Saturday, December 10, 2011

Rally, and then what?

With the year end quickly approaching, I have been trying to put together an outlook for first half of 2012. I would like to express a few concerns about my outlook, which is still a work in progress.

We have started a possible relief rally into the end of the year. Relief from constant worries about European financial system collapsing and taking the whole world down with it. While underperforming fund managers grab every pullback on the way to Dec 31, a much bigger question arises - what happens after this year-end rally is over? Here are some of my worries.

1. The "new fiscal agreement" in EU is a plan but not a certainty. There are already a handful of problems I see. Ratification of changes will need to undergo  parliamentary scrutiny in many countries, with nothing less than a referendum in some. That will take a long time, much longer than this market wants to wait. Also the enforcement of new fiscal covenants will be very questionable due to outside-of-treaty nature of this new non-EU27 agreement. Great Britain may have done a great deal of damage to Merkozy by abstaining. I would not be surprised if more countries decide that yesterday's pact is a bit more than they signed for in the original EU27 treaty, and keep their sovereign independence intact.
So these possible obstacles may finally catch up with EU sovereign bond investors and send them running for the exits again. Let's also not escape the fact that while Italian 10-yr bond yield pulled back from highs, it still closed @ 6.5% on Fri, well above the sustainable borrowing rate level for Italy's declining economy in 2012.

click on chart to enlarge

2. Eurozone is in recession, yes it is already, just watch for EU PMI reports next week, they will be ugly. With 20% of S&P 500 earnings coming from there it will be practically impossible for us to decouple from their mess. Do not listen to TV pundits telling you we have already decoupled, they said the same thing after Japanese tsunami and Fukushima nuclear plant accident.

3.  Our things here in US are not looking too rosy either. I am starting to worry about a few items, some of which have shown up in the last few days:

a) SOX is going to be under pressure. I posted my detailed thoughts about this yesterday - ailing SOX  = ailing NDX = ailing market. I am expecting more semiconductor companies to cut their guidance, and/or preannounce and warn in January. That will be a detrimental affect on Nasdaq.

b) RLX is not acting like it is supposed to around strong holiday shopping season. It is in a wedge with a series of lower highs since October. It needs to break out or a test of lower trendline inside the triangle would come soon. What exactly is going on? I may have more questions than answers here. There are signs of much lower sales post Thanksgiving. While this is usually the fact, and shopping picks back up a few weeks before Christmas, I am worried about some internals. Various shopping traffic counters are reporting lower shopper counts compared to last year. Also the promotional sales are quite heavy and will weigh on the bottom line, as margins compress. That will be the worst possible outcome and will send the affected retailers' shares plummeting in January of 2012. A quick peek inside the index reveals a troublesome picture. While shopping numbers at brick-and-mortar retailers were setting records on Black Friday, the only shares making new highs lately are of the heavy discounters, off-price, and dollar stores: TJX, ROST, FDO, DG, and DLTR - all at the expense of DDS, JWN, TIF, KSS, LTD, GPS, JCP, SHLD, WMT, and TGT. Also internet has taken a huge toll on BBY, RSH, ODP, and SPLS. Folks, that kind of internal performance among the retail index components will not set the world on fire. Even during these times when consumers are shopping for mostly necessities, food and drug stores are not able to keep the margins from declining due to underlying rising costs.

click on chart to enlarge

And speaking of internet, AMZN is not acting well either. Why is the stock slumping when internet shopping was the strongest ever on Cyber Monday? Declining margins? It is in 5-wave downtrend, I think. Let the chart do its magic.

c) We have fiscal issues of our own. We have not resolved our debt problems. We also have a lame duck congress which has been very ineffective. Our lawmakers are playing a stalemate game with tax cut extensions, which are very vital for our fledgling economic recovery.
As I noted in my post before, 4th year of Presidential cycle is historically very positive for stock market. But our president has been unfriendly to markets, due to his policies lacking any pro-growth measures. He is the incumbent, and way too many way too early have already written him off.
These political uncertainties will weigh heavily on investors' minds in 1st half of election year.

Year 2012 will be an interesting balancing act for stock market, which does have some positives going for it as well, like lack of recession, accelerating GDP growth, very reasonable valuations, strong corporate balance sheets, and extremely high accumulated investors' cash on the sidelines.

Update on Dec 12 @ 9:10 am
Intel warns!! Are you going to watch SOX index now??

Update on Dec 13 @ 4:00 pm
November retail sales disappointed today. Retail index is down 3%.

Update on Dec 14 @ 7:40 pm
Retail index is quickly approaching lower trendline of triangle. I expect that support to hold.

Update on Dec 23 @ 6:25 pm
Italian 10 Yr Bond Yield closed at 6.98% today. This can not be good, and is clearly a vote of no confidence by the debt market in all current measures to solve the crisis in EU.

No comments:

Post a Comment