Thursday, September 22, 2011 9:13 am EDT
DJIA: 11,124.84 S&P 500: 1166.76
Hopes for a further rise in stock prices were dashed yesterday by a statement by the FOMC that “There are significant downside risks in the economic outlook.” While the Fed will ramp up efforts to lower borrowing and mortgage costs, investors turned tail and hit the exits yesterday, raising chances that the market will break down significantly from the consolidation range intact since August 9.
The recovery in jobs is NORMAL compared with the last three recessions. This is illustrated in a chart in the July 29 issue of The Economist online, which compares the 2007 – 2009 recession to three prior recessions (1973-74, 1981 – 82, 1990 -91) and the job recoveries that accompanied them. The conclusion is, a jobs recovery is a product of the severity of the preceding recession.
The Republicans won’t talk about it, they want to oust President Obama; the Democrats won’t talk about it because they are inept at researching issues, BUT we can talk about it, because it is reality and to ignore it doesn’t help get on the right side of the market.
The Street weighs on each economic indicator as if it was going to offer a clue to the direction of the economy, and at times they do.
But, the truth is the global economy took a monstrous hit in 2007 – 2009, as did the net worth and liquidity of individuals and most businesses. We almost had a total meltdown – TOTAL with an unthinkable domino effect.
Most likely we are out of the woods, but it will take time to recover, so get used to it – a long time.
What is needed now is for the stock market to find a level that discounts that unpleasant fact. The sooner we find that level, the better.
We are getting close to resolving the big question of do we break out UP or DOWN from the Aug. 9-to-present consolidation range, roughly contained by DJIA 10,600 – 11,740 (S&P 500: 1101 – 1220). This “consolidation” I refer to has been a very irregular trading range, so precise levels defining a breakout are not quantifiable.
Two days ago, it looked like we would get an upside breakout, though I warned that it would be a fake out followed by a plunge in prices.
Now it looks like we will get a downside breakout.
Essentially, the market has been telling us, it isn’t sure which direction it wants to go, what with Europe’s sovereign debt problems, the global economies, and our political dysfunction. The latter takes added prominence now that the Tea Party (plus some Democrats) voted down a bill intended to shore up FEMA which will need funding to help victims of Hurricane Irene. Some Dems voted with the Republicans because the bill took funds away from incentives to the auto industry to develop fuel-efficient technologies.
So, aside from Irene’s victims who need help, who cares ?
All of us should, because this vote reopens the spectre of a government shutdown, since the bill would fund the government until November 18. We need more info on this one, which wasn’t available at presstime.
As I have noted repeatedly, the downside risk is DJIA 9,680 (S&P 500 1050) based on what I know now.
And while stocks are reasonably valued by historical yardsticks, they can get more attractive.
ON A MORE POSITIVE NOTE: Step back for a moment and look out beyond today’s problems. Let’s assume Europe bites the bullet and heads off a meltdown, even establishes some stability.
Let’s assume the U.S. either doesn’t slip into a recession or bumps along until it can regain positive traction. Let’s further assume Congress begins to set partisan agendas aside long enough for tax reform and deficit reduction.
What is the investment environment then ?
These things will happen in time, maybe not for a year or two. What are the stocks of well run companies worth then ?
I doubt individual investors will see change coming in advance, usually they wait for it to be reported. The BIG and SAVVY money will see it well in advance and will be buying the stocks distraught investors are dumping.
12-member SuperCommittee timeline:*
Sept. 22: Deadline for Congressional consideration of resolution of disapproval for first $900 bn tranche
of debt limit increase.
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 and
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.”
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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