Tuesday, October 8, 2013

Social Security Issues a Debt-Ceiling Warning…Breadth Diverging


“The federal government shutdown hasn’t affected Social Security benefits. But it’ll be a different story if the government doesn’t raise the debt ceiling, according to the Social Security Administration….it can’t guarantee that benefits will be paid in full.” Full story at…

This is Government fear mongering at its best.  Worry the seniors who will pressure the Politicians.  

Here’s more:

ANALYSIS – WHAT DEFAULT? REPUBLICANS DOWNPLAY IMPACT OF US DEBT LIMIT (Reuters) – “The Obama administration says a U.S. default would be ‘catastrophic.’ Economists say it could plunge the country into recession and prompt a global financial meltdown. To many Republicans, however, the prospect of the world's lone superpower juggling its bills doesn't seem so bad. The government could muddle through without a debt-ceiling increase as long as it kept up with interest payments and a few other priorities, they argue….‘We are not going to default on the public debt. That doesn't mean that we have to pay every bill the day it comes in,’ Republican Representative Joe Barton of Texas said on CNBC on Monday.”

If there are no negotiations, my guess is that the Republicans will offer a small debt increase and a line in the sand - no further increase without negotiations.   Conversely, they may just wait on Obama. Waiting looks like it will bring no results, so we could pass 17 Oct (the debt ceiling bust date) with no increase.  That will trigger a lot of effort by the Administration as they figure out who to pay. 

Just a couple of days ago Treasury was saying they didn’t have the capability to prioritize and pay some bills and not others due to their old computer system.  I do not believe that.  It is highly unlikely that debt instruments (Bonds, T-bills, notes, etc.) are lumped in with General obligations of the Government.  Today, it was reported on CNBC that perhaps they can prioritize.

But make no mistake, the debt issue is huge.  We ran a budget deficit of more than 1-trillion dollars in 2012.  So using 2012 numbers, if we need to balance the budget instantly, (if the borrowing limit isn’t raised) we must 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 now higher than they were, but the point is clear.  Instant balancing of the budget is a calamity…no bull.
Tuesday, the S&P finished down 1.2% to 1655 (rounded) at the close.
VIX rose 5% to 20.34 as VIX breached the level of 20 that many traders see as a big worry.

The 10-day moving average of stocks advancing on the NYSE fell to 43% Tuesday from 47% Monday.  (A number below 50% for the 10-day average is generally bad news for the market.) 

In a reversal, New-lows outpaced new-highs Tuesday, leaving the spread (new-hi minus new-low) at minus 12 (it was +10 Monday).  The 10-day moving average of change in the spread is minus 12. 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. 

Carter Worth, Chief technical Analyst at Oppenheimer, made an interesting observation on CNBC the other day regarding breadth as measured by the number of stocks trading above their 150-day moving average.  It was falling and he pointed out divergence with the S&P 500.  We see a similar divergence when breadth is measured as the percentage of stocks advancing.

The below chart shows that the 100-day moving average of percentage of stocks advancing has been falling rapidly since last May when compared to the S&P 500 that has been rising.  That is well in advance of the current political crisis. Is the market worried about more than just the Debt ceiling? I think it is worried about earnings, too, so we'll see how the earnings come in for last quarter and how companies guide for the future.


Tuesday, the overall long-term NTSM analysis remains HOLD at the close.  

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.