The last minute is rapidly approaching for the fiscal cliff negotiations and both sides offered new sound bites that moved the market.
Late Monday night the president made an offer to the House that was deemed "not balanced" and Speaker Boehner quickly rejected it. Early on Tuesday Boehner said time was running out on negotiations and without a serious offer from the president they were preparing to proceed with Plan B to extend the tax cuts.
Plan B would be to vote on legislation to extend the tax cuts for everyone except those making over $1 million per year. There is currently a bill in the House that was approved by the Senate where taxes will rise on everyone over $250,000. They could just pass that bill and the tax hike question would be over and the focus back on spending cuts. The House is threatening to pass a bill with slightly higher limits and send it to the Senate. That would force the Senate democrats to vote down the tax cuts, which is essentially voting for tax hikes. They do not want to be forced to do that because of the implications for voter sentiment. Nobody wants to be blamed for voting to raise taxes.
The market rallied on the Boehner comments and then lost ground when Senator Harry Reid attempted to put the blame back on Republicans saying by exercising the plan B option they were "walking away from the negotiating table" and shirking their responsibilities to do what is best for the country.
The afternoon market decline was reversed at the close as shorts covered on fears of what may happen in the negotiations overnight. With counter proposals now being exchanged in hours rather than days or weeks you can tell we are approaching the last minute threshold. Urgency is increasing and that suggests we are getting closer to at least a partial resolution.
I want to make one point and then I will move off this topic. The president has reportedly offered $800 in spending cuts and the republicans are trying to get $1 trillion. Those are big numbers but that is over a ten year period. Even if the final number was $1 trillion that equates to ONLY $83.3 billion a year. In budget terms that is a drop in the bucket. We are two months into the current 2013 fiscal year for government. In the first two months of 2013 our debt has increased by $292 billion or roughly $146 billion a MONTH. The opposing parties are arguing over cutting spending by $83 billion a YEAR then the government is overspending by $146 billion a MONTH.
Also, that $800 billion in cuts offered by the president includes nearly $300 billion in "interest saved" because spending will be reduced by ending the wars. The republicans claim that does not count because ending the wars has been a Obama campaign platform plank for four years. If there was no fiscal cliff deal the war would still end and the interest would still be saved.
The current political theater is just orchestrated drama as Tim Geithner put it and regardless of the outcome the U.S. debt will continue to grow by $1 trillion a year. Nobody is really serious about cutting spending. They are only cutting the "growth" in spending and then only by pennies on the dollar. I am ready for this charade to be over and let the market deal with the result.
On the economic front the NAHB Housing Market Index rose to 47 for December, up from 45 in November. That is the highest level since April 2006 and the eighth consecutive month of improvement. However, the internal components were still weak with plenty of room for improvement.
The traffic of potential buyers component rose to 36 from 35 but remains well below expansion territory over 50. The single family sales component just inched into expansion territory at 51. The six month outlook component declined a point to 51. The latter two indexes are up +29 and +25 points over the last year while the prospective buyers component has only risen +18 points.
There remain some headwinds to the housing sector with real income slowing and mortgages still very hard to get.
The Weekly Chain Store Sales snapshot exploded higher by +4.3% after two weeks of post Thanksgiving declines. That was the largest gain on record and suggests consumers have suddenly began shopping in earnest. The biggest gains were at drug stores and wholesale clubs. The ICSC survey showed consumers have completed less of their shopping than last year so the season could finish strongly. Only 17% had completed their shopping and 12% had not yet begun.
Anecdotal reports claim consumers were waiting for stores to discount merchandise as the shopping days before Christmas began to shrink. Stores have educated buyers over the last several years by heavily discounting in the week before Christmas in order to blowout slow moving merchandise before year end.
The calendar for Wednesday is highlighted by New Home Sales and that is not actually a market mover. The next important report is the Philly Fed Manufacturing Survey on Thursday followed by the Kansas Fed Survey on Friday.
Obviously the market moving events will come from fiscal cliff headlines out of Washington. With three days left in the week the urgency factor will be increasing rapidly.
Oracle (ORCL) reported earnings after the bell today of 64 cents compared to estimates of 61 cents. Revenue was $9.1 billion compared to estimates of $9.02 billion. Oracle said software sales growth would remain strong in early 2013 despite the fiscal cliff. Oracle's president said businesses were still trying to spend money allocated to 2012 budgets. Oracle said sales would rise 3% to 13% for the quarter that ends in February for them. However, hardware sales were expected to be flat to down -10%. Oracle has projected hardware sales to begin rising in the March 2013 quarter. The guidance was roughly in line with analyst expectations.
The company said software subscriptions rose +17% to $2.4 billion last quarter Oracle had predicted sales growth of 5% to 15%. Shares rose +2.6% in afterhours trading.
FactSet Research (FDS) reported earnings that were in line with estimates but also issued weak guidance and shares declined -$4. FDS reported earnings of $1.11 and revenue of $211.1 million. However, they guided for $1.12 and $213.5 million for the current quarter and analysts were expecting $1.13 and $216.3 million.
The Limited (LTD) went ex-dividend today and declined -$3 to $48.34. The special dividend was $3 so this was to be expected. There are a lot of companies paying dividends in the next eight days so sudden drops like this are going to be common.
Nielsen Holdings (NLSN) said it had agreed to buy Arbitron (ARB) for $1.26 billion in cash or $48 per share. This is a +26% increase from Monday's closing price. Arbitron is the largest source of data on radio listeners in the USA. Neilsen is the largest TV ratings agency. Arbitron plans to begin rating Pandora after the acquisition. The companies already have a joint venture called Scarborough Research that monitors print advertising and other consumer data. Nielsen shares rallied +4% on the deal so investors seem to like the acquisition.
The school shooting in Connecticut has spurred numerous calls for stricter gun laws. Some of these comments come from previously pro-gun politicians. This suggests there will be laws passed and the gun buying public is reacting normally and rushing out to buy more guns.
We will not have the national background check numbers for December until mid January but November was the 11th consecutive month of record checks. After the shooting several agencies have claimed that checks are up 200% to 300%. The NCICS system had processed almost 17 million checks through November 30th. Firearm sales in the U.S. was a $32 billion a year business or it was before the latest spurt.
The Colorado CBI reported that local checks on the day after the shooting spiked to 4,154 and a record high. The volume has only declined slightly in the days that followed. The check in Colorado normally takes 20-30 min. On the day of the shooting that rose to 4 hours because of the demand spike. Today CBI claims they have a sizeable backlog and they are working each day to clear the prior day's backlog before working on current requests. That means the "instant" check is now taking 24 hours in Colorado.
The worry over stricter gun laws has created a shortage of guns and ammo in the system according to a major dealer in Texas. He said "All of our suppliers are almost sold out of items across the board." Sales in that dealer's stores were up 200% to 400% over 2011 levels.
This increase in sales has not helped the stocks of gun manufacturers and retailers. Fears of strict gun control laws have caused investors of all types to flee the stocks of those companies. Sturm Ruger (RGR), Smith & Wesson (SWHC), Cabella's (CAB) and Dicks Sporting Goods (DKS) have seen their shares crushed. Dicks announced they were pulling "modern sporting rifles" off store shelves nationwide. "Modern sporting rifles" was a politically correct name for semi auto rifles.
Private equity giant Cerberus Capital said it would immediately sell its interest in firearms manufacturer Freedom Group. Freedom was the company Cerberus had used to consolidate some individual brands including the Bushmaster brand. The shooter used a Bushmaster AR-15. Other brands in the Freedom group include Remington, Marlin and Advanced Armament. Cerberus said it would retain a financial adviser to sell its interest in Freedom.
The decision to sell was hastened by pressure from the California Teachers Retirement System commonly known as Calstrs and the California Public Employees Retirement System known as Calpers. They have $600 million invested in Cerberus and the California Treasurer said the states pension funds should not own a stake in any company that makes assault weapons. Cerberus immediately posted a 400 word response to the Treasurer's demands and put Freedom up for sale.
In the stranger than fiction department S&P upgraded Greece by 6 notches from selective default to B-minus with a stable outlook. I know, you are probably wondering if we just slipped into the Twilight Zone. S&P said "The upgrade reflects our view of the strong determination of European Economic and Monetary Union (eurozone) member states to preserve Greek membership in the eurozone."
Basically S&P realized the EU was going to continue pouring good money after bad until hell freezes over and therefore Greece was not going to fail. The EU has agreed to complete the funding of 49 billion euros by the end of March.
The end of the three year Greek disaster suggests life will return to normal in the eurozone and that lifted the euro currency to an eight-month high.
The dollar index fell to a three month low on expectations for a weak fiscal cliff deal that leaves most of the major issues concerning spending and budget deficits unresolved.
Nearly as amazing as the Greek upgrade was the continued drop in gold prices. Gold fell -$26 in regular trading to hit the 200-day average at $1663. Having gold and the dollar down hard on the same day is rarely seen. Analysts believe this is an asset allocation trade. The world is not coming to an end as the result of the fiscal cliff and equities are nearing recent highs. A cliff deal could push equities to a new high by year end and funds are deciding they want to be in equities rather than gold for their year end statements. Long term gold is going higher because the dollar is going lower. Bank of American Merrill Lynch reaffirmed their claim that gold will trade over $2,000 in 2013.
Dollar Index Chart
The increased urgency in the fiscal cliff negotiations and the Plan B by republicans to pass a tax bill was all the markets needed to push through resistance and send shorts running for cover. The indexes were flat when Boehner approached the microphones but the result was immediate. While there is no guarantee a tax bill can be passed in the House OR even less likely to be approved in the Senate, it appears investors are growing more confident that something will be done before year end.
The S&P broke through resistance at 1430 and again at 1439 to close at 1447. The next material resistance is 1465 and the failure level from September and October. There is nothing preventing the S&P from reaching that level if the news flow on the cliff continues to show increased urgency and the likelihood of a deal of some sort.
The challenge will be the hangover in January. There is always a hangover after a major party. Once the actual impact from whatever deal they come up with is realized in January the outlook could change. We could have a sell the news event. Since it is unlikely they will be able to get a comprehensive deal done in December the continued hope could propel the market higher. Once they backfill the actual details in January and possibly have a couple failed votes the market could begin to fade.
Earnings will begin to flow around the middle of January and the vast majority of guidance has been negative. That will be immediately factored in once the first few earnings misses appear.
The Dow broke through resistance at 13,279 and closed just below the high for the day. The biggest gainers were UTX, IBM, CVX and CAT. Only four stocks were negative, HD, VZ, GE and KO with HD the biggest lower at -0.31 cents. That is hardly a major decline.
The Dow should be targeting late summer resistance at 13,625 and there is nothing in the way of economics that should be a hindrance. This is purely a fiscal cliff rally and headlines will control the direction.
Apple gained ground for the second day after dipping to $497 on Friday. Apple gained +15 today and helped power the Nasdaq well past resistance at 3030. Priceline +16, Amazon +7 and Panera +6 helped to support the Nasdaq as well.
Multiple analysts came out in support of Apple and putting down the negative comments from the prior week. This should be a turnaround point for Apple and therefore the Nasdaq.
The next material resistance level is 3085.
The Russell shifted into hyper-drive after the dip back to 825 on Friday. The increasing urgency in the cliff talks and the expectations for a deal have sent fund managers racing back into small caps.
Russell 2000 Chart - 45 Min
Russell 2000 Chart - Daily
We remain hostage to the headlines but investors seem to be getting their news from tea leaves rather than CNN. The expectations for a deal are increasing even though the comments from the participants suggest talks may be breaking down.
We knew there would be some grandstanding by both sides as we got closer to the "last minute" and that has begun. If anyone is going home for Christmas there needs to be some agreement in the next 48 hours. Since lawmakers rarely let law making get in the way of their vacations I am sure the atmosphere is getting pretty intense in the Capitol.
Remember the TARP vote. When we went through this same exercise with the TARP program the market rallied on expectations and then imploded when the first vote did not pass. We can expect the same reactions from the market this time because there are going to be some votes that will not pass. Be prepared.
I remain in buy the dip mode until proven wrong.
Until a resolution appears, enter passively, exit aggressively!
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