The Three Shrugs of Fate: What May Happen After the Election

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A Divided Country With Armed Individuals Makes For A Dangerous Election

The stock market sold off aggressively on Friday despite a higher than expected number of new jobs reported in the October Employment Situation report. When placed in the context of where thigs are at the moment, it's clearly a sign of major concern.

There are still three major big things affecting this market. Europe, the Economy, and the U.S. Presidential Election. None of them are going away anytime soon. All three are connnected. And any kind of significant development in any of them will affect the others, and thus affect the things that the financial markets will have to work out.

Along with the three major big things, there are three plausible scenarios about the way things may turn out, based on the outcome of the election, which is now at the forefront of the three E's. These are based on how those who work, pay taxes and hold to more traditional values may respond to whatever happens on Tuesday. Note that this analysis is not based on whether Obama or Romney wins. It is based on how those who foot the bill for society may respond to the election results and the repercussions of those results.

Ayn Rand, in "Atlas Shrugged" described how a society that transitioned away from an individual focused political model to one based on one focused on the government unraveled. The "shrug" refers to how those who were "Atlas" like, holding the weight of the world on their shoulders disappeared, and how society fell apart.

As we see it, there are three potential "shrug" scenarios. One, the "slow shrug," is already unfolding. This weekend, in Rhode Island, we spoke to a businessman who owns a mining operation. He told us that over the last few years, as a result of government regulation and intrusion on his business, he has had to fire half of his employees and discontinue paying for benefits on the ones he's kept. He currently has a long standing legal fight with the government ongoing, which is also sapping his resources. On top of that, his business continues to sag because of the slow economy. He loves his business and his employees. His family has owned the business for decades. His "slow shrug" is involuntary. It is being forced upon him by circumstances.

What we saw in Providence, over the weekend, was an economic picture that was a bit slower than what we saw this summer. Our Tales of the Road installment from that visit can be found here.

One restaurant that was very busy last time we were in the city was nearly empty during prime dinner time on Friday night. The bar was full. The tables were sparsely filled. The businessman, with whom we were dining, told us that it's been this way for the past few months. Everyone is just putting one foot in front of the other. This is another example of the " slow shrug." Most of the after work crowd that visits this restaurant works for a large financial services firm that has offices in the area. That Friday was a bad market day says a lot for how full the bar was and how empty the tables were.

Dinner, at a more upscale restaurant on Saturday night saw moderate traffic on the streets. We had a reservation for 8:15 but were sitting down 45 minutes ahead of schedule. The place was comfortably filled but not overwhelming. Our companion, the same businessman, told us that the reason this place was a bit better off than the other place was that it was a hangout for upper level government workers. He told us without the government things would be really bad in Providence.

The next scenario is the "fast shrug," which is what we witness in the market every time something triggers heavy selling. Imagine an election where the result, Obama or Romney winning, triggers a major exodus of participation in daily life, all at once. It would be like buyers walking away from stocks. A collapse would ensue. It is plausible, although, hard to tell how possible it is. Yet, to ignore this as a potential scenario is a bad idea. It could happen.

In real life, if this were to happen, it would be a sign that the workers finally had enough, as a result of too much regulation, too much taxing, and not enough profits. This dynamic is already well established. Our mining business dining compassion described it well. He has just enough business to pay the bills, but has had to cut his workforce in half. He can't cut prices to increase sales because the margins are too thin and he would have to fire more workers.

Corporate earnings have disguised this phenomeon well for the last couple of years. But in the most recent quarter, there have been plenty of kinks in the armor. Sometimes it's sales that falter. Sometimes it's revenues. Earnings are holding up, but most of it is because, like our dinner companion, they've cut their workforces. So, corporate America has been doing an involuntary "shrug" of sorts. More specifically, it doesn't want to "shrug" yet. Upper management is still making ends meet at the expense of cutting the workforce and spending less money. They have lots of cash on hand for a rainy day, too. At least that's what the financial reports tell us.

Yet, we live in a Chaotic Universe, where life is, by design, predictably unpredictable. Hurricane Sandy, and its aftermath, are a poignant example of how quickly things can go fro Chaos to Disorder. How many people will "shrug" after Sandy? It's hard to tell right now. But you know that many will. And many will be from the well to do class. This is how the world works.

Finally, there is the "no shrug" scenario. This would be where everyone just takes whatever comes and decides to fight for what they believe. This would be the prelude to a long lasting conflict, political, and perhaps even quasi-military. The threats of riots by Obama supporters are reportedly on the rise, at least according to Twitter and other sources. Gun sales are rising and have been rising. Recent reports suggest that robberies on gun stores are on the rise.

What's the most likely scenario? It's hard to tell. To us, it looks as if the "slow shrug" is already well entrenched in our society. That means that any key event, such as a heavily contested election, or a suprise outcome, could trigger the "fast shrug," or the "no shrug" scenarios. Even more disturbing would be a combination of both, or the onset of anarchy, as businesses close and the public arena turns into a protracted and highly partisan gunfight.

The "no shrug" scenario is already well entrenched in the Middle East and other places such as Greece, where the "slow shrug" became the "fast shrug," and eventually tipped over into the "no shrug" for those who couldn't leave the country.

In the U.S., there is little precedence for anyone to leave the country. The U.S. is where people from all lands come to find opportunity and success. If the U.S. becomes like other parts of the world, a disaster of epic proportions could unfold. There is no precedence for a mass exodus of people to leave the U.S. That means that the "no shrug" scenario here would even be more potentially violent than elsewhere, especially since many people are armed.

All of this brings us back to the markets. The employment report was better than many of us expected. That the market sold off suggests that the effects of hurricane Sandy and the upcoming election clearly have traders on the edge.

Traders tend to be reasonably well off people. When this demographic shows that it is nervous, it's not a good thing. If people with money pull back their horns, societies tend to decline. And a society that is already on the ropes needs very little to tip it off of Atlas' shoulders and into the vast emptiness of space.

The conservative media is predicting a landslide for Romney. Polling results that call the election even are being questioned. Romney is drawing huge crowds in unlikely places. Yet Obama is the president. Despite his shortcomings, he has the power of incumbency and a divided nation with many who depend on the largesse of government to live. It's as bad a scenario as there has ever been. And it's playing out in real time, via the 24-hour news cycle and social media.

Which "shrug" will tell the tale? We'll know soon enough. Expect a very volatile election night on Tuesday.

On to the charts we go.

spx 2 nov 2012
Chart Courtesy of StockCharts.com

The S & P 500 (SPX) failed in its bid to rise above its 20 and 50-day moving averages on Friday. Both lines were on top of one another making the resistance twice as difficult to rise above. This was a big test for the market. Support is back at the 1390-1400 area.

rut 2 nov 2012
Chart Courtesy of StockCharts.com

The small stocks in the Russell 2000 index (RUT) also failed. This index is still making lower highs and could make another lower low if the action turns worse in the next few days. This is a big negative right now.

naad 2 nov 2012
Chart Courtesy of StockCharts.com

The Nasdaq Advance Decline line (NAAD) failed again. Last week it looked as if was bottoming out. But Friday it made another new low, re-establishing the lower high lower low bearish pattern that it has traded in over the last few weeks. This is a big negative also.

Market momentum is still flat. The Nasdaq Hi-Lo line (NAHL) is smoving sideways. This is not very encouraging. Expanding numbers of stocks making new 52 week highs are crucial to keeping investors putting money into the market.

nahl 2 nov 2012
Chart Courtesy of StockCharts.com

Conclusion

The market seems to have made a decision. Friday may have been a transition day toward a "fast shrug" scenario. Stocks may be starting a new down leg.

The response to the election results is likely to be the deciding development. If Mr. Romney wins and there is no positive response, the market would be sending a very negative message. If Mr. Obama wins, the response, in our opinion, is even more unpredictable.

Caution and a plan for whichever way things break will be needed here. No big bets is still a viable plan. By Wednesday, many things are likely to be clearer. And many things will likely be more confusing.

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