U.S. Consumers Not Concerned About Fiscal Cliff

Includes: FXE, UDN, UUP
by: Ralph Shell

The University of Michigan Consumer Sentiment Report released this afternoon showed the optimism had increased to 84.9, better than an anticipated 82.9, and 82.6 in the prior period. This soaring optimism is up from numbers in the mid-sixties a year ago, and is the best consumer attitude since July 2007.

The consumers crystal ball gave the wrong signal in 2007. Is it doing the same now? With the election over, markets are starting to be concerned with the pending "fiscal cliff." A combination of higher taxes and reduced government expenditures, combined with cumbersome health car laws all come into play after the first of the year.

Attempts to find solutions to these complicated problems was deliberately postponed until after the election. Now the campaigning is over and it is time to govern, a more serious task than the former.

The problem is the election did not result in clear solutions. The "soak the rich" theme played well with the Robin Hood factions, but there are opposition groups that want fiscal responsibility and no new taxes. House Speaker Boehner said raising tax rates is "unacceptable," and Senate Minority Leader Mitch McConnell said, no tax hikes.

Perhaps this is merely pre-negotiation posturing and a compromise can be achieved, but usually solutions do not emerge without a deadline. If that proves the case, some of the University of Michigan's optimistic consumers may be headed for disappointments.

Despite lower U.S. equities and angst going forward that gridlock will continue, the USD versus the euro has fared well this week. Going back several weeks, there had been rumors Washington officials had requested that EU debt problems not be an issue until after the U.S. election. Weather true or not, the plight of the Greeks has again emerged.

The Greeks have been dutifully performing their acts of austere penance, raising retirement ages, cutting pensions, and scaling back food and medicine for the sick any needy. This effort is to get the troika to release the next €30B tranche before they become insolvent, rumored to be in the middle of November. The latest rumor, however, is the EU finance ministers are going to delay the money for another month.

Resolution of the Greek debt issue would give the euro (EURUSD, FXE, UUP) relief, but a rally next week without resolution means the euro can still be sold. The double high at about 1.3135 from the middle of October has given us an orderly sell-off down to 1.27. This channel remains intact, with further downside likely barring the release of funds. As always, watch your stops.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.