November 12th, 2012
by Jeff Miller, A Dash of Insight
Like nature, the media abhor a vacuum. There is so much time, and so little valuable content!
That is the best explanation I can offer for the latest media frenzy: The Fiscal Cliff.
It was the big theme on financial television, but also caught the attention of the mainstream news shows as well. This week's Barron's has the recessionary implications of "the cliff" on the cover. CNBC has continued its images of crashing vehicles and also introduced promotional messages and little buttons that all of their anchors wear.
Anyone paying attention has been following this issue for months, understanding that the tense election climate prevented any real progress. The day after the election the stories started, mostly reflecting unrealistic expectations about how quickly Congress goes back to work!
There was also an instant verdict by some, suggesting that since the partisan alignment is about the same, there is no chance for progress.
This chart (via Joe Weisenthal) shows how crazy this has gotten. Check out Joe's article for his helpful take on this subject.
James A. Kostohryz explains why the "obvious" conclusions are seriously flawed. He provides eight interesting reasons, introduced with the following statement:
"In the context of the very understandable pessimism regarding the US's long-term fiscal health, I believe that the real possibilities of a "Grand Bargain" being achieved in the next few weeks / months are perhaps being overlooked. In this regard, it is important to remember that in July of 2011, a Grand Bargain that would have done a great deal to rectify the US's deficit and debt situation was almost reached. I believe that today, while the players may be the same, the historical circumstances are different - and in my view more favorable for achieving a Grand Bargain than they were in July of 2011."
All eight points are worth consideration, as are the author's additional articles describing the possible outlines of a solution.
I'll offer my own take on cliff diving in the conclusion, but first let us do our regular review of last week's news.
Background on "Weighing the Week Ahead"
There are many good lists of upcoming events. One source I especially like is the weekly post from the WSJ's Market Beat blog. There is a nice combination of data, speeches, and earnings reports.
In contrast, I highlight a smaller group of events. My theme is an expert guess about what we will be watching on TV and reading in the mainstream media. It is a focus on what I think is important for my trading and client portfolios.
This is unlike my other articles at "A Dash" where I develop a focused, logical argument with supporting data on a single theme. Here I am simply sharing my conclusions. Sometimes these are topics that I have already written about, and others are on my agenda. I am putting the news in context.
Readers often disagree with my conclusions. Do not be bashful. Join in and comment about what we should expect in the days ahead. This weekly piece emphasizes my opinions about what is really important and how to put the news in context. I have had great success with my approach, but feel free to disagree. That is what makes a market!
Last Week's Data
Each week I break down events into good and bad. Often there is "ugly" and on rare occasion something really good. My working definition of "good" has two components:
- The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially -- no politics.
- It is better than expectations.
The economic news last week was mostly positive. Perhaps it is partly the political season, but there was a little bit of "yes, but" connected to each report.
- Consumer sentiment (via the University of Michigan survey) has finally climbed out of recession territory. I do not use this as a leading indicator, but my research has shown it to be a good concurrent indicator of employment. In recent years it has been affected negatively by high gas prices and last-year's debt ceiling controversy. Since there are continuing effects from those sources, the rebound is encouraging. Doug Short's charts on sentiment do a great job of showing the relationship to the economy as well as the long-term trend.
- Q3 earnings may represent a trough in growth. Earnings guru Brian Gilmartin has been predicting this for some time, and now there is confirmation from the earnings team at Thomson Reuters. Brian also provides a comprehensive review of S&P valuation measures.
- The Chinese economy showed more progress (Bloomberg) both in industrial production (up 9.6%) and inflation (up 1.7%). There was a report from the NYSE floor that some traders were immediately worried that this would mean a reduction in stimulus. This is not a real concern, given the low inflation rate, but it does say something about sentiment.
- Greece voted to approve austerity measures and a new budget. This result was widely expected, despite the headlines about striking workers. It is not a solution, but a step. This has been the story of progress in Europe.
- The election is over! About half of the people are happy with the outcome and the rest are unhappy. Regardless of the outcome, we should all be delighted that there is now hope for dealing with the legislative impasse. Was it a market-unfriendly outcome? Doug Short thinks so, and produces this chart:
Guy Ortman of Scarsdale Equities, who writes an excellent daily technical commentary, offered a contrary viewpoint in his Thursday note (available only by email):
"...(T)he current dominant media spin suggesting yesterday’s decline was due to the presidential election results is mistaken. Futures were essentially flat around 8:oo am yesterday prior to the disappointing industrial production numbers released by Spain and Germany. It was at that point that futures fell out of bed suggesting European concerns were the cause for the market’s slide, not the re-election of President Obama."
Personally, I was surprised by the pre-election surge on Tuesday. There were many influences. With the market at a key technical level, it does not take much to generate a move. The late-week selling seemed to have much more to do with the non-stop fiscal cliff coverage.
The actual data last week was pretty good, but there were some noteworthy negatives.
- Earnings. The earnings "beat rate" has turned weaker as the season nears its end. Expectations were lowered before the season. Bespoke continues to provide helpful coverage and charts nearly every week throughout the season.
- Rail freight traffic is lower, suggesting economic softening. Stephen Hansen has a full report with charts and analysis of the trends.
- The ISM Services Index had a small decline, although the employment component was solid. You can see the trend readily in this chart from Calculated Risk (part of the detailed weekly look at all economic data).
- European economic reports showed further deterioration. The news got an exclamation point from the comments of Mario Draghi, hitting US markets on Wednesday.
The charts. If you are looking at trends, you will find many that seem threatened. You can also find worries about "three domes" and a massive head-and-shoulders.
Since many active traders swear by their charts, we can expect some short-term behavior to follow.
Putting the technical together with the fundamentals, we can see the effect in this chart from Bespoke. (see the full article to get a sector-by-sector breakdown.
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