to-date.  That can change, especially for U.S. companies with a lot of international business. Flat to lower earnings growth would raise questions about  the valuation of stocks at current levels.

I could buy into the “darkness before the dawn” scenario, I just have little confidence Congress can rise above partisan politics to get a job done.

Facebook (FB) Downside risk is 31 – 31.5.  Without short covering, I think current levels would be able to hold in this environment. I could be wrong, maybe the shorts haven’t been covering, the market action suggests they are. I don’t own FB, nor have I ever owned it. It was such a hyped  and botched IPO, I thought it was important that I cover it for a while.

EUROPE:  

The European  summit meeting starting on Thursday may produce some visibility as to whether the euro can be saved, or it may simply extend “uncertainty” for another time or another summit.

Get ready for a new euro-term – “dissolution risk,” what happens if you are in line to be compensated in euros, but the euro no longer exists. (see Bloomberg.com, “U.S. Banks Aren’t Nearly Ready for Coming European Crisis.” – Simon Johnson)

ECONOMIC INDICATORS: The Street is watching the economy for enough signs of weakness to prompt measures by the Fed to stimulate the economy. (bad is good !). Interest rates can’t get much lower. People on fixed incomes are without income on savings, insurance companies are forced to jump premiums because their treasuries yield next to nothing.  Generally, they make their money on investments not  insurance risk.

MONDAY:

Chicago Fed Activity Index (8:30): Dipped into negative territory to a minus 0.45 in May vs. a plus 0.08 in April. The Index encompasses 85 economic indicators drawn from production and income, sales, employment/unemployment, hours, consumption, housing,  orders and inventories.

New Home Sales (10:00): Surged 7.6% in May to 369,000 units at an annual rate  well above estimates that ran  a 346,000 rate., Residential construction is expected to contribute positively to GDP this year for the first time since 2005.  Sales advanced 3.3% in April after a 7.3% drop in March and 5.6% rise in February.

Dallas Fed Manufacturing Index (10:30): Increased 5.5 points to 15.5 in June, the strongest reading in 15 months, however the index of future business activity declined to 1.3 from 4.3. he survey covered 91 Texas manufacturers.

TUESDAY:

S&P Case-Shiller Home Price Index (9:00):Was up 0.1% in March after a 0.2% rise in February.

Consumer Confidence (10:00): declined 3.8% in May to 64.9 from a revised 68.7 in April.

Richmond Fed Mfg Index (10:00): Dropped 10 points to 4 in May

WEDNESDAY:

Durable Goods (8:30): Unchanged in April after a 3.7% drop in March

Pending Home Sales Index(10:00): Jumped sharply 5.5% in April.

THURSDAY:

GDP (8:30): Second estimate. Real GDP grew at a 1.9% annual rate vs an initial estimate of plus 2.2%. Q4 was plus 3.0% annualized.

Jobless Claims (8:30): Was 387,000 for the week ended June16 vs. revised 389,000 the week prior.

Kansas City Fed Mfg Index (11:00):Rebounded to 9 in May from 3 in Apil.

FRIDAY:

Personal Income (8:30):

Chicago PMI (9:45):

Consumer Sentiment (9:55):

George  Brooks

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The writer of  Investor’s first read, 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.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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