Wednesday, November 9, 2011 9:03 am EST
DJIA: 12,170.18 S&P 500:1275.92
Interest rates on Italian debt at all levels soared overnight, raising the specter of heightened fiscal problems in that country. It wasn’t that this punch wasn’t telegraphed, it’s just that Greece got all the ink.
This crisis will cost the DJIA a couple hundred points at the open. Initially, expect support at the DJIA11,920 (S&P 500: 1244) level. Breaking that, look for DJIA 11,560 (S&P 500: 1215).
(Note: a reminder about “support” levels. They can be targeted with a reasonable amount of accuracy, but become suspect IF conditions change significantly in the interim)
In face of all this uncertainty, the stock market has performed remarkably well. That may reflect the fact the big-name companies dominating the market averages are profitable and flush with cash, or it may reflect the fact that with interest rates here at rock bottom, and stock prices at historic values, there is nowhere else to invest money. Then too, it may reflect the belief that Europe “reportedly” has the resources to clean this mess up, it just has to set politics aside.
Or the market’s strength may simply reflect another repeat of a reliable seasonal tendency for the market to do well during the “Best Six Months” period for owning stocks.*
The knee-jerk reaction to this crisis would be to buy the dip. It paid off on four occasions since October 4, prior to a 19% run in the S&P 500.
Waiting in line to add uncertainties and angst to investor confidence is, you guessed it, the SuperCommittee.
The deadline for the SuperCommittee to vote on a plan that addresses a 10-year deficit reduction of $1.5 trillion is two weeks 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.
Here comes the SUPERCOMMITTEE!!
With a key deadline looming on November 23, the actions of the SuperCommittee will soon come to the forefront.
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. 14, DJIA: 11,478, “Europe Still the Key – Q3 Earnings Run a Close Second”
Oct. 17, DJIA: 11,644, “Snags En Route to Euro-Solution to be Expected”
Oct. 18, DJIA: 11,392, “Test of the October 4 Rally’s Strength”
Oct. 19, DJIA: 11,577, “Best Six Months Looms, But Volatility to Continue”
Oct. 20, DJIA: 11,504, “All Eyes on Euro-Summit this Weekend”
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…”
*Stock Trader’s Almanac
**Council for Foreign Relations (www.cfr.org): “Defense Spending and the Deficit Debate”
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