Market Trick More Likely Than Treat In October!
Tuesday, October 2, 9:25 a.m. Conditions have set up more heavily for a market downturn, without one having taken place, than I can remember in quite some time. In fact, without even considering those conditions, the S&P 500 has had only three rallies in the last ten years that lasted as long as the June [...]

Tuesday, October 2, 9:25 a.m.

Conditions have set up more heavily for a market downturn, without one having taken place, than I can remember in quite some time.

In fact, without even considering those conditions, the S&P 500 has had only three rallies in the last ten years that lasted as long as the June rally without even a 5% correction.

And then we can look at the conditions, which make that even more remarkable, since any one or two of them have been more than enough to mark some significant tops in the past, let alone just a correction.

Global economic growth has been collapsing and continues to do so. The economic slowdowns continue unabated in the major economies of the world, including the U.S., China, Japan, Germany, France, the United Kingdom, Brazil, Italy, India, Canada, Russia, and Spain, as well as in the rest of the 17-nation euro-zone.

The U.S. economy is in a similar situation, GDP growth in the 2nd quarter revised down to just 1.3%, durable goods orders plunging 13.2% in August, the Fed’s various Business Indexes (Empire State, Chicago, etc.,), and its National Business Index (CFNBI), all dropping into negative territory, etc. Yes, in the mix there was a small uptick in the ISM Mfg Index yesterday. But overall the reports are not encouraging at all.

Then we have the situation where the ECB and Fed have fired off their most powerful ammunition, raising the question of what they can do if things continue to deteriorate.

Corporate earnings are nose-diving. S&P 500 earnings grew 45% in 2010 as they recovered from the steep declines and losses suffered in the Great Recession. That pace slowed to a still robust 15% growth in 2011. But this year companies have run out of ways to increase profit margins through cost-cutting and lay-offs, and are running into the effects of the global economic slowdown. So year on year earnings growth for the S&P 500 slowed to just 0.8% in the second quarter, and Wall Street analysts are now forecasting an earnings decline of 2.7% in the 3rd quarter.

The 3rd quarter earnings reporting period kicks off a week from today when Alcoa reports. So far in the earnings ‘warning period’ 80% of companies that issued pre-announcements warned they will not be meeting Wall Street’s estimates for the quarter. That’s about double the usual rate.

Meanwhile, even as individual investors remain complacent (so much so that money flow out of equity mutual funds throughout the bull market that began three years ago, has finally reversed to inflow), insider selling has become even more intense.

In Europe, leaders panicked into action by the March-June market plunge, have been encouraged by the June rally to return to complacency and wrangling again, not in any rush to implement the rescue efforts they were forced to agree to.

For instance, Spain is still refusing to take its next required step of requesting a bailout, even as the credit rating agencies are again poised to downgrade its debt rating to junk status. Reuters reports this morning that Germany has returned to its previous stance of having reservations about a bailout of Spain, citing EU officials as saying German Chancellor Merkel “does not want to present another bailout to her increasingly fed-up parliament”. Meanwhile, while officials fiddle, Spain’s economy continues to burn, its unemployment rate reported this morning as having jumped another 1.7% to 25%, the highest in the euro-zone.

EU officials are still struggling to find a compromise with Greece over the additional austerity measures it must impose on its people in order to receive the next payment in its bailout, while the Greek population continues to engage in strikes and protest marches that are not helping its worsening recession.

And then there is the lack of follow through so far to the initial spike-up reaction to the ECB and QE3 programs.

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And so it goes.

It does add to up to high odds that markets will more likely receive a trick than further treats in October, noted for being a month of tricks anyway.

The Fiscal Cliff is an uncertainty of major magnitude.

The ‘fiscal cliff’, when previously enacted automatic spending cuts and tax increases take place, looms just ahead.

The law was a compromise reached when Congress could not reach agreement on whether the budget deficit and federal debt problems should be tackled immediately, or not until after the economy has recovered. The compromise was a law that delayed the changes, but makes them automatic, no further ratification needed, on Jan. 1, 2013.

If that happens it’s estimated that it will reduce the budget deficit by $560 billion.

But also that it would cut U.S. GDP (currently running less than 2% growth) by 4%, throwing the U.S. into recession for sure, and result in a loss of 2 million jobs.

The estimates of a total of $560 billion that would be pulled out of the economy consists of $280 billion by the expiration of the Bush tax cuts, $125 billion from the expiration of the Obama payroll-tax cut, $40 billion from the expiration of emergency unemployment benefits, and $98 billion from the Budget Control Act spending cuts.

Washington has been in no hurry to address the obvious problem, and here we are.

It’s an uncertainty for the economy, corporations, and markets of major magnitude. And for that reason I’ve been confident that somehow Congress will cobble together a last minute deal that will pull the economy back from the cliff.

But I’m beginning to wonder.

An article in the New York Times this morning The ‘Fiscal Cliff’ Opportunity  notes that the fiscal cliff will be the principal item of business in the period when Congress returns after the election and prior to its Christmas recess, but points out why it’s difficult to expect a resolution in such a short time frame, especially given the animosity between the two parties on the subject of spending and tax cuts.

The article suggests two possibilities.

One would be to kick the can down the road if both sides could agree to take the same action as last time, delay the spending cuts and tax increases for another year, while (as was planned last time), Congress and the White House theoretically negotiate something better.

But the writer of the article (Bruce Bartlett, who held senior policy positions in the Reagan and George H.W. Bush administrations) suggests kicking the can down the road again is unacceptable and should be rejected.

He advocates letting “the fiscal cliff occur as scheduled and enacting a fix later”, when the new Congress convenes for its session next year.

And that apparently is a real possibility, and not a new thought, but one that has been promoted for several months by Peter Orszag, former director of the Office of Management and Budget, and William Gale, an economist at the Brookings Institution.

The thought is scary.

To read my weekend newspaper column click here: Are Declining Oil Prices Predicting A Stock Market Decline- Sept. 28, 2012.

Subscribers to Street Smart Report: In addition to the charts and information in the ‘premium content’ area of this blog, there will be another in-depth U.S. Market update (5 pages) tomorrow in your secure area of the Street Smart Report website.

Yesterday in the U.S. Market.

Somewhat more volatility on somewhat heavier volume.

The Dow traded in a range of 161 points from its intraday high to its intraday low, with 0.7 billion shares traded on NYSE.

The market hit its high mid-day with the Dow up 161 points. But selling came in during the afternoon, and near the close it was up only 55 points, and closed up 77 points. But the rest of the market was not as positive as the Dow all day, nor at the close.

The Dow closed up 77 points, or 0.6%. The S&P 500 closed up 0.3%. The NYSE Composite closed up 0.4%. The Nasdaq closed down 0.1%. The Nasdaq 100 closed down 0.2%. The Russell 2000 closed up 0.3%. The DJ Transportation Avg. closed up 0.2%. The DJ Utilities Avg closed down 0.3%.

Gold closed up $5 at $1,777 an ounce.

Oil closed unchanged at $92,26 a barrel.

The U.S. dollar etf UUP closed down 0.2%.

The U.S. Treasury bond etf TLT closed up 0.4%.

Yesterday in European Markets.

European markets rallied back strongly after last week’s big losses. The London FTSE closed up 1.4%. The German DAX closed up 1.5%. And France’s CAC closed up 2.4%. Greece closed up 0.7%. Italy closed up 2.8%. Spain closed up 1.0%. Russia closed up 2.1%.

Asian Markets were down Sunday night and back up some last night..

The Asia Dow closed down 0.4% Sunday night, and up 0.3% last night.

The markets of China, Hong Kong, and South Korea were closed for a holiday Sunday night, and China’s market will remain closed on holiday all week.

Among individual markets last night:

Australia closed up 1.0%. China closed up 1.5%. Hong Kong closed up 0.4%. India closed up 0.3%. Indonesia closed up 0.5%. Japan closed down 0.1%. Malaysia closed up 0.4%. New Zealand closed up 1.1%. South Korea closed down 0.1%. Singapore closed up 0.7%. Taiwan closed up 0.6%. Thailand closed up 0.5%.

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Markets This Morning:

European markets are off earlier highs but still up fractionally this morning. The London FTSE is up 0.2%. The German DAX is up 0.3%. France’s CAC is up 0.1%

Oil is up $.12 barrel at $92.60

Gold is up $2 an ounce at $1,779.

This Morning in the U.S. Market:

This week will be an important week for potential market-moving economic reports. They include the ISM Mfg Index, Construction Spending, ADP Monthly Jobs Report for September, Factory Orders, minutes of the Fed’s last FOMC meeting, and on Friday the big one, the Labor Department’s Monthly Employment Report for September. To see the full list click here, and look at the left side of the page it takes you to.

Yesterday’s reports were that the ISM Mfg Index ticked up enough in September to get back above 50, into positive territory, rising to 51.5. But the Commerce Dept. reported that Construction Spending fell in August for the 2nd month, falling by 0.6% compared to the consensus forecast of a 0.5% gain.

Outside of the U.S., the worsening economic slowdown in Europe was confirmed  as the Markit PMI Index in the U.K. fell to 48.4 in September from 49.8 in August. Markit’s chief economist said “That could dampen economic growth severely and keep the U.K. economy in recession.” And the Markit PMI for the 17-nation eurozone ticked higher, but only to 46.1 in September, its 14th straight month below the recessionary level of 50. “Output, order books, and exports all continued to fall at steep rates.” Markit’s chief economist said.

This morning reports will be auto sales in the U.S., which will come out piecemeal through the day. 

Our Pre-Open Indicators:

Our pre-open indicators are pointing to the Dow being up 35 points or so in the early going.

To read my weekend newspaper column click here: Are Declining Oil Prices Predicting A Stock Market Decline- Sept. 28, 2012.

Subscribers to Street Smart Report: In addition to the charts and information in the ‘premium content’ area of this blog, there will be another in-depth U.S. Market update (5 pages) tomorrow in your secure area of the Street Smart Report website.

I’ll be back with the next regular blog post on Thursday morning at 9:25 a.m.

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