Brooksie’s Daily Stock Market blog – an edge before the market opens
Tuesday, November 15, 2011 9:14 am EST
DJIA: 12,078.98 S&P 500: 1251.78
Not so fast, Brooksie! While the SuperCommittee and our economy will be jousting for news headlines in coming weeks, Europe’s woes aren’t yielding turf without a fight.
Today’s markets are spooked by the fact the 10-year Italian bond yield rose above 7% overnight suggesting fears that a new government under Prime Minister Mario Monti will have difficulty implementing austerity measures designed to reduce its 1.9 trillion ($2.6 trillion) debt, and concurrently enable its economy to recover after years of sluggishness.
While that development is taking a toll on today’s stock market, a drop below 7% in coming days will spark a rebound.
This is a “news sensitive” market and news is hard to anticipate, especially when it flows 24/7, first during trading here, then overnight in trading abroad.
I think we simply have to acknowledge Europe’s bank and sovereign debt problems will haunt global financial markets for years, at times more than others.
Maybe, European leaders waited too long to address the problems, but on a positive note, it took action on October 27 with its “rescue” agreement and recently with administration changes in Italy and Greece.
Reportedly, Europe is now preparing for another recession, and that is not good news for the United States, which is bumping along the runway hopefully en route to liftoff.
Behind all this is the fear of contagion in international banking circle, and the unraveling of derivatives that few people understand. We can deal with hard times, a meltdown – NO! How can an investor protect themselves from a meltdown, it’s never happened with global leverage like this ?
That concern is keeping a lot of individual and institutional investors on the sidelines.
We got three economic reports at 8:30 this morning. Producer Prices in October declined 0.3 percent vs a plus 0.8 percent in September [good], Retail Sales advanced 0.5 percent vs a plus 1.1 percent in September (still good), and after five consecutive months of negative readings, the Empire State Manufacturing Survey rose nine points to a positive 0.61 (very good).
Tomorrow it will be Consumer Prices and Industrial Production, Thursday, Housing Starts, Jobless Claims, and the Philly Fed Survey (regional business conditions) and Friday the Leading Economic Indicators.
The doomsters expect a U.S. recession, yet the economic reports are not suggesting the odds favor that. Economists at the Federal Reserve Bank of San Francisco see a 50-50 chance of a recession in early 2012 if there are any sovereign debt defaults in Europe.
Dallas Federal Reserve Bank President Richard Fisher believes the U.S. is “poised for growth.” St. Louis Fed chief , James Bullard, agrees, noting that the fear of recession that gripped the investment community is now over.
Morgan Stanley’s chief emerging-market strategist, Jonathan Garner is calling for a 39% gain in the MSCI Emerging Markets Index by year-end 2012, based on a soft landing for China’s economy, earnings growth and attractive valuations.*
CONCLUSION: Yesterday’s correction rebounded from my support at 12,030 (S&P 500: 1254) and will test that level again today. There is a chance of a further drop today to DJIA 11,955 (S&P 500: 1241). Without new negatives from Europe, those levels should produce a rebound.
We are locked in a consolidation pattern that has the potential to support a nice move up. Gutsy traders may want to use weakness today to take some shots.
THE SUPERCOMMITTEE: 8-Days to a deadline!
With a key deadline looming on November 23, the actions of the SuperCommittee will soon come to the forefront.
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”
George Brooks
*Bloomberg.com
**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.
