What Are You On The Lookout For? - Real Time Insight
March 15 2013 - 10:18AM
Zacks
At Zacks, the editors get together now and again to discuss the
state of the markets and exchange ideas. This week, we did
this. I took down some notes on what concerned the
editors.
Yes, we are in a strong rally that is now close to five months
old. The last two event-driven rallies lasted six
months. This market could hit some negative pothole to bring
a correction on at any time. Such events we don’t wish
for. But we urge, as good investors -- be on the lookout.
Collectively, we identified six possible means for this rally to
find its way into a leg down, or a correction, however you want to
term it.
Six Ways to a Leg Down:
(1) Possible Federal government shutdown on March
27th. Is this the time when budget
dysfunction reaches market fundamentals? The Republican-controlled
House approved legislation Wed., March 13 to prevent a government
shutdown on March 27 and blunt the impact of newly imposed spending
cuts on the Defense Department. The 267-151 vote sent the measure
to the Senate. Democrats hope to give additional Cabinet
agencies similar flexibility in implementing their share of the $85
billion in cuts.
(2) The European economy in real GDP terms is to shrink
-0.3% this year. When does a new raft of bank loan
problems emerge from the lengthening period of stagnation in
activity and mass jobless-ness? The so-called “strong” German
economy, in the lead in Europe, is set for a pathetic +0.7% y/y
real GDP growth rate. Yes, the Spanish 10-year sovereign bond rate
is pricing at 4.84%, well below the 5% threshold. It last saw
the 6% threshold in Sept. 2012. That sounds
great. Perhaps authorities serve up even more stimulus.
But Germany has a Sept. election, and may not be willing to move
forward now.
(3) Jobs numbers could slow to +100K a month, as in
summer’s past. Yes, we are doing a +200K a month
pace now, but is that going to slow? Budgets in companies for
hiring may now close out the high level of hiring activity early in
the year and cause job growth to settle back.
(4) Steep downward revisions to annual 2013 earnings
projections are coming. What happens when estimates
start to come down? This is the bread and butter of the Zacks
Rank. Many long-time and astute observers of earnings inside
Zacks on revisions think the current projections for growth in the
second half of 2013 and 2014 are way too high.
(5) Investors take profits. Does the
spring rally get tired, as it nears a six-month threshold, much
like the last two event rallies? This is yet another negative cycle
for the market. More profit taking, and the lower go the
stock markets, and the lower go consumer sentiment numbers. It
feeds on itself.
(6) Upward Fed revisions, to a +3.0% growth rate or more
for the U.S. economy, pull forward the end of $85B a month in
QE. We know the Fed is planning to begin to taper
its purchases of bonds in Q1-2014. If the economy is so
strong the unemployment rate of 6.5% is reached by the end of this
year, the timing will change. Members of the FOMC could vote
to begin tapering bond purchases much sooner. Then, once the
bond market stalls, the stock markets follow. The Fed can’t
close out the stimulus without a negative feedback loop in
financial markets.
Two Questions:
What are you on the lookout for? Which of
these possible events listed above concerns YOU the
most
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