It did not take long before the gloves came off and the congressional leaders started taking shots at each other in the fiscal cliff war.
Democratic senator Harry Reid fired the first salvo today saying it was time to end the "happy talk" and get to work. He said time was running out and little progress had been made on a deal to avoid the fiscal cliff. He said the happy talk had to end and republicans would have to get serious on raising taxes if there was going to be a deal. The market fell off a cliff intraday when his comments hit the wires around 2:20.
Reid said time was growing short and in perfect partisan tone he said he hoped republicans would not allow the country to plunge over the cliff. Why is Harry Reid in such a panic to get something done? Because the Senate adjourns for the holidays on December 14th. If something is not done in the next two weeks they may have to put their holiday plans on hold.
I warned for the last two weeks the negative headlines would return after the Thanksgiving holiday and the market would suffer. I would call this "posture week." This is the week where the president and congressional leaders will layout their positions in the press and try to show they are working hard for their constituents. The democrats are going to claim they are protecting Medicare, Medicaid, Social Security and Welfare and demand tax hikes to fund additional spending. The republicans will claim they are ok with raising additional revenue by eliminating deductions but requiring spending cuts to go along with the additional revenue. The president will blame republicans for the cliff and claim his reelection was a mandate for raising taxes and "protecting" existing social programs.
These headline wars should last through next week and once they actually start meeting again we will see those tense after meeting camera appearances to tell us how insincere the other side is in the negotiations. The democrats have already started their positioning campaign claiming the republicans want to end the mortgage interest deduction and raise Medicare payments. The republicans have called on the president and democrats to turn off the campaigning and come up with some proposals instead of campaign speeches.
Eventually they will start kicking certain pieces of the cliff farther down the road. They will agree on some minor points and kick the major problems deep into 2013. Career politicians rarely get anything done when the spotlight is on them. They prefer to work in committee in the background and only when they agree on something will they actually bring it to a vote. That takes months and months of horse trading in rooms where voters don't actually see what is being done so politicians can't be held individually accountable. For this reason I don't expect anything major to be accomplished in the next couple of weeks other than an agreement to postpone the problems until later in 2013.
The president has canceled planned meetings with the gang of four at the White House this week because congressional leaders have not been able to agree on any specifics. If he is waiting for Boehner and Reid to agree on a plan he may be waiting a long time.
The markets were struggling to hold their gains all day as worries over the negotiations weighed on investors. When Harry Reid made his microphone appearance at 2:20 the markets immediately cratered. We can expect the same result as long as the war of words continues.
Dow Chart - Intraday
It was a busy day economically with six reports and a debt deal for Greece. The weekly Chain Store Sales snapshot came in with a +3.3% spike for last week. That includes Black Friday, which posted between 13% and 18% gains in sales over the prior year depending on who you believe. The +3.3% spike was the largest weekly rise since the early 1990s when the weekly series began.
In addition to the retail sales numbers the Durable Goods report for October was also better than expected. The headline number was flat at zero but that was better than the -1.8% Moody's had expected. Unfortunately it was significantly lower than the +9.9% in September. Analysts thought there would be some retracement of that monster gain so a flat month was unexpected. For perspective the August number showed a -13.1% decline so the volatility has been extreme and a flat October is actually just reverting back to the pre August trend.
Moody's Durable Goods Chart
The Case Shiller Home Price Indexes for September showed a gain of +3.0% compared to +2.0% in August. Home prices were up +3.6% in Q3 compared to Q3-2011. The housing recovery is firmly in place with only three major cities showing declines in September. Those were Boston -0.6%, Chicago -0.6% and New York -0.1%.
The FHFA Purchas Only Home Price Index rose +4.4% in September compared to +4.7% in August. Analysts were expecting a +3.5% increase. The pace of increases is slowing but that is normal as the summer selling season comes to a close.
The Richmond Fed Manufacturing Survey for November rose dramatically to +9.0 from the -7.0 reading in October. That 16 point jump pushed the headline number to the highest level since April. New orders jumped from -6 to +11 but backorders declined from -3 to -9. Employment rose from -5 to +3 and the first gain since July so that was a positive indicator.
Richmond Fed Manufacturing Survey
Consumer confidence rose slightly in November with a headline number at 73.7. That was up from the prior reading of 72.2. It is also the highest level in four years. However, the gains were lower than in the prior three months. The cycle low was 62.7 in June so the index is up +10 points but the majority of those gains came in the July-Sept period.
Shopping patterns improved slightly with those thinking about buying a home rising from 5.4% to 6.9%. Those planning on buying an appliance, which includes a flat screen TV, rose from 46.8% to 50.6%. Those planning on buying a car declined slightly from 13.1% to 12.4%. Those expecting more jobs over the next six months rose for the third consecutive month and hit the highest level since Feb 2011.
Falling gasoline prices and rising home prices were noted as the primary reason for the increase in confidence.
Consumer Confidence Chart
The economic calendar for tomorrow is highlighted by the Fed Beige Book and the outlook for all 12 Fed districts. This could be a market mover if conditions have improved or worsened significantly. With the Richmond Fed survey turning sharply positive I would expect the Beige Book to also be positive.
The Kansas Fed Survey on Thursday and ISM Chicago on Friday are also important but they might be overshadowed by fiscal cliff headlines.
Greece finally got a bailout deal that should keep them out of the headlines for many months. The EU Finance Ministers agreed to extend the maturity of their bailout loans from 15 to 30 years. They also agreed to defer interest for ten years. That means Greece has no debt payments under those bailout loans until 2022. Lastly the comments surrounding the deal vowed to reduce Greek debt to 110% of GDP by 2022. It is currently projected to be 200% by 2014. Without specifically saying it that implies there will be a haircut on the outstanding debt at some point in the picture. There is a rumored debt buyback program attached to this deal where 10 billion euros of Greek debt will be bought back from private investors for 35 cents on the euro. Finance Ministers also agreed to give back 11 billion euros in profits they made by buying discounted Greek debt in the open market. If the deal is approved by the German, Dutch and Finnish lawmakers Greece will get its final tranche of 43.7 billion euros sometime in December.
Once Greece gets its 43.7 billion euro payment they should be out of the headlines for the next 12-18 months. They will be back but you have to admit zero payments for ten years is a really sweet deal. The finance ministers really wanted this problem to go away.
The Greek deal initially lifted Brent crude prices but they faded as the details became available. Brent is on the verge of becoming the most widely traded oil contract and surpassing WTI for the first time in history. Trading in Brent has increase +14% this year to average 567,000 contracts per day. WTI volume has slipped to 575,000 and analysts believe the official change in leadership is only weeks ahead. Brent volume has exceeded WTI from April through October.
WTI production has risen +9% in the U.S. but transportation of landlocked WTI crude to the gulf has depressed WTI prices. Brent is currently seen as the global standard for crude prices because it is water borne and deliverable anywhere in the world. WTI is landlocked and export from the U.S. is prohibited. Brent crude will see its allocation in the S&P GCSI Commodity Index of 24 raw materials increased to 22.34% from 18.35% in 2013. WTI will be cut from its current 30.96% to 24.71%.
Brent Crude Oil Chart
In stock news Green Mountain Coffee Roasters (GMCR) reported earnings of 64 cents compared to estimates of 48 cents. This was a monster beat and short covering was fierce with shares up +24% in afterhours. GMCR said an expanded lineup of single serve coffee makers and new drinks helped provide the boost in earnings.
The September expiration of its patent on the K-cup opened the door for competitors to crush GMCR sales. In the Denver area the 12 K-cup pack of GMCR coffee sells for about $10.95 in the regular food stores. Wal-Mart is slightly cheaper. However, Wal-Mart just started selling its own brand of K-cups for $6 a box. Other retailers are also racing to capitalize on the high cost per cup market.
GMCR is branching out into "wellness" drinks and pushing the higher end Vue system that still has patent protection. They also unveiled an espresso machine in cooperation with Italy's Luigi Lavazza.
GMCR also raised guidance from 2.55-2.65 to 2.64-2.74 for the full year. Revenue also beat at $947 million compared to estimates of $902 million. Apparently the news of GMCR's death has been premature.
Monster Beverage (MNST) rallied +13% after an FDA letter appeared to signal the all clear on the safety of Monster drinks. The Wall Street Journal said "The letter noted there is no scientific literature calling into question the safety of Taurine and Guarana, two ingredients used in the Monster beverages along with caffeine." The tame letter from the FDA eased fears about the safety of the drinks and over possible regulatory challenges in the company's future.
Monster Beverage Chart
Acadia Pharmaceuticals (ACAD) rallied +136% after news their late stage experimental Parkinson's drug reduced symptoms. The common side effects were falls and urinary tract infections, both minor compared to the impact of Parkinson's.
It appears to be the season for special dividends. The worries over the change in dividend taxes on January 1st has prompted more than 60 companies with market caps of more than $1 billion to announce a special dividend. Some of the latest are RGR, DDS, LVS, ETH, CCL, TSN, BF.B. Apple is widely expected to announce a special dividend given their $125 billion in cash. That is powering some of the speculation in their shares. Even Microsoft is rumored to be a potential candidate for a dividend after selling 40 million copies of Windows 8 in just the last month. That is a monster cash infusion and December is expected to be another big month.
So far in 2012, mostly in Q4, there have been 60 companies announce special dividends compared to 35 in 2011, 46 in 2010 and only 22 in 2009.
The motive for this is to return cash to shareholders before the tax change. Since a lot of these companies have high employee ownership of shares they are also voting themselves a windfall. If the fiscal cliff arrives in its current form the dividend tax rate for a couple making greater than $250,000 a year will rise from 15% to 43.4%. The tax rate will rise from 35% to 43.4% and the capital gains tax rate will rise from 15% to 23.8%.
Regardless of the dividend games in Q4 or the eventual fix to the fiscal cliff there is going to be a fiscal drag in 2013 in at least the first two quarters. Consumer confidence is high today but most consumers don't realize that there will be a $400 billion deduction from their pay in 2013. More than $125 billion of that will come from the expiration of the Social Security payroll tax holiday. Another $280 billion will come from the expiration of the Bush tax cuts. That will probably not be a 100% expiration. Lawmakers will probably water down the cuts to something in the $200 billion range but that still increases taxes by $200 billion.
There are some rumors making the rounds that the democrats are going to let the Bush tax cuts expire and then propose some new tax cut plan in order to get away from arguing over the "Bush" tax cuts. The new plan could be the "Democratic tax cuts for middle class workers act" or something similar. That way whenever the new tax cuts were set to expire the lawmakers would have to argue against raising taxes on the middle class rather than extending the Bush tax cuts. Never underestimate the thought process of politicians trying to guarantee their future reelection.
They say you should never watch politicians in action or sausage being made. Unfortunately we are going to get the microscopic view of the fiscal cliff resolution and it won't be pretty.
The S&P bumped up against resistance at 1407 three different times today. Each test failed. That is material because 1407 is the 100-day average and this is concrete proof of that resistance strength. After the comments by Harry Reid the S&P gave back -10 points to end just above the lows of the day. With the market hostage to the headlines for the next several weeks I think the odds are good we are going to retest support at the 200-day at 1383.
As I wrote in the weekend commentary I think we have shifted from a sell the rally market to a buy the dip market. I would look forward to a return to the 200-day average and another bounce. Unfortunately Louise Yamada, a very highly respected technical analyst, was on CNBC late today suggesting we could see S&P 1300 before year end.
I agree that is possible but until we actually see the 200-day support fail I am going to stick with my buy the dip theory. We saw five weeks of market declines that took the S&P back to 1350 the week before Thanksgiving. If the 200-day support at 1383 breaks I would suspect that support at 1350 to hold.
I think far too many people now expect a resolution to the cliff. It may not be pretty and it may not be in the next couple of weeks but they are beginning to price it into the market and that means dips should be bought.
The Dow chart is similar to the S&P only the 200-day average at 12,993, call it 13,000, is now strong resistance. Fortunately support at 12,500 is also strong so that is probably going to be our range over the next couple weeks. We already had a big decline from 13,650 in October so that relieved a lot of the selling pressure. The sudden flurry of special dividend announcements has blunted the selling for tax reasons. Nobody wants to sell a big stock only to have them announce a $5 dividend the next week. There is plenty of time to sell for tax reasons before year end.
The Nasdaq has been outperforming the other indexes because of the gains in Apple. Those gains have stalled at $590 for the last two days. Apple shares gave back $5 today and that allowed the Nasdaq to slip back into negative territory after spending much of the day in the green.
The Nasdaq is also fighting resistance at the 200-day average at 2985 with light support at 2960. However, if Apple elected to squash the special dividend rumors we could see the Nasdaq back at 2900 very quickly. I see no reason for Apple to create a self inflicted wound like that so the rumor will likely persist.
We are going to be at the mercy of the headlines as the three parties to the negotiations do battle with a war of words. The president is going to speak on Wednesday and you know how that is going to play out without even listening to it. That will put the burden back on the republicans to launch their own attack. The market will be the ground over which the battle will be fought and you can bet it will be strewn with craters and scorched earth as we near a solution. With congress scheduled to leave for the year on Dec 14th I do not see how they will get anything done before then. The betting pool has December 21st-24th as the anticipated date for a resolution. The closer to the Christmas holidays the more eager they will be to settle and then rush home. Missing Christmas at home is not an option for politicians.
Plan your trading accordingly. Buy the dips but don't rush in with three full weeks of hostility remaining on our calendar.
Until a resolution appears, enter passively, exit aggressively!
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