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Wall Street Shifts Focus to Sequestration

Investor’s first read - Brooksie’s edge before the openMonday August 6, 2012 9:10 a.m.DJIA: 13,092.17S&P 500: 1390.99Nasdaq Comp.: 2967.90Russell 2000: 787.92Friday’s 217-point rise in

Investor’s first read – Brooksie’s edge before the open
Monday August 6, 2012 9:10 a.m.
DJIA: 13,092.17
S&P 500: 1390.99
Nasdaq Comp.: 2967.90
Russell 2000: 787.92

Friday’s 217-point rise in the DJIA was testimony to the crux of Friday’s post, “What This Market Needs” – i.e., assurance that the euro and consequently, global stock markets won’t crash. It also needs assurance that the U.S. economy will be able to withstand a crunch in the euro.

The bull market that began in early 2009 climbed a wall of a lot of worries, but hovering out there in the forefront, or back, of everyone’s mind has been a fear of total meltdown, starting in Europe and spreading throughout the world’s stock markets.

Five years ago, such a disaster would be unthinkable, but the Great Recession/Bear Market changed all that – nothing is impossible, we almost had a much Greater crash.

Commentary by key European leaders supporting the euro and comments last week by ECB’s Mario Draghi, seem to go well beyond the “usual” pablum served up over the last year in an attempt to ease fears of a collapse of the euro.

That, combined with strong assurance by the Fed it will step in to buoy the economy if needed, as well as a better-than- expected Employment Situation report (163,000 jobs) Friday enabled markets to recoup their entire losses for the week.

CONCLUSION: If the BIG money buys this newfound optimism, it will buy “in-size” along with institutional investors and eventually the public. Such buying would take the market to new 2012 highs.

However, my feeling for months has been that the big turn won’t come until September/October. I have based that on the existing uncertainties. Europe is one. Last week’s position statements by the ECB’s Draghi need confirmation which will takes weeks.

The horrors of the “fiscal cliff” (fact or fiction) will hog headlines in coming months, as will vicious campaigning for November’s elections.

Congress has “wiggle room” on this one, and if anyone knows how to wiggle, it is a U.S. Congress person. Rhetoric about sequestration, mandated spending cuts and the Bush-era tax cuts/extension will be a tough hurdle for the stock market to hurdle at this time.

TODAY: Very light week for economic reports. Look for a little spike at the open to DJIA 13,148, then a correction. Downside risk this week is DJIA 12,925 (S&P 500: 1371).

Facebook (FB): FB rallied in sympathy with LindedIn’s (LNKD) good earnings report, but faded at the close. But LinkedIn doesn’t carry the baggage FB has, namely a bungled IPO that created a lot of disappointed investors and doubts about the company’s ability to generate revenue and earnings growth.
I think FB will test last week’s lows of $19.82 later this week. Odds favor that last week’s buying was short covering along with some hit ‘n run traders. I still see a worst case of $16.88, or so, but most likely it would take general softness in the overall market to generate the kind of frustration that would be needed to create enough fear to prompt a selling climax. I don’t own, nor have I ever owned FB. Generally, I don’t recommend or comment on individual stocks. I started covering FB technically after its IPO, because I felt at $34 it was very vulnerable in face of all the misunderstanding and hype.

Consumer Credit (3:00p.m.):Rose sharply $17.1 bn in May with student loans a big contributor to to non-revolving loans.
Productivity and Costs (8:30a.m.): Business productivity declined 0.9% in Q1, revised upward from a gain of 0.5% vs. a gain of 1.2% in Q4, 2011.
Jobless Claims (8:30): Rose 8,000 claims in the July 28 to 365,000 bringing the 4-week average to 265,500.
U.S. International Trade Gap (8:30a.m.): Narrowed in May due to lower oil prices. The trade deficit narrowed to $48.7bn from $50.6bn in April.
Wholesale Inventories (10:00a.m.): Rose 0.3% in May bringing the inventory/sales ratio up a smidge to 1.18 from April’s 1.17.
Import/Export Prices (8:30a.m.): Import prices dropped sharply in June by 2.7% following a downwardly revised decline of 1.2% in May. Export prices declined 1.7% in the period.

George Brooks
The writer of Investor’s first read, 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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