We may have seen a glimmer of light at the end of the fiscal cliff tunnel today.

Market Statistics

The light was faint but if you are a Washington watcher it was clearly there. Two things happened. Several republican strategists called on the House to accept the extension of the Bush tax cuts for the 98%. The reasoning behind this was the obvious result if they don't. The president has painted himself into a very tight corner by saying he will veto anything that does not raise taxes on the 2% and reduce taxes on the 98%. The republicans cannot win this fight because the trump card for the democrats is the automatic expiration of all the tax cuts for 100% of the people on Dec 31st. The president can sign a bill today with higher taxes for everyone over $250,000 as he has promised or he can wait until January and get a tax hike on everyone. At that point the republicans would be seen as the bad guys for allowing the taxes to go up and then the democrats could offer a bill cutting taxes on a smaller number of people and be seen as working for the people. The republicans know this and are therefore working from a weak position.

The second point was a clue from the president. When he spoke for the cameras today he said we don't have time to reform the tax code and we certainly don't have time to find ways to cut billions in spending from critical social programs. (Medicare and Medicaid) His "we don't have time" speech shows that the most likely result of all this political theater is a big can kick down the road a year in order to erase the fiscal cliff cloud. Politicians love to delay major decisions when possible and Obama is no dummy. He knows there will be more democrats I office in 2013 than there are today and he will have a better chance getting tough legislation passed under those conditions.

I think we are looking at a compromise where the republicans accept the tax extensions on the 98% and allow the other cliff components to be postponed until late 2013 ostensibly to give everyone time to craft comprehensive tax reform and restructure spending.

It may take another week or two before this compromise appears because both sides are not done posturing for the cameras and their constituency. The last minute has not arrived. You may remember in 2011 both sides did not agree to extend the tax cuts until Dec 17th and the start of the Congressional holiday recess. Lawmakers can move mountains in a short period of time if it appears business will interfere with their holidays.

The markets traded sideways on low volume as the fiscal cliff headlines tended to be repetitive. The S&P slipped back under the 100-day average at 1410 but only by a couple points. Today was a day for watching rather than trading.

The economic calendar was light and provided no direction. The weekly chain store sales snapshot declined -3.1% after rising +3.3% the prior week. That should be no surprise since the prior week contained Black Friday.

The ISM-NY Index rose slightly from 559.9 to 561.1 and just slightly under the high set in September before hurricane Sandy. The minor hurricane weakness in the October report was erased. Most importantly the six-month outlook component surged from 57.7 to 75.3 and the highest reading since March. That suggests businesses in the New York area are suddenly very optimistic about the future. For comparison the current conditions component rose from 45.9 to 52.5 and showing much less enthusiasm. The expected demand component also spiked sharply from 50.0 to 69.5.

The calendar for tomorrow is highlighted by the ADP Employment report as the first read on the November employment. Expectations are for a gain of +125,000 jobs compared to +158,000 jobs in October.

The ISM Non-Manufacturing report is expected to decline as a result of Sandy. However, the ISM Manufacturing on Monday was expected to increase and instead it fell sharply to 49.5 and back into contraction territory. The decline was blamed on Sandy as will every other report that declines over the next month.

The Nonfarm Payroll report on Friday remains the biggest report of the week. Estimates are for a gain of +100,000 jobs. However, jobless claims spiked after Sandy so the number of jobs could be a lot lower.

Sandy will be blamed regardless of what number appears and the market will probably ignore a weaker than expected report.

Economic Calendar

There was a lot of stock news today thanks to the weak news flow on the cliff. NetFlix soared +14% on news they had inked an exclusive contract with Disney for first-run live-action and animated feature films. The deal included televisions, tablets, computers and phones. The deal includes immediate content availability from Disney Animation, Pixar Animation, Marvel Studios, Disney Nature and the archive library for films like Dumbo and Alice in Wonderland as soon as the content is released to pay TV. Financial terms were not disclosed but the stock exploded higher. The surge in the stock price was mostly short covering since the agreement does not begin until 2016.

NetFlix Chart

Darden Restaurants (DRI) shares declined -9% after it cut its profit forecast for the year. The company said failed promotions and bad publicity about its attempt to reduce healthcare costs for workers. The CEO said the promotions did not resonate with "financially stretched" consumers. He said the failed promotions showed the need to make bold changes. For the quarter the company expects same store sales to be down -2.7%. The company is now projecting Q4 profits to be in the range of 32 cents while analysts were expecting 46 cents.

Darden Chart

Edwards Lifesciences (EW) rose +4% after the company said it was raising its 2013 forecast above analyst estimates. For 2013 the company said it now expects adjusted earnings of $3.21 to $3.31 and a gross margin of around 75%. Analysts were looking for earnings of $3.19.

EW Chart

Best Buy (BBY) declined -6% after research group NPD said consumer electronics revenue declined -5.6% on Black Friday. The company said higher tablet and smartphone sales have been offset by weakness in TVs and laptop revenue. In another story Cerberus Group was rumored to be in talks to make a bid for Knight Capital Group (KCG). Cerberus had been rumored to be a possible backer of Best Buy founder Richard Schultz in a possible bid for Best Buy. If Cerberus does pursue Knight Capital that would take them out of play as a partner to Schultz. That would mean Best Buy was going to continue flailing about as a showroom for Amazon.

Best Buy Chart

Gap Stores (GPS) had been rumored to announce a special dividend. They announced today there was no change to Gap's dividend policy and the stock imploded. Gap had been expected to announce a special dividend because Gap founders, the Fisher family, owns 37% of the company. Declaring a special dividend would have been a windfall for the family. Apparently they did not feel the Gap was in a strong enough position to make a change to the dividend and that translated in the market as a week outlook by the family.

Gap Chart

Pandora (P) declined -$2 or -23% after the close when they announced earnings and lowered their guidance for the current quarter. Pandora beat the street for Q3 with earnings of 5 cents compared to estimates of a penny. However, they lowered revenue estimates for Q4 to $120-$123 million with analysts expecting $130 million. Earnings are now expected to be a loss of 9 to 12 cents compared to analyst estimates for a profit of a penny.

This is a prime example of a kitchen sink quarter. Pandora blamed the sales decline in Q4 on the fiscal cliff. That is a stretch of credibility that the impending fiscal cliff has impacted online music sales. This is the same kind of generic excuse we are going to see with companies blaming Sandy for weak earnings.

Pandora Chart

Big Lots (BIG) jumped +11% after the company said earnings for the full year would be as much as $3.05 compared to their prior estimate of $2.95. Analysts were expecting $2.80 so this was a big improvement. They also announced the retirement of the Chairman and CEO, Steven Fishman. In August they replaced the COO, CFO and chief merchandising officer positions as well after same store sales declined. Investors cheered today or maybe it was just the shorts screaming in pain but shares were up strong. There is strong resistance at $32 and that is exactly where the spike failed.

Big Lots Chart

Apple (AAPL) shares declined nearly -2% after Digitimes said Apple had reduced its orders for MacBook Pro models because of "high inventory levels." The publication said shipments of MacBooks to Apple were -20% below prior expectations. With the entire PC market in decline thanks to soaring tablet sales it is only reasonable that MacBooks sales would decline as well. Recent estimates suggest Windows notebook sales are off -10% as well. There was also a block trade of 2.36 million shares so somebody was definitely jumping ship. There are a lot of analysts that believe Apple is broken structurally and will continue to decline. However, Apple will begin selling the iPhone 5 in 50 more countries in December, bringing the total to more than 100 countries. That surge in sales is going to produce a very profitable Q4. Unfortunately Apple is still experiencing component shortages for the new iPhone so deliveries may continue to be sluggish.

Chartists point to the imminent death cross of the 50-day over the 200-day and suggesting Apple could be in for a long term correction.

Apple Chart

Another factor clouding the market is the riots in Egypt since Morsi declared himself pharaoh and above the law. More than 100,000 people took to the streets with 40,000 in Tahrir Square. The large mob advanced on the palace forcing Morsi to exit under heavy police guard. Two weeks ago Morsi declared his government to be above the law and could not be sued or affected by any court ruling. After violent protests against his ruling he said it was only temporary and would only last until a new constitution was approved. A rushed vote on the constitution was set for two weeks. The constitutional committee putting the document together protested they were not ready but were ignored. When the text of the constitution was released for the vote there were new paragraphs and phrases in it that were not in the one the committee had prepared. It appeared the Morsi government had made their own changes and then tried to force it through in a hasty vote.

The situation in Egypt is deteriorating but that is only one country. Syria was warned by president Obama and NATO today to halt preparations for use of chemical weapons. NATO warned that any use of chemical weapons would bring an immediate response by NATO. The U.S. said it appeared Syria was making preparations to use its chemical weapons against its citizens. The threat of chemical weapons caused an emergency move of Patriot anti-missile systems to Turkey. The French government said "movements on military bases storing the weapons" suggested they were preparing to use them and there would be "serious consequences."

In Europe there is a strong rumor that Moody's is preparing to downgrade Germany, Luxembourg and Belgium. The ratings agency put them on negative watch back in July and they downgraded France last week. Moody's said the recent debt deal with Greece and the rising commitments to the ESM and EFSF coupled with the recession in Europe was weakening the credit outlook.

Greek private creditors will apparently be forced to take another 70% haircut on their outstanding debt. The deal is not done but there does not appear to be any way around it of the IMF will back out of the Greek debt deal.

All of these factors weighed on the U.S. markets with the S&P slipping back below the 200-day average at 1410. The minor -2 point decline was nothing but noise and was mostly due to the declined in AAPL, GOOG, BIDU, DRI and AZO.

We are just passing time until there is a resolution of the fiscal cliff. Whether that resolution is real or just a can kick farther down the road is immaterial. The market just wants the clouds of uncertainty to clear so business can continue. It would be VERY helpful if a tax deal was done soon so the worry over the increase in the capital gains and dividend taxes would be lifted from the market. Otherwise we could see selling accelerate as we move further into December.

The S&P has support at 1400 and again at the 200-day average at 1385. Unless there is a highly publicized halt to discussions I would be surprised to see those levels broken.

S&P Chart

The Dow continues to fight resistance at 13,000 but it is still within striking distance should good news break out. No Dow stock gained or lost more than 78 cents so it was really a do nothing day. Initial support is 12,800 followed by 12,500.

Dow Chart

The Nasdaq also traded sideways as we wait on news. Considering Apple was down -10 and Google -7, I am surprised the Nasdaq only declined -5. The 3,000 level is turning into a price magnet and the 100-day at 3,020 is resistance. Support is well below at 2,950 and again at 2,900. With five point moves we are nowhere close to a breakout or breakdown.

Nasdaq Chart

Tuesday was a neutral day. There was nothing of substance to move the markets but the fiscal cloud remained a negative factor. There is a growing expectation for a resolution of some kind but I don't think we have gone through enough posturing yet for one to appear this week. Both sides have yet to appear conciliatory so there may still be some posture points they want to make before they decide to move the fight into 2013.

If by chance a resolution appeared we could see a 3-5% rally. Likewise if talks completely stalled we could see a 2-3% decline. Since most of the bad news is already priced in I expect the downside to be limited.

I remain in buy the dip mode until proven wrong.

Until a resolution appears, enter passively, exit aggressively!

Jim Brown

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