World banking leaders are in the process of re-greasing the wheels of global economy. Yesterday the FOMC announced plans to continue Operation Twist into the new year, the ECB has released funds to Greece and Japans expected new prime minister is set to continue easing. Despite all this the Fiscal Cliff still looms in everyone's minds. The stage is set for economic expansion but it is possible the financial leaders have done all they can. What else can they do, print more money?
What we really need is a catalyst to spur business investment and drive consumer demand. The Fed is maintaining the status quo as far as fiscal policy goes; their bazooka has run dry and we can't expect much more from that quarter. The economic data supports a stable and mildly growing economy, without signs of decline Ben and the FOMC are unlikely to act. Economic data released today shows an economy that, if not growing, is at least solidly stable. With things as they are the Fed is unlikely to act any further.
Headlines this mornings stated that Fiscal Cliff talks had started to turn negative. After looking through several reports I could find that little had changed even with new statements today. Rep. Boehner came out this morning and repeated what we already knew; He feels the republican plan is on track and the Presidents is not. The talks drag on and are still snagged on the issues of revenue and spending cuts. Even though nothing has changed the markets still decided it was reason enough to sell off.
I keep hearing and reading about cutting the mortgage interest deduction and all I have to say about that is please don't do it. Regardless, there is going to be some higher taxes and less spending, lets just get it done so the markets and our corporations can return their focus to actual business.
With all this to consider the futures were able to hold yesterday's close in overnight trading. The futures trade was just under flat line before the jobless data and turned slightly positive following the release. 1430 is proving to be resistance on the S&P, the index failed to maintain that level yesterday and fell from it today.
Around The World
Asian markets closed the day mixed. The Asian Indexes hovered around the break even point from the previous days trading except for two notable exceptions. Korea and Japan both moved up by more than 1.5%. Korea's move is linked to the announcement of holding key interest rates steady. Japans move higher is being driven by a weakening yen. The yen continued its slide versus the dollar today in anticipation of the elections being held on Sunday. The expected incoming prime minister Shinzo Abe and the Liberal Democratic Party are expected to hold good on their promises of â€œunlimited easingâ€. The LDP is also planning on implementing a new round of public works projects in its efforts of stimulating the economy. The Nikkei reached a new 8 month high and crossed technical resistance at 9,700.
Europe, the Eurozone and the ECB are making big moves to get their house in order. The most pressing issue, Greece, may have finally, once again, be put to rest. The country has finally been given its 34.3 billion euro bail out package. There was a little question in the air if it would come through after Greece's bond buyback missed its target. Never the less the deal was completed and now the ECB is turning to longer term measures to strengthen the EU and the euro.
The EU and the ECB announced plans today for a more centralized banking system that could be in place as soon as next year. The ECB would become the regions top banking supervisor and would have direct oversight of more than 150 of Europe's banks. This move should boost confidence in the EU and the euro over the long term and could be a sign of real recovery. The European markets had been trading to the downside and extended their losses following the remarks by Rep. Boehner this morning.
The Economic Data
Jobless claims have returned to pre Sandy levels as the northeast recovery continues. Initial claims for unemployment fell to the second lowest level seen this year and for the last several. Claims were reported as dropping more than 29,000 to an adjusted 343,000. This is the fifth week since the storm and the fourth week of data. The previous weeks data was revised up by 2,000. The four week moving average of claims also fell but held above the levels seen in the weeks preceding the storm. The average fell by 27,000 to 381,500.
Continuing claims also fell in this weeks data. The number of people filing for a second week of benefits dropped by 23,000 to 3.19 million, 25% lower than last year at this time. Continuing claims are also at their second lowest level this year, the lowest number was in the week preceding Hurricane Sandy.
Total claims posted a surprise jump this week, climbing by nearly 700k to hit 5.643 million. This is the highest level since July but is still about 25% lower than last year. This spike is probably Sandy related, I am expecting total claims to return to its low levels next week or the week after. Jobless claims and unemployment are trending down but as Jim mentioned earlier in the week the number of people in the workforce is in decline. If people keep dropping out total claims and unemployment figures could retreat to the FOMC's target without any improvement in the economy.
What I want to know is how many people that are so-called dropping out are actually not working. Can these people actually survive without jobs? Are these drop outs spouses of primary bread winners? How many are creating their own work or businesses? Small business is a pillar of our economy, if these drop outs are creating their own jobs won't that help the recovery? These questions and more are begging to be answered...I have been looking for some data on the subject but as of yet have not found any. I welcome any insights into the subject.
Other data released today also shows signs of improving conditions and a resurgence of the consumer. The PPI data for November shows that headline prices declined by -0.8%. This was slightly more than economists had been expecting and a good sign for profit margins and consumer level inflation. Ex-food and energy prices increased by a smaller than expected 0.1%. Energy prices led the decline in overall PPI, dropping by -4.6%, the largest decline since 2009. Lower prices are a good thing for business and consumers. Lower prices for raw materials and the energy that is needed to create them will help increase profit margins that we already saw expanding in third quarter earnings data.
Conversely, retail sales increased in November by 0.3%. This gain was slightly above expectations and were off set by a big decline in energy sales. The lower cost of gas and other fuels impacted the gain in retail sales by nearly a half percent. Ex-gas and autos retail sales increased by 0.7% led by consumer goods. Increasing sales and lower producer prices lead me once again to speculate on the possibility of fourth quarter earnings surprises. Low expectations and lowered guidance for corporate profits have the bar set pretty low to start with. Add to that the trend of improving margins we saw last quarter and the possibility of that trend continuing in the fourth quarter makes it very possible for businesses to beat those expectations.
Gold and Oil
Gold traded lower today, dropping below $1700 during the morning session. Gold has returned to lower end of its two month trading range, weighed down by Fiscal Cliff politics and global outlook. Gold found support last week around $1690, a break below this could be bearish for the metal long term. The Gold Index found support last week before reaching the 78% retracement of the most recent bull movement. The index has since regained the 61% level and is now retesting that support. On the daily charts momentum is still bearish but has now diverged from the recent low suggesting that the last low was at or very near the long term support. Low gold prices will probably not be a catalyst for gold stocks, based on that I am expecting the Gold Index to remain range bound. I will be watching $180 very closely as support and the lower end of the range.
The Gold Index, daily
Oil is also trading at the lower end of it's recent range between $85 and $90. Oil has been bouncing between these two levels driven by mid east tensions, Fiscal Cliff politics, global outlook, OPEC and current demands. A break above or below this range would be significant. At this time I see more chance of a downside break than one to the upside. The Oil Index has been trading toward the top of its range, opposite of the underlying commodity. The index has bounced from support but was capped at a long term resistance line around 1250. Momentum on the daily charts is converging with the upward price movement and suggests that the resistance could be broken. A move above 1250 would encounter new resistance at 1275 and 1300.
The Oil Index, daily
Story stocks today encompass buyouts, earnings and dividends. Two companies have buyout offers on the table, one tech stock is set to run and one retailer is boosting shareholder value. Best Buy is expecting a buyout offer from its founder Richard Schultze worth $5-$6 billion. This is not unexpected and has been a possibility for several months. The stock gapped up strongly today with the conviction of more than 5 times average daily volume. The move has created an island and potential reversal in the stock but I don't know how far it will get with plans to take the company private.
Best Buy, daily
Sprint has announced plans to buy Clearwire pending approval. Sprint already owns the majority share in Clearwire and is seeking to purchase the remaining 49%. The offer currently stands at $2.90 a share, or about $2 billion dollars. This is a premium over yesterday's prices but the news sent the stock well over $3 in trading today.
Adobe released earnings today. The company is expected to beat estimates of $0.46 a share based on strong sales during the quarter. The caveat is that another article I read cited they expected them to miss expectations of $0.56 per share. This shows how important it is to get more than one opinion. Trading in Adobe was volatile today with the stock making a very bearish candle signal should it be confirmed. The actual results reported by the company were profits of $0.44 per share on revenues of $1.153 billion. The results are a record for the company on a quarterly and annual basis. The stock traded to the upside in after hours trading following the release.
CVS made some very nice announcements today. The company is expecting next year to be a good one and it is returning some of the expected good fortune to its shareholders. The company is raising the its dividend by 38% to $0.225 per share and is moving forward with plans to buy back $4 billion in stock. CVS is expecting full year earnings in the range of $3.84-$3.98 versus the consensus median estimate of $3.79. The stock gapped up on heavy volume but the move faded throughout the day. The stock did remain above resistance and maintained a +1.5% gain on the day.
The S&P fell today from resistance at 1430. This level marks the lower end of the range formed by the short term reversal we saw in September/October and could provide a substantial barrier to prices. Fiscal Cliff driven selling could return before the end of the year and 1430 is a good technical level to do that. Today's selling brought the index below the 1420 level where support began to kick in. Late day buying that began just above the short term moving average brought the S&P back above that line but failed to hold it into the close. On the chart of 30 minute closing you can the attempt and failure to cross back above 1420. I'll need to see a close above 1420 to regain short term bullishness.
S&P 500 30 minute closings
The anticipation of FOMC QE helped to inflate the indexes, bringing the S&P up to 1430. Worry over the Fiscal Cliff capped the move once the markets got what they wanted from the Fed. Political stumping and pot shots will continue to drive short term price fluctuations while the negotiations stall. In the long term potentials for corporate profits should regain the upper hand in the minds of traders and investors but this won't happen until the cliff is out of the way.
The long term charts of the S&P show a market in great indecision. The series of small bodied candles with long wicks is forming the pattern called spinning tops and marks a period of potential change. A drop from this level could bring the index back down to 1350, a move supported by indicators on the daily charts.
S&P 500 weekly closings
The convergence of MACD and price peaks in the S&P during the October/November sell off suggests that the market will return to retest the lowest levels. A move back down to 1350 over the next couple of weeks would bring the S&P to its long term trend line.
S&P 500 daily closings
As the Magic Eight Ball would say, things are hazy at this time. The market could go either way. The trend is still up and there is still no evidence of a reversal. However, if the market does move down from here to retest the previous lows a potential reversal would then be on the table. Important support at this time for the S&P 500 is at 1420,1410 and 1400. On the upside resistance is at 1430 and 1465. 1410-1430 may prove to be the range of trading over the next few days or until a new development in Fiscal Cliff negotiations.
There is not a whole lot on the economic front over the next week that I see as a market mover. Tomorrow CPI data is released and early next week new information from the housing sector. Thursday comes the next round of unemployment figures and Friday brings us the final revision for 3rd quarter GDP.
As I finish the wrap and get ready to publish I see that Boehner and Obama are about to meet in the White House. Maybe we'll get some new developments.