First, I hope you all have a great Turkey Day. Regardless of the market situation, I know that we still have plenty to be thankful for in life. Thanksgiving usually means good food, good drink, football and sharing stories with family and friends. Although I miss the old days of playing football with my friends prior to feasting on the bird, I now like relaxing with a glass of wine and catching a game on TV, before and after. Speaking of wine, it is often difficult to pair a good red with Turkey. However, I have found (thru much trial and error) that a good Red Zinfandel is the best match with possibly a Pinot Noir a close second and a Syrah also in the mix. Although I love Italian Reds, I haven't found a great match although a Primitivo is probably the closest (this is the Italian Zin). Since it is tough to pair just one wine, try 2 or 3 through the meal. Hearty wines generally don't work as well and of course there are also several good whites you can use, though personally I'm not much of a white drinker (I'm told that Reisling and Sauv Blanc are good white pairs).
This week I was trying to come up with a theme but I found myself with too many random thoughts through my reading. So, my theme will be Random Thoughts (mostly about the Fiscal Cliff). So in no particular order, here are a bunch of things that keep my mind occupied regarding the markets and the economy:
- Are you tired of the term "Fiscal Cliff" yet? We need a new term. One term I heard was "Taxageddon." Not bad. Send me an email if you have any good ideas.
- Investors face an investment conundrum - safety of US Treasuries versus volatility of stocks. The conundrum is that if a deal is reached, Treasury prices will likely decline while stocks will jump. However, in the meantime, stocks are dropping and likely to go lower unless progress is made. When do you get out (if not already) and when do you get back in? If you feel a deal will happen, stay the course and ride the volatility.
- The market has declined over 5% since the election and the NASDAQ is in correction territory down for 6 weeks in a row, the most in 3 years.
- Politicians from both sides of the aisle finally seem to grasp the severity of the fiscal cliff and at least are talking about a compromise. There seems to be a recognition (after the market dove) that investors are impatient and need to see progress.
- I think the market is oversold but unless a deal is reached it can get worse. Look for continued volatility as investors digest the daily info coming from DC.
- High dividend stocks are particularly oversold and offer a good risk/reward here.
- Cyclical stocks such as technology, basic material and industrial stocks have also sold off the hardest and stand to bounce on any positive news.
- Investors definitely are taking capital gains but do not seem to be re-investing immediately. Institutional investors are under-invested in equities and Retail investors probably the same. Look for the market to pop if a deal is reached.
- Companies are cutting back on investment and spending less until they get more clarity.
- Even a cliff deal is still likely to lead to lower growth due to austerity measures. However, you could also get a burst of activity due to pent-up demand from companies and consumers.
- Europe GDP declined for the 2nd quarter in a row as the EuroZone remains in recession. Only France and Germany, among the major countries showed any growth and it was minor.
- The big holiday retail season is about to start in the US beginning on Black Friday - will consumers step-up or pull back? My guess if that there will be a lot of bargain hunting.
- Fighting is intensifying in the Middle East. This could get really ugly and I don't think has affected the market too much yet.
- This week, Euro leaders and the IMF meet to decide on whether to release a chunk of cash to Greece. The market is reacting positively in anticipation.
- Hurricane Sandy has already impacted weekly economic numbers and will continue to impact going forward. How bad will it be and how much is already baked into the market?
- AAII bearish sentiment has gone thru the roof with retail investors 48% bearish. As a contrary indicator this is bullish for equities.
- The Fed's Operation Twist is scheduled to come to a close at the end of the year and the Fed must decide whether to continue or come up with an alternate program. (Currently the Fed buys lon-dated USTs while simultaneously selling short term.)
So there are my random thoughts. Most deal with the fiscal cliff which is foremost in investors minds. The market is up today as investors maybe think that a deal can be reached or the framework can be agreed upon which will relieve some of the uncertainty. Personally, I am hopeful that this is not hot air coming from Washington and they will first announce a "down payment" on the deal by agreeing to something, then give us a framework or more positive rhetoric that investors can hang on to. If that happens, this market jumps as the under-invested chase stocks. If it doesn't happen or investors don't like the progress, look for more selling of stocks and a rush to Treasuries. Again, the investment conundrum...
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Industrial production declined 0.4% in October coming in below the consensus expected gain of 0.2%. Production is up 1.8% in the past year. Overall capacity utilization moved down to 77.8% in October from 78.2% in September. Manufacturing capacity use fell to 75.9% in October from 76.7% in September. The Consumer Price Index (CPI) was up 0.1% in October, exactly as the consensus expected. The CPI is up 2.2% versus a year ago. Retail sales declined 0.3% in October, close to the consensus expected -0.2%. Sales were also -0.3% including revisions for August/September. Retail sales are up 3.8% versus a year ago.
The US Market continued its nosedive due to continued concerns over the fiscal cliff. However, Friday the market reversed positive after political leaders talked constructively about reaching a deal before year-end. The Dow dropped 227 points to 12,588 and is now down 7.5% from 2012 highs. The S&P 500 fell 1.45% to 1359.88 and is off about 7% from its high and 5% since the election. It remains up 8.1% for the year. The NASDAQ fell for the 6th straight week (down 1.78% to 2853 and is officially in correction territory having fallen 10% since reaching its high. Small and mid-cap stocks are also in correction territory since reaching 2012 highs in October. European stocks followed US markets with the Euro Stoxx 600 down 2.74% for the week after not surprisingly results were released showing the economy in recession. The Netherlands fell 3.64% and Germany dropped 2.97% for the week. For the year, the Stoxx 600 is up 7.5% with Germany leading all major markets up 17.8% YTD. Asia/Pac stocks fell 1.27% with China down 2.63% while Japan surged ahead 3.04% bucking the trend.
Have a Great Week and Happy Thanksgiving!
Bob Centrella, CFA, President/Managing Partner, Forza Investment Advisory LLC, a Registered Investment Advisor.
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