Monday, November 14, 2011 9: 18 am EST
DJIA: 12,153.68 S&P 500: 1263.85
Friday’s 259-point surge in the market averages set the stage for a potential breakout above October’s highs (DJIA: 12,303 and S&P 500: 1293).
Based on the fact the U.S. economy has not fulfilled the doomsters’ claims that it is headed for a recession, based on the fact stocks are historically and fundamentally cheap, and the fact we have entered the “Best Six Months” for owning stocks (Nov. 1 to May 1)*, as well as the fact there is nowhere else to invest money, a breakout and run up should happen.
But doubts about the ability of certain European countries to implement austerity programs that will effectively reduce indebtedness, still stand in the way.
A bleak European picture has improved somewhat with new governments in Greece and Italy.
Significant progress was made on Oct. 27 when the Euro-rescue agreement was signed, addressing a discount rate for Greek bonds, bank recapitalization, and an increase in the bailout fund (European Financial Stability fund or EFSF) to 1 trillion euros. This had to be done before anything else and it stands as the foundation for European recovery.
So, Are we out of the woods now ?
However, the chances of a meltdown are less, and that alone may free up some institutional buying.
In addition to Europe’s bank and sovereign debt issues, the Street has been plagued by concerns about another recession here. But, so far, the U.S. economy has held its ground.
This week’s economic reports confirm a recession is NOT around the corner.
Tuesday: Producer Prices, Retail Sales and the Empire State Manufacturing report come at 8:30 and Business Inventories at 10 o’clock.
Wednesday: Consumer Prices are reported at 8:30 and Industrial Production at 9:15.
Thursday: Housing Starts and Jobless Claims at 8:30, the Philly Fed (regional economic conditions) at 10 o’clock.
Friday: Leading Economic Indicators.
CONCLUSION: Friday’s “relief” rally could take a breather today, which would be normal after a big day Friday in response to long-awaited news. Concerns linger about how much new governments in Greece and Italy can achieve in reducing debt enough to avoid bankruptcy. That too is normal, the problems didn’t vanish with the exit of old administrations.
Support for a pullback is DJIA 12,030 - 11,955 (S&P 500: 1254 - 1247).
We have a shot at a 500 – 700 point run in the DJIA here if the Street can set aside worries about Europe, which wouldn’t have the influence it has if it weren’t for the magnitude of the global damage a bankruptcy in Italy or Greece would have.
That run CAN HAPPEN even if we get a correction today and tomorrow, watch this one closely. This market has had umpteen reasons to tank, but hasn’t done so.
All this said, all my drivel aside, what I am saying here is, if Europe gets out of the way, we got ourselves a race horse, be ready to saddle up.
THE SUPERCOMMITTEE: 9-Days to a deadline !
With a key deadline looming on November 23, the actions of the SuperCommittee will soon come to the forefront.
The big roadblock is increased taxes. Reportedly, the committee is now considering a two-step process, small increases to be followed by larger ones to be debated by Congress - hmmmmm. Now who’s kicking the American citizen down the road ?
Parts of President Obama’s “American Jobs Act” may be used as a bargaining chip.
I have been publishing the following info on the SuperCommittee for weeks in an effort to highlight its importance, because it will gain traction on Page One as Europe’ s crisis eases.
The deadline for the SuperCommittee to vote on a plan that addresses a 10-year deficit reduction of $1.5 trillion is 9 days 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.
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. 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 Circle”
Nov. 10, DJIA: 11,780, “ OK Greece and Italy – Cut the Crap – Decision Time !”
*Stock Trader’s Almanac
**Council for Foreign Relations (www.cfr.org): “Defense Spending and the Deficit Debate”
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