Brooksie;s Daily Stock Market blog – an edge before the open
Wednesday, December 21, 2011 9:08 am ET
DJIA: 12,103.56 S&P 500: 12141.33
In Monday’s blog, “BIG Week: Economic Reports – Watch Housing,” I reasoned that housing has been one of the biggest drags on our economy over the last four years, but that it can become one of its big contributors in 2012 for two reasons.
One, owning a home and all the expenses and investments that go with it (furnishing, painting, upgrade, remodeling) is so very basic to families and the economy.
Two, most of the industry has been in a depression for more than three years and overdue for a recovery. At some point, the pendulum must swing and I think it is beginning to do so now.
While 9% of our work force is unemployed or under-employed, 91% is employed and the outlook for jobs is finally improving. The slow economic recovery we have been seeing is normal following the worst recession/bear market since the 1930s. The prospects are improving, though little is said of it in the press. As the economy improves, houses will begin to sell.
Buyers will want to take advantage of attractive prices, and may panic if prices start to climb. As house prices increase so does the “wealth effect.” As one’s net worth improves, so does one’s willingness to spend.
A number of housing reports (see below) were scheduled this week. One, the NAHB/Wells Fargo Housing Market Index was reported Monday, ergo the third straight month in which builder confidence improved.
Yesterday, an increase of 9.3% in Housing Starts for November was reported vs. an October decline of 2.9%. Both reports were big reasons for yesterday’s surge in prices.
November’s Existing Home Sales, released at 10 a.m. today, are projected to sport an increase of 1.6% over October adding to the sense that this sector has reached a turning point as most things do at extremes.
(8:30 a.m.) GDP – Third estimate for Q3 growth
(8:30 a.m.) Jobless Claims – workers filing for first time
(9:55 a.m.) Consumer Sentiment –U. of Michigan survey reflects sentiment for spending
(10: a.m.) FHFA House Price Index single family
(10 a.m.) Leading Indicators – for overall economy as reflected by indicators that “lead” other indicators.
(8:30 a.m.) Durable Goods – new orders for hard goods
(10 a.m.) New Home Sales – newly constructed homes
CONCLUSION: Yesterday’s 337-point surge in the stodgy DJIA demonstrates just how starved investors are for good news. The housing reports caught the Street off guard, prompting investors to scramble to buy stocks and shorts to run for cover. I didn’t see the monstrous volume that would indicate the BIG money was part of that, but it rarely eats with the downstairs help.
Not all of yesterday’s relief rally was due to housing reports, The European Central Bank (ECB) indicated a greater than expected willingness to provide longer term support for banks in an effort to facilitate lending to consumers and businesses. Banks will face heavy refinancing pressures early next year. Upon closer scrutiny the ECB action and response by the banking industry may not be as bullish as thought yesterday.
TODAY: As indicated above, there are more economic reports due this week, if better than expected, could add more to the upside. Expect the market to give back some of yesterday’s gain. Support is DJIA: 11,965 (S&P 500: 1227).
Fears of a euro meltdown will continue to put a damper on U.S. investor willingness to buy aggressively, nevertheless, institutions have nowhere else to invest client’s money. Yesterday’s surge whetted appetites to come off the sidelines, I have a hunch quality stocks selling in the lower end of their 12-month range will get a big play in 2012.Odds favor another push to DJIA 12,196 (S&P 500: 1254).
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:
Nov. 28, DJIA: 11,231, “Finally ! The European Leaders Act”
Nov. 29, DJIA: 11,563, “Game’s On !”
Nov. 30, DJIA: 11,600, “Full Court Press to Address Europe’s Problems”
Dec. 1, DJIA: 12,020, “New “Tradable” Trading Range DJIA Emerging”
Dec. 2, DJIA: 12,020, “U.S. & Euro Shaping Up – Game Changers ?”
Dec. 5, DJIA: 12,019, “Big European Week Spells Volatility”
Dec. 6, DJIA: 12,097, “Mounting Uncertainties Call for a Pullback of 200 – 300 Dow Points”
Dec. 7, DJIA: 12,150, “Easy Does It ! No Room For Disappointment at Euro Summit
Dec. 8, DJIA: 12,196, “Getting Close to Tectonic Shift- Pessimism to Optimism.”
Dec. 9, DJIA: 12,184, “Good Summit – Uncertainties Linger”
Dec.12, DJIA: 12,184, “Summit’s Success Questioned – Market Seeks Comfort Level”
Dec.13 DJIA: 12,021, “Money Managers Pondering Risk/Reward”
Dec.15, DJIA: 11,954 “More Consolidation Needed”
Dec. 16, DJIA: 11, 568 “ Market Probing for a Level that Discounts Euro-Uncertainties”:
Dec. 19, DJIA: 11,866 “BIG Week: Economic Reports – Watch Housing”
Dec. 20, DJIA: 11,766 “ The U.S. Economy – Last Man Standing ?”
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.