Investor’s first read
Thursday, January 5, 2012 9:14 am ET
DJIA: 12, 418.42 S&P 500: 1277.30
Over night, concerns about European banking and sovereign debt issues resurfaced as we knew they would, but the U.S. economy is gaining traction. The question now is, can U.S. economic strength over ride what looks like a sure recession abroad, or hold its own, so investors can buy reasonably priced equities with confidence ?
What is needed here is the elimination of the threat of an out-of-control financial meltdown in Europe, one that surely will impact the global banking system. A lot of institutional and individual investors have limited their exposure to equities and settled for the safety that Treasuries, CDs and money markets offer with their paltry yield for fear of getting blindsided by a European financial calamity. We don’t have assurance yet that that can’t happen, but I think we will soon as the European “thing” pushes to a catharsis.
Meanwhile, the U.S. economy is getting stronger, tempting investors to come off the sidelines.
If they do, it will result in a huge surge in stock prices.
The ADP private employment data came in well above projections, with an increase of 325,000 jobs reported vs. an estimate of 175,000. Of special note is the fact small business hires and “service” jobs were strong, both signs that the economy is gaining strength.
December is prone to some distortions, but these numbers are big.
What’s more the Jobless Claims data showing a drop of 15,000 jobs in the last week of December continues a trend of fewer jobs lost each week. This too, was better than expected.
CONCLUSION: Money managers compete based on portfolio performance. They must buy stocks in order to do that. Based on valuations, many stocks are historically attractive. But they are also technically attractive having been locked into consolidation patterns or having pulled back from mid-2011 highs.
I sense, the BIG money is leaning toward aggressive buying, assuming a meltdown can be averted. The Euro-problem is more than two years old, giving leaders more than enough time to develop measures capable of preventing a meltdown.
While pre-presidential election years tend to be the best for the stock market in the four-year cycle, election years run second. Last year was flat, primarily due to Europe and Congress’ obstruction tactics.
This year could be a winner as Europe fades and Congress tries to shed itself of a “do-nothing” stigma and goes to work.
TODAY: We didn’t adequately test support yesterday at DJIA 12,310 – 12,326 (S&P 500: 1270 – 1272) , but I think we will today.
Key economic reports scheduled for release this week may demonstrate how much traction the U.S. economy is gaining.
ISM Manufacturing Index (10 a.m.) A survey of 300 manufacturers encompassing production, new orders, backlogs, inventories, employment, supplier deliveries, exports, imports, prices. November was up 1.2 points to 52.7 (greater than 50 = growth). December was reported at 53.9, comfortably above economist projections of 53.3.
US Construction Spending (10 a.m.) New construction residential, non-residential, public prospects.
Was up 0.8 in Oct., led by a 3.5% gain in private residential. Construction spending rose for the third time in four months, rising 1.2%, well above projections of a gain of 0.5%
Motor Vehicle Sales reported by Autodata Corp., are now running at an impressive 13.6 million annual rate.
Motor Vehicle Sales: ( a.m.) Includes domestic and foreign. Rose 2.8% in Nov. following 1.2% Oct.
US Factory Orders: (10 a.m.) New orders durable and non durables. Fell 0.4% in Oct.
ADP Employment (8:15 a.m.) Includes private payrolls only (no government) through the 12th of each month. Usually, but not always, an early indication for Friday’s Employment Situation report.
Jobless Claims (8:30 a.m.) reported weekly, it includes new claims for unemployment insurance for the first time. Claims rebounded 15,000 in the week ended Dec 24, but was not alarming since the four-week average is declining.
ISM Non-Manufacturing report (10 a.m.)Surveys 375 firms in cross section of U.S. including: agriculture, mining, construction, transportation, communications, wholesale and retail trade. Slipped 0.9% to 52 in November. Readings above 50 suggest growth.
Employment Situation (8:30 a.m.) Includes the “unemployment” report, average workweek, and average hours worked. Jumped 120,000 in November and is projected to jump by 150,000 in Friday’s report according to 62 economists surveyed by Bloomberg.
Conclusion: A strong market today suggests the possibility of a strong market in January, leading to a January Barometer signal for a good overall performance for the market this year.*
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. 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”
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”
*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 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.