Investor's First Read--Brooksie's edge before the open
Tuesady, January 10, 2012 8:58 a.m. ET
DJIA: 12,392.69 S&P 500: 1280.70
As difficult as it may be to believe we could get a 600 to 1,000 point surge in the stodgy DJIA in coming weeks, it must be given a chance, because it can happen. For one, no one expects it, therefore there is cash on the sidelines that is earning next to nothing. For another, the U.S. economy is gaining traction as consumer sentiment improves. Then too, the Europeans just may come together and take contagion off the table chasing billions of dollars out of “safe” investments into stocks.
PROs and CONs
With its gain of 1.8% in the first five days of January, the Stock Trader’s Almanac’s January Early Warning barometer has just indicated the strong likelihood January will be a gainer, which in turn suggests the tone (and direction) for the year will be positive. The barometer boasts an accuracy of 86.5% for forecasting the S&P 500’s direction for January.
Seasonal tendencies and barometers like this sport a consistency that deserves respect, though a lot can happen in a year, even in a month and that is worthy of consideration too.
Again, be aware that Sequestration will hit Page One of most newspapers and TV news. There will be talk of casualties of the automatic spending cuts that will be triggered on January 15, but not become effective until January 2013, giving Congress and the President plenty of time to alter the impact. A lot of smoke, but little fire.
Q4 earnings will be streaming in over the next five weeks and are not expected to make exciting reading.
Alcoa (AA) was the first big name to report and as expected came in with a loss, though in line with projections. The stock closed up for the day, extending its gain in after-market trading.
While Q4 earnings are expected to be well below the growth rates of the year’s prior quarters.
How can that be good ?
Well, let’s step back a sec and give some thought to the fact that S&P 500 earnings increased close to 13.7% in 2011, but the S&P 500 index itself was flat for the year, suggesting it has some catching up to do. So what if the S&P earnings increase 8% to 10% this year ?
It is highly unlikely the market will be flat or down this year.
Let’s throw some raw meat on the floor for all those hungry institutions that have been chased to the sidelines by fear of European contagion. What if contagion is taken off the table by a solution to the euro-area woes or even a catharsis that roils markets and some economies but clears the air of an uncertainty that has plagued spending plans by corporations and investors?
Equity valuations can be diced a number of ways to justify the market going up or down. Average P/E ratios, for example, will vary depending on how many years are used in the calculation. Percent changes vary with the base date for calculation.
Essentially this is a game of making money. Investment professionals have to perform or lose their job. Investors need to grow capital because CDs, money markets, Treasuries and their house aren’t doing it for them. Equities are the ONLY game in town, and when that light turns green from this level or a euro-crisis induced lower level that clears the air and this market is free to run.
With the exception of the doomsters, everyone BIG and small wants the European mess cleaned up at least enough to deny a meltdown. That should be enough reason to pressure the European leaders to get the job done – pronto.
After last week’s upbeat economic reports, we get a breather. Comments arising from the Beige Book release may have some impact. Jobless Claims are important in the current cycle to confirm or raise doubts of an economic expansion. Consumer Sentiment reflects the mood of the consumer.
Monday (3 p.m.) Consumer Credit. Surged 10% in November for the biggest one-month increase since Nov. 2001. Revolving credit – credit cards up 8.5% and non-revolving credit (auto loans, etc.) up 10.7%. This suggests an important change in consumer sentiment which can only add to an accelerating economy.
Tuesday: Wholesale Trade (10 a.m.) Indicates sales and inventories held by merchant wholesalers.
MBA Applications (7 a.m.) Measures applications at mortgage lenders a reflection of consumer intent in the housing area and economy as a whole, ergo it has a “multiplier effect.”
Fed’s Beige Book (2 p.m.) Released two weeks before FOMC meeting, it provides insight into business conditions in 12 Federal Reserve districts, which stand to have an influence on policy decisions at the next meeting.
Jobless Claims (8:30) Declined 15,000 for the week ending Dec. 31. Economic bulls want this number to keep declining. Doomsters praying for a big jump.
Retail Sales (8:30) Comprised of the total receipts at stores that sell merchandise and related services to final consumers. Retail Sales grew at a 0.2% rate in Nov., following growth rates of 0.6% in Oct. and 1.3% in Sept.. Growth rates have been bumping along sideways at an annual rate of 4% to 9% since soaring in the last four months of 2009 from recession lows of minus 11%.
Business Inventories (10 a.m.) Comprised of the dollar amount of inventories held by manufacturers, wholesalers and retailers. Obviously, a rising inventory to sales ratio suggests a decline in sales or alarming rise in inventories which will have to be worked off at the expense of production. To-date the ratio is steady and not of serious concern.
Treasury Budget (2 p.m.) Monthly account of the surplus or deficit of federal government. December expected to run close to breakeven.
International Trade (8:30) Comprised of merchandise (tangible goods) and services. International trade balance has posted a deficit since 1980s. Trend to smaller balance adds to GDP growth, increase is drag on growth.
Import/Export Prices (8:30) Can indicate inflationary trends.
Consumer Sentiment (9:55 a.m.)Reuter’s/Univ. of Michigan’s survey of 500 households and is directly related to consumer spending. Improved to 69.9 in Dec. from 64.1 in Nov.. The latest reading implies a strong 72.1 over the last two weeks suggesting momentum will carry into 2012.
Looks like the Merkel/Sarkozy euro-duo is at it again. This
I MAY BE ALONE ON THIS, and WRONG, but there is too much at risk here globally for the euro-area countries NOT to develop a solution that strengthens the European Union. I sense this problem is heading at warp speed for a solution that removes the risk of a global meltdown, and that solution most likely means a reduction in euro-area members. That could mean a week of turmoil and confusion somewhat on the order of a stock market selling climax. It could also be the best buying opportunity since early March 2009. It could be devastating to long-term bond values as investors bail out and buy stocks. Then too, solutions could be agreed on that reduce the risk of meltdown without the carnage. This needs to be considered as possible, especially because too few people are seeing it happen.
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
SEQUESTRATION – TRIGGER SPENDING CUTS
While the SuperCommittee failed to agree on cuts, 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:
Dec. 19, DJIA: 11,866 “BIG Week: Economic Reports – Watch Housing”
Dec. 20, DJIA: 11,766 “ The U.S. Economy – Last Man Standing ?”
Dec. 21, DJIA: 12,103 “ Housing Turnaround = Wealth Effect Rebound = Economic
Dec. 22, DJIA 12,107, “Trading Range Intact
Dec. 23, DJIA 12,169 “Don’t Take the Day Off”
Dec. 27, DJIA: 12,254 “Selective Opportunities”
Dec. 28, DJIA: 12,291 “Market Attempting to Break Out of Trading Range”
Dec. 29, DJIA 12,151 “Opportunities, Even in this Muddle”
Dec.30, DJIA 12,287 “ Strong Stocks Today = Winners Next Year
Jan. 3, DJIA: 12,224 “Good Start, but Follow-Through Key”
Jan. 4, DJIA: 12,397 “Buyers Expected on Any Weakness”
Jan. 5, DJIA:12,418 “U.S. Economy Gaining Traction”
Jan.6, DJIA: 12,415. “Long-Term Bonds at Risk Via Euro-Meltdown/Solution –Money Out
of Bonds Into Stocks
*Stock Trader’s Almanac: The January Barometer was developed by Yale Hirsch in 1972 four years after he began publishing the Almanac in 1968. He and son Jeffrey publish it today. (Must buy – loaded with info that will help make money and preserve capital. – www.stocktradersalmanac.com
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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