Market Matters…         

Here we go again.  No, not Italy or Greece this time (though they remain prominently in the news along with newbie Spain).  This repeat performance belongs to the US Congress, the super committee to be exact (de-emphasis on “super”), which has less than a week to come to agreement on deficit reductions before the automatic $1.2 trillion in pre-established spending cuts take effect.  The bipartisan group, that was supposed to be above the pure partisan fray, seems to have merely picked up where their finger-pointing, blame-placing brethren left off months ago.  Republicans claim to have given much more than an inch by agreeing to $250 billion in tax hikes; while Democrats scoff at the seemingly token gesture.  Some politicos hoped that the committee would think big (like the $4 trillion deficit cut range), but even the $1.2 trillion looks like a huge stretch with time running out.  A few key senators are even looking into rewriting the automatic reductions by taking certain military adjustments off the table.  All the while, investors, voters, and, of course, the rating agencies are watching.  Anyone remember what happened when S&P downgraded the US debt over the summer?  A similar move will not provide much holiday cheer. 

In corporate news, retailers remained in the earnings’ spotlight this week and the results were mixed at best.  While Home Depot got a sales boost from Hurricane Irene and Target benefited from growing same-store sales, JC Penney offered a very cautious outlook for the current quarter and Wal-Mart continued to struggle in the lackluster US economy.  On the transaction front, Warren Buffett (Berkshire Hathaway) reversed a long-standing position of avoiding tech by making a sizable investment in IBM.  Angie’s List, an online reviewer of consumer service providers, opened strong in its first day of trading following its IPO before giving back some gains late in the week.  Domestic financial institutions like JP Morgan, Morgan Stanley, and even Goldman Sachs have come under additional scrutiny as of late over exposure to euro-zone sovereign exposure.  Many are beginning to detail their related holdings in regulatory filings even though the potential losses fall well below the level that requires disclosure. 

Investors kept a watchful eye on Europe as Italy’s bond yield crept back above the dreaded seven percent level early in the week.  A new government (of fewer politicos and more business professionals and academics) took over and now faces an arduous task of slashing debt, while regaining investor (and public) confidence.  The contagion fears progressed as Spain’s latest auction resulted in record euro-era bond yields and even France was forced to pay higher rates for its debt.  Despite some decent domestic economic data (see below), stocks fell throughout much of the week as investors seemed to have lost all confidence in their elected officials (in the US and EU).  Europe continues to crawl back toward recession and the Congressional super committee’s lack of progress does not bode well for future market confidence.  Crude rose mid-week on news that a pipeline bottleneck may be eased in the Gulf, thus improving demand, though the debt concerns (at home and abroad) prompted renewed selling late.  Any potential for Thanksgiving holiday cheer (or just a bunch of turkeys on the loose in DC)? 

Economic Calendar

While the endless debates continue over the numerous country austerity programs and the comprehensive bailout plan, the state of the European economies moved from bad to worse.  GDP in the 17-country euro-zone grew by a measly 0.6% in the third quarter, the worst showing in over two years or the height of the last recession.  While Germany (+2%) and France (+1.6%) continue to lead the expansion, even their “lackluster” growth rates seem hardly able to pick up the slack for the other troubled economies.  During the week, the European Central Bank (ECB) jumped in to buy debt issued by Italy, Spain, and Portugal, though the actions seemed to do little to inject much confidence.  Japan’s economy expanded at a nice 6% pace last quarter as the country starts the steady rebuilding process from the devastating earthquake and tsunami.  Property values in China declined for the first time in two years, lending optimism that the government’s ongoing actions to halt its overheating economy actually may be working. 

Closer to home, the economic data on the domestic front was generally favorable.  Retail sales grew again in October (after a very strong September) as consumers returned to the malls in advance of the holidays.  Inflation remains well off the radar screen as wholesale prices fell at the fastest pace since February 2010 and even the core indexes (PPI and CPI) barely budged last month.  With inflation on the backburner for now, the Fed may have more leeway in its battle to stimulate growth.  Industrial production jumped by 0.7% as manufacturing continued its nice recovery from the doldrums of the Japan tragedies, and even the Philly Fed report offered a strong outlook for future biz conditions.  Jobless claims fell again last week and the four-week moving average (a perceived better, less volatile gauge) dropped below the critical 400k level for the first time in seven months, an indication that some real job expansion may be in the works.   Finally, leading economic indicators, a predictive measure, rose for the sixth consecutive month.

On the Horizon…While traders, investors, and politicos prepare for their Thanksgiving travel plans, the week should be anything but dull.  HP highlights the earnings reports as shareholders try to figure out the future of its PC biz.  The Fed releases minutes from the last policy meeting so economists can view the dissension in its midst in determining if and when Bernanke and Co. will act again.  GDP headlines the economic releases and some analysts expect a slight downward revision to the initial 2.5% reported expansion rate in the third quarter.  Retailers will be opening their doors early and often as Black Friday officially kicks off the traditional holiday season (though plenty of promotions and discounts have been in the works for months already).  Finally, all eyes (especially the ratings agencies) will be on DC as the super committee reaches the deadline on its would-be deficit cuts.  How about some compromise in the Thanksgiving spirit?  

(c) Brounes & Associates

www.ronbrounes.com

         
 

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