Friday, January 6, 2012 9:15 am ET
DJIA: 12,415.70 S&P 500: 1281.06
The stock market rebounded smartly off my support yesterday suggesting money managers and investors are buyers on dips.
How long can this continue with indications that Europe will soon fall into recession ?
Tough call. At this point it is anyone’s guess, since a crisis of this nature and magnitude has never been confronted before.
On the plus-side, it has begged a solution for over two years now and euro-leaders have been forced to consider numerous solutions, sacrifices and consequences of action, some of it extreme.
It looks like a European recession is unavoidable. What’s more, it looks to me a jolting catharsis is at hand that ultimately clears the air but not without casualties (banks, countries, companies, individuals).
The news headlines stand to scare the wits out of investors, since the fallout is unpredictable, and stock markets around the world stand to get whacked.
But that should indeed clear the air of this unrelenting and bedeviling uncertainty, thus providing a major buying opportunity.
That said, please understand that I am not an expert in this area. Due to its uniqueness, I am not sure anyone is sure they can forecast the outcome of a euro-catharsis.
Having experienced every bear market/recession since 1962, I can venture a reasonable guess, that once the bulk of this uncertainty is removed, our stock market will hum, big-time.
It may do so anyhow. Just be prepared for a JOLT out of Europe that will provide a brief but very attractive buying opportunity in face of bad news for some, just not for all.
Key economic reports scheduled for release this week may demonstrate how much traction the U.S. economy is gaining.
ISM Manufacturing Index (10 a.m.) A survey of 300 manufacturers encompassing production, new orders, backlogs, inventories, employment, supplier deliveries, exports, imports, prices. November was up 1.2 points to 52.7 (greater than 50 = growth). December was reported at 53.9, comfortably above economist projections of 53.3.
US Construction Spending (10 a.m.) New construction residential, non-residential, public prospects.
Was up 0.8 in Oct., led by a 3.5% gain in private residential. Construction spending rose for the third time in four months, rising 1.2%, well above projections of a gain of 0.5%
Motor Vehicle Sales reported by Autodata Corp., are now running at an impressive 13.6 million annual rate.
Motor Vehicle Sales: ( a.m.) Includes domestic and foreign. Rose 2.8% in Nov. following 1.2% Oct.
US Factory Orders: (10 a.m.) New orders durable and non durables. Rose 1.8% in Nov. following a drop of 0.4% in Oct.. New orders increased 3.7%.
ADP Employment (8:15 a.m.) Includes private payrolls only (no government) through the 12th of each month. December’s data came in well ahead of expectations with an increase of 325,000 vs. a projection for an increase of 175,000. Small business hires and service jobs were leaders, a good omen for the economy
Jobless Claims (8:30 a.m.) reported weekly, includes new claims for unemployment insurance for the first time. This too was good news as claims declined 15,000 for the last week of December
ISM Non-Manufacturing report (10 a.m.)Surveys 375 firms in cross section of U.S. including: agriculture, mining, construction, transportation, communications, wholesale and retail trade. Slipped 0.9% to 52 in November. Readings above 50 suggest growth. December’s numbers rose but fell short of projections. Accounting for 90% of the economy, the non-manufacturing Index rose in December to 52.6, economists were looking for 53%.
Employment Situation (8:30 a.m.) Includes the “unemployment” report, average workweek, and average hours worked. Jumped 120,000 in November and is projected to jump by 150,000 in Friday’s report according to 62 economists surveyed by Bloomberg. It came in at 200,000 new hires ! While the Unemployment Rate for November was revised from 8.6% to 8.7%, December’s rate dropped to 8.5%.
Conclusion: A strong market today suggests the possibility of a strong market in January, leading to a January Barometer signal for a good overall performance for the market this year.*
TODAY: A ho-hum open looks a little more robust after the 8:30 Employment Situation report came in well above projections and on top the week’s economic reports which suggest an acceleration in our economy. Without Europe’s dilemma, this market would sizzle. Unfortunately, there remains the risk of getting blindsided by jolting news out of Europe, and I am sure that will keep a lot of money on the sidelines, enough to prevent a huge surge in stocks.
*It is important to bear in mind that an enormous amount of money fled to treasuries and other “safe” investments in recent years. If the euro-crisis suddenly is downgraded to a less awesome concern either by the application of a solution or by a catharsis, a lot of that money will flow out of safe investments where it isn’t earning squat and stampede into the stock market.
With interest rates at historic lows, such an event would devastate long-term bond holders.
The European Union (EU) is an economic and political union of 27 sovereign member states with origins going back to 1958, but which was officially established by the Maastricht Treaty in 1993. Its goals are a free movement of goods, services, capital and people differing in life style, language, economies, geography, religion, politics and history.
Its 27 Members include: Austria, Belgium Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom. The EU comprises a population exceeding 500 million people a GDP exceeding 16.2 billion USD, some 20% of the world’s GDP.
Important components of the EU include: European Parliament, European Commission, Council of European Union, European Council Court of Justice and European Union, and the European Central Bank.
The euro area (eurozone) is an economic and monetary union (EMU) of 17 member nations that use the “euro” as their common currency and sole legal tender. Its members include: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain.
While the goal of single currency originated with the European Economic Community (EEC) in 1969, it was not until 1993 that members were legally bound to start the monetary union no later than January 1, 1999. At that point, the euro was launched after which it was an “accounting” currency until January 1, 2002 when euro notes and coins were issued and national currencies phased out in the eurozone.
The European Central Bank (ECB) is the central bank for the eurozone. Governed by its president, Mario Draghi, and a board of the heads of national central banks, the ECB’s primary responsibility is to maintain the euro’s purchasing power and price stability within the eurozone.
The Eurosystem is the monetary authority of the eurozone comprised of the ECB and the central banks of its member states, which are charged with applying the ECB’s policy.
The European Commission, comprised of one commissioner from each of the 27 member states, represents the interests of the EU, drafts proposals for laws, and manages the day-to-day business and disbursement of funds.
European Banking Authority (EBA): Established on Jan. 1, 2011 as a regularity agency to conduct stress tests of banks in order to detect weaknesses in capital structure. It has the power to overrule national regulators if necessary to prevent unfair competitive advantages between jurisdictions. It issues a report, Common Reporting Framework (COREP) covering capital requirements regarding credit risk, market risk, operational risk, fund and capital adequacy ratios.
The European Financial Stability Facility (EFSF): created by eurozone members to safeguard financial stability in Europe. Authority includes loans to countries in need, intervention in primary and secondary markets pursuant to ECB analysis, finance recapitalizations of financial institutions. It is backed by guarantee from the eurozone members for a total of 780 billion euros and has a lending capacity of 440 billion euros. (not considered adequate)
One euro = 1.3035 U.S. dollar (12/21)
Prominent names: European Union President: Herman van Rompuy, European Central Bank President: Mario Draghi, European Commission President: Jose Manuel Barroso, German Chancellor: Angela Merkel, French President: Nicolas Sarkozy, Italy Prime Minister: Mario Monti, EFSF President: Klaus Regling
Super Committee: While the committee failed, I am keeping this up FYI, since it will continue to get press coverage prior to the “trigger” in January.
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:
Dec. 19, DJIA: 11,866 “BIG Week: Economic Reports – Watch Housing”
Dec. 20, DJIA: 11,766 “ The U.S. Economy – Last Man Standing ?”
Dec. 21, DJIA: 12,103 “ Housing Turnaround = Wealth Effect Rebound = Economic Expansion”
Dec. 22, DJIA 12,107, “Trading Range Intact
Dec. 23, DJIA 12,169 “Don’t Take the Day Off”
Dec. 27, DJIA: 12,254 “Selective Opportunities”
Dec. 28, DJIA: 12,291 “Market Attempting to Break Out of Trading Range”
Dec. 29, DJIA 12,151 “Opportunities, Even in this Muddle”
Dec.30, DJIA 12,287 “ Strong Stocks Today = Winners Next Year
Jan. 3, DJIA: 12,224 “Good Start, but Follow-Through Key”
Jan. 4, DJIA: 12,397 “Buyers Expected on Any Weakness”
*Stock Trader’s Almanac: The January Barometer was developed by Yale Hirsch in 1972 four years after he began publishing the Almanac in 1968. He and son Jeffrey publish it today. (Must buy – loaded with info that will help make money and preserve capital. – www.stocktradersalmanac.com
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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