Wednesday, October 9, 2013

Failure to raise the Debt Ceiling? It’s a calamity…Corporate Profits Weakening

I made a mistake in my analysis of the budget yesterday.  I considered the problem entirely incorrectly.  Basically, we ran a budget deficit of more than 1-trillion dollars in 2012.  So using 2012 numbers, if we don’t raise the debt ceiling then we need to balance the budget instantly.  That would require that we reduce spending by 1-trillion dollars.  To avoid cutting entitlements (social security, Medicare, etc.), available funds would have to come from 2-sources: (1) discretionary spending ($615-billion) and (2) Defense spending ($670-billion).  Even if we eliminate ALL discretionary spending, to make up the shortfall we’d need to cut the Defense expenditures in half.  Now, the numbers are a little better than 2012, because revenues are higher today than they were, so the budget isn't quite as bad as it looks in my quick analysis, but the point is clear.  If the debt limit isn’t raised, it would be a calamity…no bull.

Unfortunately, this just shows once again, how critical it is for the US to begin cutting the deficit.  That means less spending and more taxes.  The deficits are so high that it will be almost impossible to deal with in the future if we don’t start making some progress now.

“Corporate profits are tracking at about a third of original expectations and trending lower, setting up a potentially rough ride when reporting season begins next week.

Earnings for companies on the S&P 500 stock index are expected to grow just 3.5 percent on a quarterly basis, a number that on its face appears consistent with trends but is well below the lofty projections set earlier this year.” Story at…

IMF: US OUTLOOK (Yahoo Finance)
“…the IMF also lowered its outlook for U.S. economic growth this year to 1.6 percent and next year to 2.6 percent. Those are 0.1 percentage point and 0.2 percentage point lower than in July, respectively…The fund's forecasts assume the U.S. partial government shutdown would last only a short period. But it warned that failure to raise the U.S. government's borrowing limit later this month could lead to a default on U.S. debt. That would push up interest rates, disrupt global financial markets and possibly push the U.S economy back into recession.” Story at Yahoo finance at…

Wednesday, the S&P finished up 0.1% (1-pt) to 1656 (rounded) at the close.
VIX fell 4% to 19.60 as VIX fell back below the level of 20 that many traders see as a big worry.

The 10-day moving average of stocks advancing on the NYSE remained 43% Wednesday. It was from 43% Tuesday.  (A number below 50% for the 10-day average is generally bad news for the market.) 

New-lows outpaced new-highs Wednesday, leaving the spread (new-hi minus new-low) at minus 57 (it was -12 Tuesday).  The 10-day moving average of change in the spread is minus 14. That just means that over the last 10-days, the spread has been getting worse.

Market Internals remain Negative on the market for this short term indicator.  There has been no indication of a reversal to the upside at this point.  Internals are getting worse in a hurry - but that can always change, especially if there is some movement in Washington.

I expect that the Politicians will have to do a short-term debt-ceiling increase since it is not likely they will settle their differences in a week. 

Wednesday, the overall long-term NTSM analysis switched to SELL at the close. 

That doesn’t mean much now because the first Sell in this cycle was 15 April; it does indicate deteriorating market conditions.  The sell was triggered by the recent large increases in VIX.  

I remain about 20% invested in stocks as of 5 March (S&P 500 -1540).  The NTSM system sold at 1575 on 16 April.  (This is just another reminder that I should follow the NTSM analysis and not act emotionally – I am under-performing my own system by about 2%!)  I have no problems leaving 20% or 30% invested.  If the market is cut in half (worst case) I’d only lose 10%-15% of my investments.  It also hedges the bet if I am wrong since I will have some invested if the market goes up.  No system is perfect.