Thursday, November 10, 2011 9: 11 am EST
DJIA: 11,780.94 S&P 500: 1229.10
We got a double header here – Greece and Italy. Greece has yet to announce a new prime minister to replace George Papandreou or vote on austerity measures, though action is expected over the weekend. Following an unnerving spike in Italian bond yields yesterday, suggesting the possibility of contagion, uncertainties persist in Italy as Prime Minister Silvio Berlusconi is about to be replaced and its senate votes Friday on measures to reduce its debt burden.
Obviously there are a lot of loose ends that will continue to skewer attempts to stabilize the euro-sovereign debt crisis. As a consequence, volatility will plague the stock market for many months.
CURRENTLY: Looks like a sharp rebound today, as hopes for clarification of the situation in Greece and Italy now appear imminent. Helping a bit today is a good Jobless Claims report – it showed a decline 10,000 for the week ending Nov. 5.
I expect resistance to this rebound to begin DJIA 11,955 (S&P 500: 1246) today or tomorrow. A little good news could push it higher to DJIA 12,030 (S&P 500: 1255), however I expect a sell off before the weekend if issues in Greece and Italy are unresolved before the close Friday.
This is a tough market even for traders, because it is so news sensitive. No sooner does a trader (or investor) establish a position in face of reassuring developments, and the news flow does a U-turn, slashing paper profits, racking up paper or realized losses.
The U-turns disrupting this market have frequently been triggered by news that suggests the imminence of financial contagion in Europe with a nasty spill over into the U.S. banking industry.
What do you do ? Maybe this is the “big one” – a ten count. “Why chance it, I better sell,” one may fearfully say.
Yet, in a matter of days, the fear of a meltdown vanishes, and the market turns back up.
“I don’t care, I’m in it for the long haul,” one is apt to say. That works some times, just don’t ask someone who bought in heavily prior to bear market plunges and had to wait for years to get back even.
The math gets ugly on losses. A 50% loss takes a double to get even.
CONCLUSION: Without Europe’s dilemma, the bull market that started in early March 2009 would progress with fewer disruptions and less volatility.
That’s not the hand we have been dealt. Risk of a worsening European situation is high. A recession abroad would definitely adversely impact the United States. A healthy cash reserve is necessary, for the obvious reasons, but I still think the bulls have the ball, but on a very muddy field.
The following was published in my blog yesterday. Since the action of the SuperCommittee will become more and more relevant as deadlines approach, I will republish this info frequently going forward.
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…”
Nov. 9 DJIA: 12,170 “Italy’s Turn to Crunch Prices, But the SuperCommittee is in the On-Deck
*Stock Trader’s Almanac
**Council for Foreign Relations (www.cfr.org): “Defense Spending and the Deficit Debate”
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