Fiscal Cliff Deadly for the Economy

George Brooks  |

Investor’s first read   - Brooksie’s edge before the open

Tuesday, June 19, 2012        9:13 a.m. ET

DJIA:  12,741.82

S&P 500:  1344.78

Nasdaq Comp.: 2895.33

Russell 2000:  772.53

In Brief:   Action, not words, or else!

-If Fed doesn’t announce measures to stimulate the economy, the market will take a hit.

-If European leaders don’t take specific action to head off the possibility of contagion, the European sovereign debt crisis will worsen.

-If Congress doesn’t address the “Fiscal Cliff” before the November 6 election, the U.S. economy will sink further.


FISCAL CLIFF: Perhaps the economic slowdown is just another spring/summer pause as it was last year. More than likely, it is a growing paralysis among businesses and consumers as they begin to dread the implications of the fiscal cliff gaining headlines.

The inability or unwillingness of Congress’ Supercommittee late last year to compromise on measures to address growing national  deficits triggered budget “sequestration,” whereby automatic cuts to defense and non-defense budgets are required to be made after January 2013.

Will the Bush-era tax cuts be extended, altered to reduce the impact on the majority of Americans, or allowed to expire subjecting all Americans to a tax increase?

Where will the  required $1.5 trillion in spending cuts be made? Who gets hurt?

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FEDERAL RESERVE: The market has rebounded since June 4 in expectation of an announcement by the Fed Wednesday that it will employ some kind of stimulus for the U.S. economy.

Having recovered more than half the turf lost in the May 1 to June 4 plunge, the market is in a “wait and see” mode, all eyes on Fed chief Bernanke’s press conference Wednesday at 2:15.

If no action is taken, the market will take a hit. If action is announced, we will get a rally though some of the euphoria has already been discounted.

EUROPE: Still a mess. You have 17 nations with different economies, governments, cultures and histories operating under one inflexible currency – the euro. Getting every country on the same page is difficult. The Group of 20 (G-20) wraps up its meeting today and is expected to announce a substantial increase in the existing $456 billion global firewall and taking action to spur economic growth.

STOCK MARKET: Head & Shoulders Bottom?

Some technicians will refer to the market’s turn up since June 4  as the completion of a “reverse head and shoulder” pattern. There is the left shoulder in late May, a head in early June, and the right shoulder between June 6 and 15, and a breakout on Friday above what is referred to as a “neckline” at DJIA 12,650 (S&P 500: 1335). If legitimate, it calls for a move to DJIA 13,200 (S&P 500: 1400).

Friday’s volume was heavy, but that could have been due to options expiration.

Yesterday’s volume was very light, a warning sign that the reverse head & shoulders is a fakeout.

CONCLUSION: Words without action doesn’t cut it. Odds favor more uncertainty as solutions are not developed until September/October.

Action by the Fed, Congress,  and European leaders now will lead to much higher prices. Currently the stock market is betting the Fed will “act.”

Facebook (FB): Recent buying looks like short covering. Support now moves up to 29,75.  At 31.75, I would expect new short selling to come in, as well as those with shorts to do more shorting.  New buying needs a strong recommendation from a respected source to overcome the  negative press of a botched IPO.

ECONOMIC DATA:  Big week for economic data, especially Thursday (see below).  The Federal Open Market Committee (FOMC) meets Tuesday with commentary and Fed chief Bernanke’s press conference Wednesday at 2:15 p.m.


Housing Market Index (10a.m.)-Rose to 29 in June from a revised 28 in May.  Currently, tight lending conditions and inaccurate appraisals are to blame for fewer closings, according to David Crowe, Chief economist for the NAHB.


Housing Starts (8:30a.m.)- declined 4.8% in May to 708,000 vs a revised 744,000 in April. Both multifamily and single house sales were good, apartment house construction adversely impacted the number for May.


FOMC Meeting Announcement 12:30p.m.)-

FOMC Forecasts (2p.m.)

Bernanke Press Conference (2:15)


Jobless Claims (8:30)-Rose 6,000 in the June 9 week to 386,000 claims vs. a revised 380,000 the prior week. The 4-week average was up 3.500 to 382,000.

PMI Manufacturing Index (9a.m.)-Slipped 2.1 points in May to 53.9.

Existing Home Sales (10a.m.)-Up 3.4% in April after a 2.8% drop in March. Gains were solid across all regions, however year-to-date is flat.

Philly Fed Survey 910a.m.)-Dropped in May to a negative 5.8 from a positive 8.5 in April.  New Orders dropped 3.9 points to a negative 1.2 for the period. A year ago, this  Index plunged from the 40 level in February to a negative 25 in August, rebounded  to a positive 10 until March 2012 after which it declined. Its behavior in 2010 was similar. I took the data from a chart so the exact numbers may vary slightly.

FHFA House Price Index (10a.m.)-Rose 1.8% in March after a 0.3% gain in February. Year over year rate also surged to a plus 2.7% reflecting a pronounced increase in home prices.

Leading Indicators (10a.m.)-Declined 0.1% in April after a 0.3% rise in March and 0.7% jump in February. Building permits and jobless claims were the big contributors to the April decline.


George  Brooks


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.

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