The market rallied on the news of the tax cut extension and then crashed back to earth when the Senate vowed to filibuster the deal.
The only material economic report today was the Consumer Credit for October. Credit rose at an annual rate of $3.4 billion and the largest gain since a $5.7 billion pace in July 2008. The $3.4 billion was a +1.7% jump and followed a +0.6% gain in September.
On the surface this would appear to be good news since consumers have been paying down credit and deleveraging ever since the recession started. However, much of the credit swing has been led by a big rise in student loans. A recent change in the process makes the government the primary lender to students. The borrowing category that included student loans rose +6.8% in October following a +7.6% increase in September. Auto loans have also picked up in volume. Experian showed that loans to subprime borrowers rose +8% in the third quarter compared to the same quarter in 2009. It was the first year-over-year increase since 2007.
All the buzz over the tax compromise had the markets moving higher until after the president's press conference. Once the Senate democrats started complaining and threatening to filibuster the bloom faded from the rose and the Dow gave back a 90-point gain to end in negative territory.
The deal will prevent a large tax increase for everyone for another two years and contained a 2% cut in Social Security taxes. That is an instant infusion of money into consumer pockets. It is not a lot but every little bit helps. The deal also contained some incentives for businesses that allow tax write-offs on new equipment. The long-term unemployment insurance payments will be extended for another 13 months. Up to two million workers would have run out of benefits by year-end. That will be a continuation of a direct stimulus for the economy with billions of dollars in payments flowing directly through workers hands and into the economy.
The group Citizens for Tax Justice estimates the package would save the average taxpayer $3,000 in 2011. That savings comes from the cancellation of the tax increase and the cut in social security taxes. Economists at Deutsche Bank claim the Social Security tax cut alone would increase economic growth by 0.7% in 2011. The Center for American Progress estimates it would create 720,000 jobs within two years. Mark Zandi at Moody's raised his GDP forecast for 2011 from 2.7% to 4.0% on the news. Economists at JP Morgan raised their GDP estimate fro 3.0% to 3.5%.
Analysts estimate the cost of the various elements of the compromise could be as much as $1 trillion over two years. BNP said it would increase the Federal deficit in 2012 from 6.9% of GDP to a "much scarier" 9.8%. This will put the new congress under an even more urgent directive to reduce spending and they may have to resort to trimming the fat from some of the sacred cows like Social Security and Medicare.
The bond market sold off on the news in what could have been the early wave of investors moving out of bonds and headed for stocks. We have seen negative fund flows from equity funds and into bonds since the flash crash and eventually this trend will reverse. With almost every analyst now projecting a stronger recovery in 2011 and a strong equity market the incentive to stay invested in the bond bubble is rapidly eroding.
The yield on the five-year Treasury note traded at 1.745% and the highest level since July. The 10-year hit 3.16% and the highest since June. The 30-year hit 4.41%.
The dollar exploded higher on the rising economic estimates. The morning low at 79.20 on the dollar index was a two-week low but it did not last. The rise in the dollar crushed oil prices and commodities in general.
Dollar Index Chart
Crude Oil Chart
Copper rallied to a new high 31-month overnight at 412.50 but was crushed back to 400 on the rise in the dollar. Copper was spiking on expectations for higher demand from a rebounding U.S. economy plus demand from China.
There is also a behind the scenes story in the copper market. Open interest in the copper futures rose to a record 310,740 contracts on Monday. Meanwhile copper stockpiles in LME warehouses have fallen by 30% and the lowest levels since October 2009. Demand will outpace supply in 2011 of 367,500 tons according to Bloomberg. Analysts warn that stocks could fall to an all-time low of less than one weeks usage according to an analyst at Merrill Lynch.
Mining companies are having trouble keeping pace with demand because new reserves are harder to find and mine and ore quality in existing mines is declining as the main deposits have already been produced. That means less copper is extracted from each ton of earth processed. In 1990 copper production was roughly 1.6% of the ore processed. Today that average has declined to 1.1%.
Also impacting supplies is the sudden proliferation of ETFs dealing with copper. ETF Securities, Blackrock and JP Morgan have said they will start copper ETFs.
One unidentified company was holding between 50% and 79% of LME copper stockpiles from Nov-22nd to Dec-2nd according to exchange data. That brings back memories of the Hunt brothers trying to corner the silver market back in the 1980s.
JP Morgan has also very active in buying copper futures over the last couple weeks. They are rumored to be building stock for their coming copper ETF. However, their ETF has not yet been approved by regulators. When questioned JP Morgan claimed "a client" was building a position in copper futures. This market has nowhere to go but up. However, with those big players establishing monster positions they will eventually need to liquidate. If you play in their game be sure to keep your stop losses active.
H&R Block posted weaker than expected earnings after the bell. HRB reported a loss of 36-cents compared to analyst estimates of 33-cents. HRB typically posts losses in quarters when tax processing is slow. Revenues declined -.5%. The loss was +2 cents better than the 38-cent loss in Q3 2009. Shares declined slightly in after hours trading.
Google (GOOG) was added to the best ideas list at Morgan Stanley with a target price of $730. That was a step up from the prior target at $700. In a research note the analysts said Google is not fully appreciated for the number of revenue sources they are using. He raised his earnings estimate for 2010 to $25.79 per share.
Google said its Chrome browser is now in use by 120 million people. The Chrome OS is going to power devices like notebooks and netbooks, which will be sold by Verizon with a data plan that starts at $10 a month. I know a dozen people who are going to buy one as soon as they are available. These tablets are going to be a major seller. The Chrome App store was scheduled to open today. Google shares were up +$14 intraday but decline to +9 at $587 at the close.
Texas Instruments gave its mid-quarter guidance after the close. They narrowed guidance to the midpoint and still inline with analyst estimates. TXN is now expecting earnings from 61-65 cents and analysts were expecting 63-cents. Yawn. TXN did say the decline in PC sales appeared to have bottomed. The company said it was confident the recent correction in demand would be short lived. The company said sales of chips would be weaker in Q4 in products like TVs and hard drives but Netbook chips had bottomed and were recovering. Shares declined slightly after the release.
Citigroup (Nyse:C) traded nearly 3.5 billion shares today on news the government had sold all of its remaining common shares. Because of those shares moving into the market and out of restricted basis S&P was forced to rebalance Citi's weighting in the S&P-500. Citi accounted for 43.4% of the NYSE volume on Tuesday. However, according to Birinyi Associates the NYSE volume without Citi was the second lowest in the last month at 3.2 billion shares.
After the close the IMF posted a meeting notice on their website for a Friday meeting to vote on the 22.5 billion euro bailout for Ireland. Earlier today Ireland passed the first stage of its new austerity budget that was necessary to qualify for the bailout. I can't imagine the IMF/ECB will want to roil the markets further with indecision so odds are good that bailout vote will pass.
CNBC reported the afternoon sell off was due to a news headline saying the government had issued over a dozen subpoenas to prominent funds in their recent insider trading probe. The new flurry of subpoenas represented an expansion of the federal investigation into the so-called expert network firms. Those firms helped funds by providing research and contacts from the companies the funds wanted to add to their portfolios. The Dept of Justice had no comments on the Reuters story.
I don't think the sell off was due to the insider trading news. I think it was due to an old fashioned sell the news program. For the last week the market has been in rally mode on expectations of the compromise with the Dow up +400 points.
The compromise was announced, the press conference held and then the democrats in the Senate announced they would filibuster the proposal. That last announcement prompted the sell the news move and even though most believe the filibuster will either never happen or fail. It is called trading the news not the facts.
Even with the big decline from the intraday highs the market has still accumulated some major gains since last Tuesday. For it to rest here on an obvious sell program is not surprising. The S&P could easily decline back to 1200 if the bears suddenly found some conviction but I don't see it. The fix is in. We still have the Fed put in the form of the QE2 program with Ben saying he could spend even more money if needed. The tax cut extension compromise will be passed even though there will be politicians on both sides offering sound bites in opposition crafted specifically for their constituents back home. Lawmakers who were not running for election in November saw what happened to their brethren and they want to avoid a repeat of that slaughter when the 2012 elections roll around. I would expect a lot of political posturing but it will be mostly flash and little substance.
The markets may see some actual sell the news profit taking simply because the intraday sell off reminded traders that the market can go both ways. There is no guarantee it will always go up even if every analyst on the street believes it should. There are still plenty of buyers on the sidelines wishing they had gotten in 400 points ago. They will buy the dip.
The S&P could decline a few points to 1215-1218 for an orderly bout of profit taking or we could go into flush the weak holders mode and drop back to 1200. Either way I still believe the dip will be bought.
The Dow may have lost -90 points intraday but it closed flat. A flat close still means it held its +350 points of gains from the last four days. That is not bearish when you consider how much of those gains could have been at risk.
The Dow could decline to 11,200 without really doing any damage but I would be very surprised to see it decline to 11,000 again. The economics and fundamentals are simply too strong for the reluctant buyers not to buy the dip.
Tech traders may have felt the need to take profits ahead of the Texas Instruments mid-quarter guidance after the close. There was no specific reason for the sell off other than a large sell program that hit all indexes equally. Nothing happened after the close to pressure techs on Wednesday so now it is up to the dip buyers to decide where they would like to enter the market.
The Nasdaq could decline -100 points without any major damage to the trend but I seriously doubt that will happen. Analysts are still predicting S&P 1250 by year-end so fund managers can't afford not to be long.
If you need any reassurance the bulls are still alive you need to look no further than the Russell. The Russell surged over resistance at 760 and HELD its gains. It did close -6 points off its highs but still well over 760. This is a strong bullish signal. Unless the Russell begins to weaken the rally is still alive.
In summary I believe the afternoon sell off was simply a sell the news event by a major fund. The net advance/decline ratio dropped by -500 stocks in less than five minutes. This was NOT investors taking profits. This was a major sell program that could have been triggered by the news flow. The follow on to the initial drop was trader flight because they did not know what happened and their stops were getting hit. This is normal market activity.
I expect the market to find a bottom and restart the move higher before year end. I am in buy the dip mode until proven wrong. The economic picture is improving daily and funds should be flowing out of bonds and into stocks.
Over 1,000 stocks hit new 52-week highs today. Don't fight the Fed, buy the dip.
I apologize for the lateness of the newsletter tonight. I had some technical difficulties.
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