Investors who fled in fear over potentially massive tax increases associated with the “fiscal cliff” have barely broken a sweat over corresponding spending cuts that are only two weeks away.
The so-called sequestration of $110 billion a year in discretionary spending will happen March 1 if Congress does not come to an agreement.
With little indication that Washington is anywhere near a compromise similar to the one that avoided the full brunt of the fiscal cliff, markets could be expected to be in full panic mode.
Sentiment surveys and fund flows remain strongly bullish, and Citigroup’s Panic/Euphoria model is near euphoria stage, according to Tobias Levkovich, Citi’s chief equity strategist.
“Given potentially bitter fiscal policy battles linked to required tax and spending reforms in March, we expect some volatility in the next couple of months,” Levkovich said in a report. “However, our outlook for 2013 remains attractive given signals from valuation, implied earnings growth and credit conditions to name a few factors.”
Should we be worried?
Here’s an interesting bit of correlation (and causation?) for you. Have a look at the chart I formulated below showing NYSE Margin Debt and the S&P 500. The two data sets show a correlation over 85%.
Now, this is really interesting in that it melds with our work on Monetary Realism and monetary theory quite nicely. Using Werner’s concept of disaggregation of credit we can clearly formulate how credit is being used at various times to benefit from improvement in the stock market. If you’re not familiar with the concept of disaggregation of credit please see here. But, in short, it is based on the understanding that our monetary system is almost entirely built around credit and how banks issue credit to perform various functions. These functions can be both good and bad.
“Have you ever had one of those weeks where your best-prepared plans weren’t good enough to accomplish everything you set out to do?” Wal-Mart exec Cameron Geiger wrote in one of the emails reported by Renee Dudley at Bloomberg.
“Well, we just had one of those weeks here at Walmart U.S. Where are all the customers? And where’s their money?” Geiger asked.
Wal-Mart is facing a scary reality: the ailing finances of its core customers, Brian Sozzi, chief equities analyst at NBG Productions, told us.
“Wal-Mart shoppers are the barometer of the U.S. consumer, and these emails reflect common sense about customers,” Sozzi told us. “The consumer isn’t mentally or physically ready to spend on discretionary inventory and there’s no reason to be optimistic.”
“They are middle-class Americans and those aspiring to join the middle class,” Duke said. “Our customers are working hard to adapt to the ‘new normal,’ but their confidence is still very fragile. They are shopping for Christmas now and they don’t need uncertainty over a tax increase.”
Wal-Mart and discounters such as Family Dollar Stores Inc. are bracing for a rise in the payroll tax to take a bigger bite from the paychecks of shoppers already dealing with elevated unemployment. The world’s largest retailer’s struggles come after executives expected a strong start to February because of the Super Bowl, milder weather and paycheck cycles, according to the minutes of a Feb. 1 officers meeting Bloomberg obtained.
Murray’s comments about February sales follow disappointing results from January, a month that Cameron Geiger, senior vice president of Wal-Mart U.S. Replenishment, said he was relieved to see end, according to a separate internal e-mail obtained by Bloomberg News.
…Thus, we find that Europe’s primary political market props (EU leaders including ECB head Mario Draghi) are coming unraveled at the precise time that EU banks are showing warning signs and the most important EU economies are heading sharply south.
2013 is going to be a very interesting year for Europe.
So if you have not already taken steps to prepare for systemic failure, you NEED to do so NOW. We’re literally at most a few months, and very likely just a few weeks from Europe’s banks imploding, potentially taking down the financial system with them. Think I’m joking? The Fed is pumping hundreds of BILLIONS of dollars into EU banks right now trying to stop this from happening….
El-Erian puts himself in the second camp.
“We think that prices are artificially high, that maintaining them here is going to be hard as central banks become less effective, and that it’s time to book some profits and to wait for some better entry points,” he explains.
He clarifies that this is not a “Lehman moment.” But “prices that have gotten way ahead of what policy can deliver,”
Click image for full clip:
KWN: Here is what Zulauf had to say: “I think the world economy is still having difficulties. Some leading indicators are picking up a little bit, and the world is getting very optimistic that we have passed the crisis, we have solved the problem, and sentiment is very optimistic. Actually it is as optimistic in the stock market as it was in 2007.
We have entered a very dangerous territory, and I think the world economy will not deliver what people expect. You just saw the numbers coming out about the eurozone GDP in the fourth quarter, it was quite a bit weaker than expected and still in negative territory….