Recap 10-23-12: What Next?


Since the S&P came within a few points of the 1400 target level today, it’s time to assess how prices could evolve from here.

The most obvious short term catalyst is probably FOMC tomorrow. A re-affirmation of QE infinity may be enough to stabilize sentiment. The S&P is also oversold and sitting just above strong support levels on the charts, so the case for at least a short term bounce is there.

However, I think the fact that this move happened quickly and apparently off of the weak earnings data is particularly important, because it suggests that the QE-driven liquidity move is now over, which means asset prices are likely to go back to focusing on fundamentals. This shift probably pushes the likely bottom for stock prices a bit lower, since the backdrop remains weak. Although I still think 1400ish is a good level to scale into longs for a year end rally, the case for a deeper drop to ~1375 has now become more likely, because that is likely to be where value investors are likely to show interest.

A final point: While I agree that the election is likely to be a positive regardless of the winner, the uncertainty around its outcome suggest that a substantial risk rally may be hard to come by before then, but could be likely afterwards. Again, I’ll bring up the 2004 election as an example. (I’m aware that it is a minimal sample size) Polls suggested a close popular vote going into the final week, but on 10/29/2004, excerpts of a video of Osama bin Laden addressing the American people were broadcast on al Jazeera. In his remarks, bin Laden claimed credit for the September 11, 2001 attacks and taunted Bush over his response to them. In the days following the video’s release, Bush’s lead over Kerry increased by several points. This is what happened to the stock market: (if you want the numbers, it’s a 7.3% rally in 2 months)


  • Moody’s downgraded multiple Spanish regions yesterday, many to below investment grade.
  • Regardless of who wins the election, investors will have to deal with a new Treasury Secretary and Fed chief. Geithner will likely step down early in 2013 while Bernanke has told people he doesn’t want to stay as chairman regardless of who is president when his term ends in early 2014
  • Japan – anticipation for further easing is rising ahead of the 10/30 BOJ meeting; according to DJ, “sources familiar w/the BOJ’s thinking said the CB is leaning towards easing monetary policy”. -DJ The government continues to pile fresh pressure on the BOJ to take more aggressive monetary actions. -Reuters
  • GS: Following another round of regional bank results, headwinds from top-line pressure and lack of expense leverage appear to be weighing on many banks in our coverage. With loan growth slowing (+1%) ahead of the “fiscal cliff,” with NIMs pressures returning (-5 bp), and with little core cost leverage materializing (-0.9%), we see risks to fundamentals leading to little or no earnings growth for many regional banks over the next two years without a pickup in the economy or higher rates – specifically for those without exposures to mortgage or large funding offsets remaining.
  • BoC kept its hawkish language. Big headfake! Arguably, it is MORE hawkish than before due to the inclusion of household imbalances, which is new.
  1. After taking into account revisions to the National Accounts, the Bank projects that the economy will grow by 2.2 per cent in 2012, 2.3 per cent in 2013 and 2.4 per cent in 2014.
  2. Core inflation is expected to increase gradually over coming quarters, reaching 2 per cent by the middle of 2013
  3. Over time, some modest withdrawal of monetary policy stimulus will likely be required. The timing and degree of any such withdrawal will be weighed carefully against global and domestic developments, including the evolution of imbalances in the household sector.

Upcoming Data:

  • Wed: EU PMI, German IFO, USMarkit PMI, US New Home Sales, FOMC
  • Thu: US DGO, Jobless Claims, Pending Home Sales,