The markets moved sideways on Friday on mediocre volume as we await the next saga from Europe and the results of the Super Committee next week.

Market Statistics

Investors are so confused by the external headlines they don't know what to do so they did nothing on Friday. Italy and Greece are progressing but now Spain has taken the top spot in the Euro headlines with a major election scheduled for Sunday. Six weeks ago you would not even have known there was an election in Spain much less cared about which party won. Fast forward to today and with events in Italy and Greece moving through a quiet period the attention is now on the next probable target of the bond vigilantes. The conservative party is expected to win the election and I am told that is what analysts would like to see. If there is an upset you can bet the markets will reflect that news at the open on Monday.

The markets wandered aimlessly on Friday on mediocre volume of six billion shares. The only material trend was the weakness in the Nasdaq all day while the Dow and S&P changed directions multiple times. The economic news was good and that probably kept the markets from moving lower. The Conference Board Leading Indicators rose +0.9% in October after a +0.1% gain in September. This was 50% better than expectations for a +0.6% gain.

Nine of the ten components rose, compared to only five in the prior month. Consumer expectations were positive for the second month after posting negative declines in the prior three months. The six month annualized growth rate rose sharply from 3.5% to 6.1%. This suggests the pace of growth is accelerating and Q1-2012 could be surprising.

The gain in the headline number was the largest since February. The index is now up +6.6% year over year. The fears of a return to recession are quickly receding although still elevated.

Leading Indicators Chart from Moody's

On Thursday another drop in Jobless Claims was ignored thanks to the European headlines. Claims declined to 388,000 from 393,000 and the lowest level since April. Several analysts were giddy with excitement but you have to realize this is a result of people taking seasonal holiday jobs to pay the bills. This is not necessarily a symptom of an improving job market. I would love to be proven wrong. About the third week in January we will know for sure. Claims need to decline below 350,000 before hiring numbers will start to increase materially.

Jobless Claims

Next week is holiday shortened for trading and all the economics have been pushed into the first three days. There are three manufacturing reports that should show positive improvement. The GDP revision on Tuesday is also expected to show a slight improvement to 2.5% from 2.46%. Analysts are raising their GDP estimates for Q4 to more than 3.0% based on the recent economic numbers. Let's hope they don't get carried away and we end up with a disappointment.

The biggest events for the week in the U.S. will be the FOMC minutes and the Super Committee decision on Wednesday. The minutes will be scanned for indications of future quantitative easing. Several Fed heads have been talking up the potential and several others have been talking it down. The minutes will tell us if the talk was serious.

The Super Committee vote on Wednesday has the market worried. Hopefully they won't drag it out and miss the deadline although I don't know what would result from a deadline miss. If they don't come up with a plan then $1.2 trillion in cuts begin to hit in 2013. Not today, not 2012 but 2013. Numerous lawmakers have said in the last week that the default across the board cuts were preferable to the alternatives being discussed in committee. Since they don't take effect until 2013 and after the elections there would not be any immediate pain at the ballot box. If the committee comes up with any plan that is a compromise then both parties will suffer from voter backlash in the polls. Republicans don't want to raise taxes and democrats don't want to cut programs.

The committee has until midnight on Monday to come up with a plan and that plan will be voted on Wednesday. They have multiple options. They can literally do nothing and get away with it by submitting a blank deal to cut $1.2 trillion in spending but leave the actual amounts up to individual congressional committees to be determined over the next year. Basically they agree to cut but don't define the cuts. Secondly they could agree to cut some portion of the $1.2 trillion, say $600 to $800 billion and then let the automatic sequestration process reduce spending using across the board cuts for the rest. They could also agree to use the automatic cut option (sequestration) and then go back in next year in the regular session and change the rules. They can change the rules at will so the entire exercise is just political theater. The least likely outcome is a deal where they submit a real plan to cut $1.2 trillion or more through cuts and tax hikes.

Complete Calendar for Joint Super Committee (JSC):

Nov 21st - Deadline for completed plan. The Congressional Budget Office (CBO) must rate the plan and certify its financial impact and then the JSC members must have 48 hours to review it before they vote. That means the plan must be submitted and rated by the CBO prior to midnight on Monday.

Nov 23rd - Deadline for Joint Committee to vote on the plan.

Dec 2nd - If the JSC approves a plan they have until midnight on Dec 2nd to submit the plan to the President and Congress.

Dec 9th - If the legislation is approved by the JSC, each committee receiving a referral by the JSC bill must report that bill by midnight Dec-9th.

Dec 23rd - Deadline for House and Senate votes on the JSC plan.

Jan 15th - If the JSC plan fails to pass or falls short of the $1.2 trillion in savings the sequestration (across the board cuts) would be triggered and start in 2013. Any agreed upon deficit savings from the JSC would be credited against the $1.2 trillion sequestration.

As a point of interest the U.S. is about to hit the debt ceiling again. When the ceiling was raised in early August by $400 billion that was enough to get us through December. There is roughly $200 billion unspent and that will run out by Dec-31st, give or take a day. In order to raise the ceiling again the Super Committee must reach some kind of agreement on the $1.2 trillion in spending cut otherwise there is no procedure for raising the ceiling again.

Assuming they put forth some kind of plan that is approved then president Obama can request a further increase in the debt ceiling of $500 billion, which is subject to Congressional disapproval, which the president can veto. Congress would have to raise a two thirds majority to override his veto and cancel the increase. In 2012 he can ask for a final increase of up to $1.5 trillion under the same approval procedure. The amount he can request depends on how much the Super Committee actually approved to be cut. However, the president cannot request a debt ceiling increase that is more than whatever is submitted and approved by the JSC or $1.2 trillion if sequestration has been triggered.

This deadline and the vote are going to be the key for the entire week and the market is going to be fixated on it in what is normally a bullish week. It is that time of the year when families go to the mall and dad stays home and starts planning how he is going to invest the year-end bonus, assuming there is going to be a year-end bonus this year.

I had lunch with a friend on Friday that had just come from a large regional mall south of Denver. She said it took her 15 min to get a parking place and there were so many people in the mall she felt like she was in a subway at rush hour. I drove past the mall later in the day and there was not a parking place in sight. Apparently the spending virus is in the air and that also suggests we are not heading back into a recession.

Economic Calendar

Friday was a lackluster trading day. The focus was Europe and the impact of the Thailand flood. Despite the flood news over the last four weeks the market finally woke up to the seriousness of the problem when Dell reported earnings. The last half of the week anyone connected with the PC sector was hit by selling.

Hewlett Packard (HPQ) was the exception on Friday with their earnings announcement coming up after the close on Monday. This will be Meg Whitman's first earnings cycle since being named HP CEO. They are expected to report $1.16 per share on revenue of $32.2 billion. However, since this will be the only quarter they can dump charges into the earnings and blame it on the prior CEO there is some earnings risk. Remember, Leo Apotheker was going to scrap the tablet effort and the WebOS operating system and was discussing selling off the PC business. Whitman has nixed all those plans but there may be some charges related to the prior announcements and the comprehensive review that took place after she assumed command.

I believe the reaction to the earnings are going to be a tossup. Whitman could announce some market moving plans and the stock could rally even if earnings are down. I will be most interested in hearing how they are handling the disk drive shortage. If you want a hard drive today it is no longer a matter of price but just finding one at any price is the problem.

HPQ Chart

Linkedin (LNKD) has a lockup expiring on Monday and 24 million shares will be available for sale. This is relative because LNKD only sold nine million shares in the IPO. Roughly 2.5 times the current outstanding shares will be available for sale. LNKD tried to diffuse this tape bomb by filing an S1 on Monday to sell another 8.8 million shares at $71 to "raise capital." Anyone putting their shares in the secondary offering will be limited on quantity and they will not be able to sell any more shares for another 90 days. Essentially by filing for the secondary at $71 when the shares were at $78.50 they were attempting to put a floor under the price so the lockup expiration would not knock the shares back to $50. There are 97.5 million shares issued but most of those are company owned or under a longer lockup period as a condition of the investment. Another 56 million shares will be eligible for trading 90 days after the secondary.

Insiders have already signed up to dump a bunch in the secondary. Bain Capital will sell 3.71 million. CEO Weiner 372,000, CFO Sordello 98,000, Greylock Ventures 1.4 million, Bessemer Venture Partners 500,000, co-founder Allen Blue 118,000, SVP Nishar 94,500 shares. Obviously these people can be rich on paper thanks to their efforts and investments but it is not money until the shares are sold. With the shares well off their $110 high and threatening to break support at $72 I probably would not have signed up for the secondary and would hit the sell button at the open on Monday.

I looked at the put options on Friday and they were astronomically high as you would expect. Evidently many traders had the same idea.

LNKD Chart

AMR, the parent of American Airlines, found some love on Friday. An analyst at Dahlman Rose upgraded AMR from sell to hold. Ok, maybe not a big improvement but still an improvement. The reason for the upgrade was "limited downside from here." With shares at $1.63 on Thursday I would say that was a reasonable assumption. S&P cut their debt rating to CCC+ on Thursday. The airline is supposedly on the verge of bankruptcy and shares have fallen -78% for the year. S&P said they felt AMR has sufficient liquidity for 2012 and was not at immediate risk of bankruptcy. AMR and the pilots union have been arguing over a contract for five years. Pilots at the American Eagle subsidiary are expected to vote on a new contract in January. If the contract is accepted AMR will spin off American Eagle. The feeder airline supplies 90% of American's long haul passengers. As an independent feeder airline they can perform the same service for other majors and that would provide additional income and allow Eagle to get out from under the problems of the parent.

AMR Chart

Clearwire (CLWR) was halted for trading on Friday after it said it may skip a debt payment coming due on Dec-1st. The CEO said in a WSJ interview that the company was evaluating whether it would make the $237 million payment. He said it would be a "significant drain" on cash.

Analysts immediately called the comment a ploy to force Sprint to cough up some cash or extend a network sharing agreement. It was also a play to attract other potential partners since Sprint has been talking about building its own network. Clearwire has been losing money as Sprint's broadband provider for years. Clearwire has enough money for another 12 months and that is when Sprint's contract expires. If Sprint agreed to continue using Clearwire the company could attract additional financing. Sprint owns 54% of Clearwire so they have a vested interest in keeping the carrier afloat. Clearwire says it needs $1 billion in financing to upgrade its network from WiMax to LTE.

Clearwire Chart

This was an extremely active week for oil prices. Brent futures expired on Monday and WTI futures expired on Friday. In the middle of that process the dollar chart looked like an EKG and rumors were rampant about greater problems in Europe. The pipeline news for the U.S. prompted knee jerk short covering when nearly every WTI trader was short crude going into expiration because of storage problems at Cushing.

It was a crazy week with WTI hitting $103.37 on Thursday and a five month high. That was a short squeeze and not a sudden buying binge. Crude has rallied from $75.15 on Oct 2nd to $100 on Tuesday. That is a 33% gain in six weeks. Nobody in their right mind would buy December futures on Wednesday two days before expiration. It was purely short covering.

The fundamentals on oil have not changed. However, the 33% gain should demand some profit taking and that would be a buying opportunity for the normal winter rally. Crude pulled back to support at the 200-day at $97.29 on the new front month January contract. That is a good resting point while we wait for the Super Committee resolution but we could still see some weakness. The commodity market is crazy because of the volatility issues surrounding the MF Global disaster. Thousands of large and highly active traders have been locked out of the market and funds frozen. Thousands of traders who closed their accounts as soon as the news broke received checks for the funds in their accounts. Those checks bounced but their accounts are closed. This is a real nightmare for thousands of traders. Expect more volatility as those problems are resolved, positions are closed, reopened, funds released, etc.

WTI Chart

Gold and Silver declined on thoughts the new governments in Greece and Italy might actually accomplish something. General market instability was also a weight as was the impending expiration of the futures next week. Gold has fallen out of favor as a safe haven as the U.S. economy improves and a meltdown in Greece seems less likely.

Gold Chart

Silver Chart

The S&P broke down. Everyone was scrambling to find a support level they could quote that was lower than 1220 and still make a case for a continuation of the rally. Unfortunately all those numbers other than 1200 were just imaginary. The index broke down and closed at five week lows. Can it rebound from here? Sure but there is risk.

Headlines trump technicals every time. Technical analysts get so bent out of shape trying to determine the importance of every point in a move. Sometimes there is no significance. It was the headlines, stupid.

Technicals tell us where support and resistance should be based on crowd psychology and previous trading patterns. Unfortunately you can chart Papandreou suddenly announcing a referendum on the popularity of the austerity programs while citizens are burning cars in the streets. Some people are just too stupid to be in public office or any office for that matter. Some claim it was all part of some master plan but unless that plan was to be thrown out of office I doubt it was anything more than a bad case of brain fade.

Friday's breakdown had no redeeming technical qualities. In theory we should go lower. However, we know the decline from the last three days was based on headlines and not on technicals.

A further decline next week "should" stop at 1200 based on past patterns. A break below that level could get really ugly, really quickly. However, it would require investors to completely ignore the suddenly improving U.S. economics. Obviously a headline from Europe could knock us a lot lower but it won't be based on U.S. fundamentals.

On Tuesday I suggested we should not buy the first pullback that came along and look for something in the "1220 range" for a buying opportunity. I have not changed my mind. The drop to 1215 on Friday was overdone given the weak news flow but I view it as an overly cautious stance given the major vote in Spain on Sunday and the Super Committee event risk. I would buy the dip back to 1200 but below that level I would turn bearish.

S&P Chart

The Dow is slightly more bullish than the S&P. The Dow closed well over strong support at 11,600 and the 100-day average at 11,669. Twenty two Dow stocks were positive on Friday with Chevron (CVX) losing -2.20 and by far the biggest loser. The next closest was IBM at -49 cents. Chevron was declining on competing news articles about an oil spill off the coast of Brazil.

The Dow could decline to 11,400 and still produce a bullish pattern but I would prefer to see it hold over 11,600 and return to test the downtrend resistance at roughly 12,125 next week. Hopefully (I know that is not a strategy) we could see some positive news from the Super Committee and a relief rally would appear.

Worst case we retest 11,400 and start over again, post committee, after Thanksgiving.

Dow Chart

The Nasdaq is another failed chart. The Thailand flood and its impact on the PC sector, earnings misses by AMAT and NTAP plus problems at Salesforce.com combined to weigh on tech stocks for the third consecutive day. Priceline was the biggest two day loser at -50 to close at $496. Amazon declined -$20 over the last three days.

The support at 2600 was critical support and it is hard to reconcile the close down at 2572 on Friday as anything but a breakdown. Based on the chart and the flood fears the Nasdaq could be leading us lower next week.

Obviously the Thailand flood is another headline but it is a persistent problem rather than something that can be fixed overnight by a drop in Italian bond yields or bond buying by the ECB. This is a long term problem that will produce a significant wall of worry for investors to climb.

Nasdaq Chart

Strangely the Russell is actually holding above support and was fractionally positive on Friday. I have a hard time reconciling the Nasdaq decline below support and the Russell holding above support since there are dozens of techs that are also small caps. I would have expected a negative performance on small caps.

However, the trend is still down. The Russell is at the bottom of its range and resting on support. The slightest move lower could trigger a breakdown. We need to see a move over 750 to trigger any serious buying and that is not likely to happen on Monday.

Russell 2000 Chart

For next week I think we are at the mercy of the headlines again. Spain is voting on Sunday and French bond yields are rising because their banks own so much Greek/Italian debt. The Super Committee and the FOMC minutes will also be hurdles to cross. The best advice would probably be to adopt a defensive bias until some of these problems pass.

Late Saturday news broke that the leader of the main conservative party in Greece has refused to sign the written austerity pledge demanded by the IMF as a condition of future payments. Antonis Samaras, the leader of the New Democracy party, said a written assurance was not needed because his word could be trusted. His rejection of the written agreement means the IMF will not disperse the $11 billion in expected funds in December.

Another problem is likely to rock the boat next week. S&P is changing the way they rate banks and the new ratings will be released over the next three weeks. According to a report on the change, 60% of all bank ratings will stay the same, 20% will go up one notch, 15% will be cut one level and 5% will be downgraded two notches. The major banks are already under fire and a technical downgrade on BAC, C, JPM, MS, etc could be ugly. Fitch has already warned the "risks of a negative shock from Europe are rising and could alter the outlook for U.S. banks." Never a dull moment. Time for puts on the bank indexes again?

For those enquiring minds who want to know what the next disaster will be I found some interesting reading on the web this week about China. The warnings that China is about to implode are growing almost daily. I have reported in my commentaries on the ghost cities in China more than once. I found a reference from last May about a report from the state electrical grid claiming 64.5 million apartments in China showed no electrical consumption for more than six months. They are vacant. That is enough housing for 200 million people. Despite this surplus Beijing has decreed the building of another 30-50 million apartment units in order to keep the economy growing and a million workers employed.

Real estate values are dropping like a rock. Prices in Shanghai fell -30% in October as developers in a panic started offering monster concessions to sell their remaining units. People who had already purchased units at full price are protesting they want a 30% refund. In Wenzhou, the most prosperous province up until a year ago, one developer is offering a free BMW to the first 150 apartment buyers. Analysts are starting to talk about a 50% correction in property prices. Info from Gordon Chang, hat tip to Chris Martenson for printing the interview.

Last week the Professor of Finance at the Chinese University of Hong Kong, Larry Lang, (I wonder if he is related to Lana?) was quoted as saying the regime is nearly bankrupt. He said every province is like a Greece. Points he quoted included, "Regime debt is 36 trillion yuan with interest of two trillion a year. The quoted inflation rate of 6.2% is fabricated. The real inflation rate is 16%. Private consumption is only 30% of economic activity. The recent drop in the PMI to 50.7 and a new low indicates the economy is on the verge of a recession. The published GDP rate of 9% is also fabricated. According to readily available numbers the GDP has actually decreased -10%. The government increase in infrastructure construction including real estate (ghost cities), railways, highways, etc accounted for 70% of GDP in 2010. Taxes on Chinese businessmen (including direct and indirect taxes) were at 70% of earnings. The individual tax rate is 81.6%."

Numerous people have made these claims over the last couple of years while others have rebutted their statements. Legendary investor, Jim Rogers, claims China has problems but they have enough resources to avoid a disaster. China has huge currency reserves and they are not a democracy. The government rules, literally.

I have said in the past I did not think China was going to tank but there were problems brewing. Those problems are growing to the point where I am starting to rethink my outlook on China. I have heard several times in the last month that China has to be really thankful that Greece and Italy are in the spotlight because that takes the spotlight off of China's economy. I seriously doubt that anyone actually believes the economic reports from China. That would almost be the equivalent of believing Iran was not trying to go nuclear. Everyone just hoped China would work its way out of its problem with a soft landing. With real estate prices in a death spiral that may no longer be possible. They may be a communist country but they are not immune to the laws of economics. Ask Russia and Cuba. Both were communist countries that imploded. I am not saying China is about to collapse but I think we need to keep an eye on events in China even though the world is focused on the Euro Zone.

On Friday Art Cashin posted this comment from Richard Fisher from the Dallas Fed.

"Greece requires an exceptional and unique solution. Such a solution is certainly in the interest of American bankers. In Saturday’s New York Times, it was reported that the Congressional Research Service has estimated that the exposure of U.S. banks to Portugal, Italy, Ireland, Greece and Spain amounted to $641 billion; American banks' exposure to German and French banks was in excess of an additional $1.2 trillion. According to the Bank for International Settlements, U.S. banks have $757 billion in derivative contracts and $650 billion in credit commitments from European banks. (Total from above is $3.2 trillion) Thus, the Congressional Research Service concluded that a collapse of a major European bank could produce similar problems in U.S. institutions. In the land of the too-big-to-fails, we find ourselves in something akin to a perverse financial Lake Woebegon: All crises are "exceptional," and all require "unique solution(s)."

Art was also kind enough to mention me in his published comments last week! Thanks, Art! Drinks are on me next time I am in New York.

Black Friday Special

It seems like every year the retailers move their special hours and deals closer to the beginning of Thanksgiving week. Numerous retailers are now opening Thanksgiving evening for Black Friday and some online retailers are having a Black Friday week with specials starting this weekend.

We don't want to be left out while everyone else is having all the fun. We normally start the End of Year Subscription Special on Black Friday. This year we are jumping ahead and starting it this weekend.

Not to let Target, Wal-Mart or Toys-R-Us beat us to the punch with their "Early Bird Specials" we have adopted one of our own.

Sign up for the End of Year Special before midnight Sunday and we will give you a genuine U.S. Silver Dollar as an additional bonus. At today's silver price this dollar is worth about $27 in silver value alone.

Genuine U.S. 90% Silver Dollar

Of course there are some other bonus items as well but this is real money that goes up in value every year. No deflation here!

Click this image to see the full End of Year Special!

Jim Brown

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"Population, when unchecked, increases in a geometrical ratio. Subsistence only increases in an arithmetical ratio."
Thomas Robert Malthus