Market Brief December 2012

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A market giving mixed signals:

The stock market had been basically playing a game of wait and see since the American presidential election but now the momentum is moving with the bulls. By all accounts the positive mood should continue notwithstanding any shock from Congress and the budgetary negotiators from the Whitehouse. The sooner these financial issues are put to bed the better. Either way, fiscal cliff or no fiscal cliff, the end result will be the same.  There has to be some budget cuts and some raising of taxes (the ratings of the American dollar make this axiomatic) so I really do wish they would get on with the job of work at hand and cool the dramatics.

The fiscal action demanded by American and European budgetary arithmetic is deflationary all-round yet the market is rallying. Thus while there is no fundamental reason supporting this bullish price action one cannot fight the market. However, it remains to be seen whether this current outlook is sustainable.

The Dow Transports held at the crucial 4900 level after the election results and if the 5350 level is broken to the upside it will be very positive. It will mean this important leading index has bullishly pierced out of a 12 month trading range or "line". In Dow Theory interpretation the longer the duration of the "line" the more technically important any breakout.

The strength of both the Dow Transports and the Dow Industrials is surprising to me given that quite a few stocks are below their 200 daily moving averages (DMA), in addition significant DMA have become points of resistance rather than support. These technical characteristics indicate distribution taking place, are indicative of  bear market commencement and should give smart traders food for thought. To explain what I mean here are a few examples: BIDU, BBBY, MSFT, DLTR and DG.

Baidu Inc.: Daily

bidu 14 dec. 2012

Bed Bath & Beyond Inc.: Daily

bbby 14 dec. 2012

Microsoft Inc.: Daily

msft 14 dec. 2012

Dollar Tree Inc: Daily

dltr 14 dec. 2012

Dollar General Corp.: Daily

dg 14 dec. 2012

An avalanche of European debt rolling over in 2013:

"One European issue you don't hear about a lot is the massive amount of debt, both public and private, that will roll over (i.e. need to be refinanced) in the next few years. In 2013 nearly $1.2 trillion of European government bonds will need to be refinanced. A few weeks ago, in a CNBC interview, CEO of money management giant Blackrock Larry Fink, hinted that his firm's clients, typically large institutions, had very little interest in buying those bonds — especially those issued by downtrodden  European Union members such as Spain and Italy. Worse still is the mountain of debt refinancing European companies will need. About $4.2 trillion worth of corporate bonds will mature through 2016, according to Standard and Poor's ratings services. In 2012  alone roughly a half trillion came due. But the real tidal wave rolls over the next two years, with $1.03 trillion for 2013 and $1.28 trillion in 2014. If these numbers aren't scary enough, then consider financial companies (i.e. banks) owe about 78% of this debt. These companies are the primary sources of liquidity to keep the commercial gears of the EU greased. If investors are hesitant to buy European sovereign debt, then the mere idea of buying European corporate debt — especially for financial companies — would send them running for the hills."

From the above report by the Jutia Group the new European Stability Mechanism (ESM) is going to have a very busy year in 2013. The ink is barely dry on recent plans when it is now apparent that the agreed 500 billion Euro targeted to be "raised" will not be sufficient to meet requirements particularly as it looks increasingly likely that Italy will go into "default" like Spain, Portugal, Greece and Ireland.

Any indication that the 27 Euroland countries are going to drag their feet in this regard will more than likely throw the Euro into its biggest crisis yet. The reason for this growing disillusion is that it is rumored the fund will need to "grow" to at least 2 trillion Euros to adequately deal with the Italian problem. It is thought in certain circles that this debt level may be substantial enough to now make the German political establishment finally consider throwing in the towel on the disaster that has become the Euro. I personally don't think they will walk but if France goes the way of Italy that is another issue. I do not think Germany could maintain its premier sovereign debt status in such an eventuality. I think then and only then will the writing be on the wall for the Euro.

Charts: Courtesy of StochCharts.com

(C) 17th. December 2012 Christopher M. Quigley all rights reserved.

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