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  • The Momentrix Week In Review July 29, 2011
    What an awful week for the markets!! The S&P 500 closed the week at 1292, down 3.9%. It was the worst week for the markets in over a year. The Dow Industrials Average was off 4.2% while the NASDAQ did slightly better with a 3.6% drop. At 1292 the S&P 500 is holding just slightly above its 200 day moving average. The S&P has not closed below this level in over a year. The 200 day moving average is the last major moving average support that we follow. Generally there should be an attempt by the bulls to defend this area of support. A break of this level would leave the bulls to defend the recent lows around 1260, after that it is anyone’s guess.
    With the S&P 500 closing down 5 straight days and getting oversold, any good news could rally the market sharply. The problem is that the market is not only discounting the debt debate, it is also discounting the continued problems out of Europe. We see this potential rally in equity prices as a likely time to reduce exposure to the market. The debt debate will likely get resolved with a debt ceiling raise, but as we wrote (http://momentrixreport.com/?p=1008) it’s the downgrade stupid!! None of the plans that are being floated as of yet approach the level of spending cuts that both S&P and Moody’s have outlined to avoid downgrade, $4 trillion over ten years. Mark Zandi, the Chief Economist of Moody’s, is on the wires saying the current framework of a deal on Sunday would be enough to delay a downgrade, but we remain skeptical at this point. We would like Washington to take these bad omens very seriously and take a significant step to solvency. Remember that an announcement of a deal and the passing of the deals in Congress are two different things and a failure to pass would make any rallies short lived.
    The week ahead will be focused on the Debt ceiling votes as Washington tries to get its act together. Although the news and eventual passing of the Debt ceiling raise and corresponding budget cuts is a positive and should engender a positive market reaction, the form the final bill takes will be the key to the reaction of the ratings agencies. Should the final bill come up short of the expected spending cuts, the agencies could act anyway, creating unknown effects in the markets.
    Europe continues to be a problem and could be the real reason for the continued weakness in the markets last week. CDS spreads and Interest rates in Europe continued to move higher last week, particularly in Spain, Italy, and Portugal. Equity markets around the world continue to be weak, potentially discounting slowing growth in the world economy. Australia, India and Brazil are down significantly this year and are views as growth drivers for world. We would like to see these markets turn around along with other markets. We continue to watch Europe along with world equity markets for signs that the worst has been discounted. This is not the case as of yet.
    The earnings calendar will continue to be full this week. This is the last peak week of earnings results and then going forward the pace of results will slow for the duration of the quarter. Results continue to be impressive but guidance is mixed at this point. In some cases we feel it is companies trying to manage expectations, something that Apple Inc is extremely good at, eventually allowing easier earnings beats. The guidance should not be ignored though, as the economic statistics are showing definitive signs of slowing along with the difficult operating environment of lackluster macro demand and surging costs.
    The economic calendar (http://www.nasdaq.com/markets/us-economic-calendar.aspx) will be full this coming week. The highlight of the week will be the employment report on Friday. The report will very likely continue to languish as the initial claims have been well above 400,000 with the exception of last week. The pace of job creation is not large enough to put any significant dent in the number of unemployed. With economic statistics showing early signs of slowing, there is no reason to think the pace of hiring has increased in the past month, especially with all the uncertainty that business faces right now. One interesting event on Thursday will be the European Central Bank and the Bank of England announcing their interest rate policies. Markets could react to this decision considering the magnitude of problems that Europe faces.
    We remain defensive going into the week. We added a slight hedge on Friday (yes we were late) along with the significant cash position as the likelihood of a debt downgrade increased last week. As we witnessed in the TARP debate, any failure to pass an agreed upon bill may cause a sharp sell-off in the market. A debt downgrade could have detrimental effects as almost every interest rate in the world is some way related to the US treasury and its AAA rating. We hope the defensive position is unwarranted; if it is the right move it will not be a good time for the equity markets.
     
    Aug 01 9:49 AM | Link | Comment!
  • It’s the downgrade, stupid!
     It’s not the debt ceiling, it’s the downgrade.
    Market participants have been focused on the debt ceiling debate for the last month. There has been little to no progress on this front as far as an agreement goes for the duration of the debate.
    The bottom-line is that the problem that the market really faces is the potential downgrade of U.S. treasuries from its AAA standing. S&P said that the U.S. needs to cut $4 trillion from the budget and that would be a good down payment of the $6-8 trillion necessary to avoid downgrade.
                    The problem is that the only bills that even come close to that are the Ryan budget ($6 trillion) and the “cut, cap, balance” bill that is died at the Senate’s doorstep. The Democrats did take a step toward compromise by removing the tax hikes from the Reid bill. But, the Reid bill doesn’t get anywhere close to the 4 trillion in cuts necessary to stop a downgrade. The Boehner bill is a short-term plan that extends the debt ceiling but also doesn’t have the necessary level of cuts.
     The Tea Party have the most aggressive track as they support steeper cuts, a broadening of the tax base through closing loopholes (raising revenue not tax rates), and a balanced budget amendment. The ratings agencies believe that the U.S. is starting to outstrip its ability to pay due to the rate of change of the spending over the past few years versus the size of our economy.
                    The downgrade from the AAA standing has some very dire consequences, potentially worse than the Lehman failure. It is likely that the 2 sides will reach a compromise in the debt debate but the problem is that there will not be enough spending cuts to satisfy the ratings agencies therefore leading to a debt downgrade. There are many resulting problems from a debt downgrade, too many to list here.
    It’s the downgrade, stupid.
    Jul 29 2:59 PM | Link | Comment!
  • The Momentrix View of the Markets for Wednesday July 27, 2011-
     
    One thing is for sure, the plunge protection team was non-existent today. What seemed like a quiet day in the future’s market turned into the feared sell off from over the weekend. The S&P 500 closed down 2%, the NASDAQ down 2.6%, and the Dow Transports closed down 2.6%. It is interesting to note that there was never a confirmation of the breakout of the Dow Transports from a few weeks ago by any other major index. The lack of confirmation led to a free fall for the Transports in the past week. Confirming indicators are very valuable tools for investor’s and this is a great lesson.
    One disconcerting statistic from the day is the move higher in the CDS spread on the U.S. 5 year note. This is the market recognizing the increased potential for a failure to reach an agreement on the Debt ceiling. CDS moves like the one today was a key indicator to the stress in Europe. Hopefully our leaders can stop a similar outcome.
    We were not positioned for this sell off and regret moving out of our portfolio hedges on Monday. We remain in a large cash position but not nearly as defensive as we were entering the week. The Model portfolio was saved today by our large position in Questcor Pharmaceuticals (NASDAQ:QCOR), closing up 25% on the day. This stock and the cash helped us not lose as much as the market although no loss is a good loss.
    We didn’t trade today but are looking to lighten up on a few positions in the coming days. Volatility will be prevalent in the market in the coming days and can only be navigated by the most astute traders. Any rumored solutions to the debt debate could cause a sharp rally in the indices. Of course failure to please the market may cause a disastrous sell-off. Tough times to say the least……
     
    Tags: QCOR
    Jul 28 9:00 AM | Link | Comment!
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