Brooksie’s Daily Stock Market blog – an edge before the open
Thursday, December 29, 2011 9:14 am ET
DJIA: 12,151.41 S&P 500: 1249.64
Ahhh…Just about the time it seemed safe to buy stocks selling at attractive valuations in a gradually improving U.S. economy, and the woes of the eurozone intruded with angst about Italy and the fact the European Central Bank (ECB) had to pump 489 bln euros into the European banking system.
Fortunately, Italy was able to sell bonds during the last two days at significantly lower rates thanks to the ECB.
Italy sold 2.5 bln euros of bonds due 2014 to yield 5,62% down from 7.89% at the last sale on Nov. 29 and 2.5 bln euros of 2022 bonds to yield 6.98% vs. 7.56% in a sale on Nov. 29. The sale’s total fell short of the maximum hoped for, but considering the fact Italy sold 9 bln euros of treasuries the day before at 3.25%, half the rate of a month ago, it is good news.
A lesser important threat, but one which will capture news headlines, is Iran’s threat to disrupt or shut down the Strait of Hormuz if sanctions are imposed on its oil exports. The United States and other countries have a huge military presence in the region. Shipments through the Strait are so vital to global economies, such action by Iran would not be tolerated.
Jobless Claims were up for the prior week to 381,000, no explanation available at this point.
At 9:45, we get the ISM Chicago report, also called the Chicago PMI report. ISM stands for Institute for Supply Management, PMI stands for Purchase Managers’ Index. It reflects the region’s manufacturing and non-manufacturing conditions. Readings above 50 signal growth. It is released monthly on the last day of the month covering data for the current month.
Every serious investor should download the economic report calendar from their broker web site, yahoo, etc. for the coming week, as well as a description of each indicator, so these impact of these reports can be anticipated
At 10 o’clock, we get Pending Home Sales, designed by the National Association of Realtors to provide a leading indicator of housing activity. These are sales where a contract is signed, but not closed, the latter taking 4 to6 weeks to close. Even “resales” contribute to economic growth since they are accompanied for the need for more, or new, furniture, appliances, as well as remodeling, fix-up outlays. Upbeat data is a confidence builder, especially if it comes in the later stages of a housing depression.
I believe this industry is turning around. Prices will still be impacted by foreclosures and overall stats may not reflect what is really going on beneath the surface. Bearish sentiment in the stock market, a gauge of all businesses, goes to extremes before turning the corner. Something as basic as housing is no exception. In both cases, the turnaround is masked by continuing gloomy news.
It will only take some upticks in prices of reasonably attractive houses to stir increasing interest. While 10% of our work force is unemployed, 90% is working, and many of the unemployed have a check coming in. Assume you are ready to buy a house and have two you like. Suddenly someone else comes in and pays the offering price. Then it happens to the other house “you simply love.” Are you going to dicker the next time around for a house that was priced 10% to 25% higher five years ago ?
The entire industry does not have to turn the corner to positively impact the economy and especially since it has been a net drag in recent years.
What must be factored in here is a home is most people’s biggest investment. The depression in the housing industry and drop of some 30% in prices (varies by region) has decimated people’s “wealth effect,” their overall feeling of financial security. For some, it deprived them of a source of borrowing for necessary or discretionary expenses. Improve their perception of financial wealth, and spending can’t be far behind.
TODAY: Year-end crosscurrents cloud the picture, but we are still locked into a trading range, roughly between DJIA 11,195 and 12,300 (S&P 50: 1160 and 1263). A break out of this range would of course be bullish, but attractive opportunities exist even if we don’t, assuming an investor’s timing is good, buying in on dips.
Looking back, I can remember targeting stocks that I felt shouldn’t be dropping this time of the year and thinking I could buy them cheaper yet. Suddenly, they bounced and I missed an opportunity. Just that time of the year when stocks defy reason.
Actually, we have support above the lower end of these ranges at DJIA 11,750 (S&P 500: 1210).
So, take Europe’s meltdown out of the picture and this market will rip. Even if the eurozone suffers some casualties, the market can still do well. I suspect a 17 nation eurozone will have fewer members a year from now, that a catharsis will intervene to clear the overwhelming uncertainty that has plagued our markets.
CONCLUSION: Two more days of this mishmash and we will only have to deal with some more of the same in the early days of 2012 as institutions take profits in stocks they wanted to show in year-end reports and investors put gains into the new year !
My New Year’s “wish” is that the Euro-uncertainty works its way into the background and we only have the political backbiting, lies and the hostility of a presidential election year to deal with.
Nevertheless, people managing money for clients, hedge funds and investors are not making money on Treasuries, money markets and CDs; they are pressured to turn to the stock market. Presently, there are attractive values, and especially looking out a year or two.
EUROPEAN UNION/EUROZONE
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:
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 ?”
Dec. 21, DJIA: 12,103 “ Housing Turnaround = Wealth Effect Rebound = Economic Expansion”
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”
George Brooks
*Bloomberg,com
**National Journal
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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.
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