Market Report – November 12, 2012

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 In The Rear View Mirror

Market Report: U.S. equities cascaded to their worst weekly performance as fears over the European debt crisis and the fiscal cliff here in the U.S. took center stage. Some traders and politicos would be apt to blame the bearish this week on President Obama’s resounding reelection over Republican challenger Mitt Romney, but that excuse does not tell the entire story.

The real issue is with a lame-duck session of Congress looming, the House and Senate have a very limited time frame in which to pass legislation that helps the U.S. dodge the fiscal cliff. The fiscal cliff is the scenario under which old tax cuts expire, thereby becoming tax increases and automatic cuts kick in. As many economists have already noted, the result could easily be another U.S. recession.

Since we are discussing politics, stumbling blocks on the road to the desired outcome (dodging the fiscal cliff) must be noted. Republicans control the House while Democrats control the Senate. The former group is not apt to raise taxes on the wealthiest Americans, but that is what President Obama wants and he has pledged to not sign any fiscal cliff legislation that excludes such provisions.

Said another way, November and the fourth quarter itself are usually kind to stocks, but unless the folks on Capitol Hill find a way to work together for once, the next several weeks could try investors’ patience.

The Markets @ 11/9/2012
Index Close Weekly % Change YTD Change YTD%
DJIA 12815.39 -277.77 -2.12% 597.83 4.89%
NASDAQ 2904.87 -77.26 -2.59% 299.72 11.50%
S&P 500 1379.85 -34.35 -2.43% 122.25 9.72%
NYSE Comp 8053.57 -181.34 -2.20% 576.54 7.71%
NYSE MKT  2385.4 26.68 1.13% 107.06 4.70%
RUS 2000 795.02 -19.35 -2.38% 54.1 7.30%
RUS MICRO 304.55 -9.28 -2.96% 28.83 10.46%
VANG INTL 14.29 -0.03 -0.21% 1.23 9.42%
USX CHINA 4304.39 -29.99 -0.69% -225.41 -4.98%
EMERG MKTS 6619.07 -122.27 -1.81% 613.76 10.22%

Market Report

In economic news, the Thomson Reuters/University of Michigan initial reading of November consumer sentiment rose to 84.9 from 82.6 in October. Economists expected a November reading of 83. The Commerce Department said wholesale inventories climbed 1.1% to $494.2 billion.

On Thursday, initial claims for jobless benefits fell by 8,000 last week to 355,000. The less volatile four-week moving average rose by 3,250 to 370,250. And on Monday, Institute for Supply Management’s non-manufacturing index fell to 54.2 in October from 55.1 in September. Economists expected an October reading of 54.5.

The jobless claims and consumer sentiment were particularly encouraging, though that ebullience was not expressed by a rising equity market. However, those data points could portend a strong holiday shopping season for retailers and that means taking a look at some micro-cap discretionary names right now could prove fruitful.

Green numbers to begin the week, red after the election and then a little green on Friday

On Tuesday, the DJIA gained 133 points as investors must have anticipated a Republican victory; then reality hit home as the Democrats recorded resounding re-election results. Wednesday and Thursday were backlash reactions to “what was hoped to be the outcome” but which proved to be only wishful thinking.

On Friday the DJIA showed a very modest upward bias with a 4.07 point gain; most of the other metrics we follow were green as well.

Wrong message, wrong time

These pages usually are not meant for political rhetoric, but I was on the record with my staff as saying I thought the President would win re-election. And for this record, I am a fiscally conservative, independent voter (I have never voted a straight ticket in my life) that as I have gotten older probably have become a little more tolerant…not liberal…tolerant. And for this single reason, I thought the Republican Party was in trouble. And in my humble opinion, that proved to be the case.

A little insight to talk you off the ledge

A friend and business associate of mine, Larry Isen, editor of OTC Journal offered an opinion that many of us share and should be comforting for market followers. Larry wrote…

“While an Obama Presidency might not be ideal for the long term fiscal health of the US, I personally believe a continuation of the current policies will be good for the stock market in 2013.

“A continuation of the current fiscal policies will have the US awash in liquidity thanks to a highly accommodative FED. The banks are loosening up their lending standards to make mortgage money more attainable. This will allow many of us to refinance at lower rates, and create upside pressure on residential real estate prices. Low interest rates are also forcing money into stocks to seek returns.

“If there’s no major shakeup in tax policy (that’s code for the fiscal cliff)- the markets should do very well in 2013 by default. We’re still shaky, but less troubled than the rest of the world.”

The caveat is of course, finding a middle road for the looming “fiscal cliff.” I’m no soothsayer, but I think something will be crafted to avoid an all out disaster.

For the week, every index we track flashed red…with significant losses in the major indices of up to 2.50%. The Russell Micro was off close to 3%.

Gold showed a solid gain

As we reported recently…Gold’s outlook hinges on uncertainty related to the U.S. election and the so-called “fiscal cliff”, a series of automatic spending cuts and tax increases in 2013 if Congress fails to reach a deficit-reduction deal by the end of the year.

Now, there’s just one uncertainty to consider. Gold gained $56.20 to close on Friday at $1,730.30.

Small Dollar gains

The US Dollar was basically unchanged against the Euro (closing at 0.7870 Euros, +$0.0081); bonds continued to registered gains last week…the 10-year bond was up $1.072 to close at $100.172 and the 30-year bond gained $3.313 to close at $100.188.

Oil prices holding steady

WTI Crude Oil gained $1.21 this week to close at $86.07 on Friday. Since opening the year at $102.96, WTI Crude has lost $16.89 per 42-gallon barrel or slightly over16%.

Several weeks ago I reported that the “WTI crude oil prices have fallen due to the gloomy economic outlook. European economic headwinds and slow economic growth rates in the United States and China have brought oil inventory levels up to record highs. Due to the fundamental change in demand and supply, we have seen a decline in oil prices.” Read the rest of this article on Seeking Alpha: I still believe this is the case.

The Bottom Line for Stocks

A quick summary of the current state of market affairs is to say a year fraught with headline risk continues. Whether it has been the European sovereign debt crisis, U.S. elections and now the fiscal cliff, investors have had to contend with an unusually large amount of negative headlines.

Regarding micro-caps, there is some good news. Actually, very good news. Precious metals miners are perking up once again as gold and silver saw some safe-haven buying this week following the election results. So discretionary and mining names would be the pick of the micro-cap litter at the moment. Avoid utilities due to weakness in the large-cap corner of the sector.

Research and Editorial Staff
MicroCap MarkePlace
Mike Casson, Executive Editor

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