PowerTrend Brief: Treading Water on a Fiscal Deal and Giving Thanks

In the past several weeks, the overall stock market has resembled a roller coaster — down and then up, down and then up, followed by a quick drop. That situation is the case no matter which major market index we review. The only real difference among the Dow Jones industrial average, the S&P 500 and the Nasdaq composite index has been the degree of the drop. While the first two indexes have fallen roughly 7% during the past month, the Nasdaq composite index dropped a more pronounced 8.1% in the past four weeks and nearly 10.4% since Sept. 14. Weighing on the Nasdaq like a rock has been shares of Apple (AAPL), which have fallen 18% alone in the last month.

With the presidential election behind us, the primary driver behind the drop in the stock market has been the uncertainty associated with the looming “fiscal cliff.” In the December issue of my investing newsletter, PowerTrend Profits, I did a deep dive on the “fiscal cliff,” what it is and what impact it will have on tax rates, tax deductions and more. To read my e-letter from last week about the uncertainty caused by the fiscal cliff, please click here.

While the politicians in Washington will look to hammer out a deal to avert the cliff, uncertainty about when that deal may be reached, as well as what it entails, will have companies and consumers hoping for the best but planning for the worst. To me, it means that as we inch closer to the year’s end without a deal, companies will revisit their forecasts, slow, if not halve, capital spending projects, freeze hiring and at least prepare for reductions in head count.

A number of companies, including Boeing (BA), Texas Instruments (TXN) and Xerox (XRX), have announced layoffs. Taken together with similar announcements ahead of Election Day, the result was a dramatic increase in weekly initial jobless claims last week. That weekly metric jumped 78,000 week over week to 439,000. While some will attribute a portion of the increase to Hurricane Sandy, we cannot dismiss the impact of the fiscal cliff. With the announced closure of Hostess Brands last week, we can expect another 18,000 people to join the ranks of the unemployed. (Currently in mediation with unions, a sale of the brands is likely.)

Aside from layoffs, we are starting to see uncertainty related to the fiscal cliff creep into other economic data. Not only did the Federal Reserve Bank of Philadelphia’s Business Outlook Survey reflect a contraction in manufacturing activity as the index fell from 5.7 in October to -10.7 in November, but its Manufacturing New Orders Index fell from -0.6 in October to -4.6 in November. Also last week, the general business conditions index that is part of the Empire State Manufacturing Survey marked the fourth consecutive negative month in November.

As if things could not get any worse, Greece once again has entered the picture and the latest data from Eurostat puts the euro zone back into a recession for the second time in four years. Eurostat’s first reading of gross domestic product for the three months ended in September showed a contraction of 0.1% in the euro zone, after a decline of 0.2% in the second quarter. To those who have been following the data over the past few months, this situation comes as no surprise, but the timing alongside the fiscal cliff will only amplify the pressure on the stock market.

Viewing that landscape, the U.S. consumer likely will think twice before plunking down hard-earned cash on discretionary items — that is, items they would like to have but may not need to have. As I always say, one person’s pain point is an investor’s opportunity, and that means good things for companies that produce necessities that we use day in and day out. Another category to consider is what I call the guilty pleasure products — things that consumers will buy no matter what — tobacco, chocolate and alcohol. The latter group reflects the Guilty Pleasure aspect of my Rise and Fall of the Middle Class PowerTrend.

As you can imagine, investors are waiting for deal making on the “fiscal cliff” to move forward. While not impossible, the probability of a deal being hammered out this week is low because of the Thanksgiving holiday. For investors, the holiday means that trading volumes will taper off big time on Wednesday and remain subdued on Friday. To many people, this coming Friday is better known as Black Friday and the official kickoff of the holiday shopping season. For me, that means more mall walks as I gauge what consumers are really shopping for and where this holiday season is taking us economically.

Between Monday and at least Wednesday, however, it’s business as usual. On the economic front, housing data will once again be front and center. While we all reflect and give thanks on Thursday, Markit Economics will be publishing the latest purchasing manufacturing indices for China and the euro zone. Shifting to corporate earnings, again an overall slow week due to the holiday, but we’ll hear from a number of noteworthy companies, including Lowe’s (LOW), Best Buy (BBY), Hewlett-Packard (HPQ), Deere (DE) and a number of food and shoe related ones.

Enjoy the trading week. From my family and me, have a great Thanksgiving with your loved ones.

Sincerely,

Chris Versace
Editor, PowerTrend Brief

Here’s a more granular look at what investors should be watching and listening to over the next five trading days as well a list of those companies reporting their quarterly results:

Monday, Nov. 19
Existing Home Sales (October)
NAHB Housing Market Index (November)
Agilent Technologies (A)
Krispy Kreme Doughnuts (KKD)
Lowe’s Companies (LOW)
Nuance Corp. (NUAN)
Shoe Carnival (SCVL)
Tyson Foods (TSN)
Urban Outfitters (URBN)

Tuesday, Nov. 20
Housing Starts (October)
Building Permits (October)
Best Buy Co. (BBY)
Bob Evans Farms (BOBE)
Brown Shoe Co. (BWS)
Chico’s FAS (CHS)
Campbell Soup (CPB)
dELiA*s Inc. (DLIA)
DSW Inc. (DSW)
Dycom Industries (DY)
H.J. Heinz Co. (HNZ)
Hewlett-Packard (HPQ)
Hormel Foods (HRL)
Jack in the Box (JACK)
SemiLEDS (LEDS)
The Valspar Corp. (VAL)
Zale Corp. ( ZLC)

Wednesday, Nov. 21
Markit Flash U.S. Manufacturing PMI
MBA Mortgage Index (Weekly)
Initial & Continuing Jobless Claims (Weekly)
Michigan Sentiment Index – Final (November)
Leading Indicators (October)
Deere & Co. (DE)
Kid Brands (KID)

Thursday, Nov. 22
Thanksgiving Day – U.S. stock markets closed
HSBC Flash China Manufacturing PMI
Markit Flash Eurozone PMI

Friday, Nov. 23
Black Friday
Industrial Production (October)