Fiscal Cliff, Debt Ceiling Debate Loom

George Brooks |

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

Monday, September 10, 2012 9:03 a.m.
DJIA: 13,306.64
S&P 500: 1437.92
Nasdaq Comp.: 3136.42
Russell 2000: 842.29

The Federal Open Market Committee (FOMC) meets Tuesday with a report out at 12:30 Wednesday. This is what the market has awaited for weeks, months.

With the economy struggling to regain traction, investors have been looking to the Fed for help. If the Fed announces a new plan to stimulate the economy, it is conceding that the economy is at risk.

If the Fed does NOT announce a plan to pump up the economy, it is sending a signal it believes the economy will snap back, leaving many doubters.

The big question for investors is what happens either way? The answer may be - down. The market has had a solid, though irregular upmove since June 4 with the broad-based S&P 500 advancing 13.5%. The move was fueled by hope the Europeans would address their sovereign debt problems and the Fed would employ another round of economic stimulus. If the Fed acts this week, both wish lists will be fulfilled.

However, if the market has already discounted their action, there may be little room for upside beyond an initial “pop.”
To make matters worse, Congress is back in session to remind us that its ideological inflexibility a year ago created the “fiscal cliff” looming in coming months, forcing hard decisions on tax and massive spending cuts or the alternative, automatic spending cuts of $1.2 trillion (sequestration) at year-end.

While certain members of Congress want to push decisions beyond the November 6 election, the issue will become a divisive campaign issue. What’s more, a six-month temporary spending bill to finance the U.S. government’s day-to-day operations will be debated as the U.S. government fiscal year ends September 30.

Ideological brinkmanship that pushed the nation close to default in July 2011, contributing to an S&P downgrade in its credit rating would be political suicide this time around, raising the possibility of some form of verbal compromise (moon walk of sorts) in coming weeks.

CONCLUSION: The focus will shift from Fed stimulus to campaign issues, specifically the raising of the debt ceiling, sequestration and the extension or full or partial, extension of the Bush-era tax cuts.

Even if the Fed opts for stimulus, there will be uncertainty of how well it will work with the rest of the world experiencing a slowdown. Easy does it! A surge in stock prices following a decision to goose the economy can result in a rally failure and correction in stock prices as other worries take center stage.

Support is DJIA 13,155 (S&P 500: 1418).
FACEBOOK (FB) at $18.98:

Volume will tell the story. A huge influx of buying suggests Tuesday’s low of $17.55 was FB’s bottom. Without that, FB will test that low.

Until that happens the tug of war between buyers and sellers will continue as the stock seeks a comfort level.
I don’t own, nor have I ever owned FB. Generally, I don’t recommend or comment on individual stocks. I started covering FB technically after its IPO because I felt at $34 it was very vulnerable in face of all the misunderstanding and hype. At some point, I will drop coverage. I would like to see readers through the full cycle, from the $34 where I picked it up as “going lower” down to a bottom.

ECONOMIC REPORTS: Big week
MONDAY:
Consumer Credit (3:00p.m.) – Rose $6.5 bn in June after a jump of $16.7 bn
TUESDAY:
FOMC Meeting begins
NFIB Small Business Optimism Ix (7:30) Dropped 0.2 points in July to 91.2. The average throughout the recovery has been 90.0.
International Trade (8:30) – Exports increased 0.9% in June after a gain of 0.3% in May. Imports declined 1.5% after a drop of 0.8% in May. The trade deficit decreased to $42.9 bn from 48.0 bn.
WEDNESDAY:
Import-Export Prices (8:30) – Dropped 0.6% for the 4th straight time
Wholesale Trade (10:00) – Wholesale sales dropped 1.4% in June, inventories dropped 0.2%, the inventory-to-sales ratio is now 1.20
THURSDAY:
Jobless Claims (8:30)- Dropped 12,000 for the September 1 week to 365,000, the lowest in 4 weeks. The 4-week average is 371,250.
Producer Price Index (8:30) – Rose 0.3% in July after a 0.1% gain in June and 0.1% drop in May. Excluding food and energy, it rose 0.4% after a rise of 0.2% in June.
FOMC MEETING ANNOUNCEMENT 12:30
FRIDAY
Consumer Price Index (8:30) – Was unchanged in July after the same in June
Retail Sales (8:30) – Rose 0.8% in July, the best since February.
Industrial Production (9:15) – Rose 0.6% in July after a 0.1% rise in June. Capacity Unitilzation rose to 79.3%
Consumer Sentiment Index (9:55) – Rose 0.7 points in August to 74.3, two points higher than the final July reading.
Business Inventories (10:00) - Business inventories rose 0.1% in June but sales dropped 1.1% the largest drop in 3.5 years. The inventory/sales ratio rose to1.29 from 1.27.

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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