Monday, December 3, 2012

Markets retreat amid fiscal cliff concerns

Dow dropped 59 (near its low), decliners ahead of advancers 3-2 & NAZ fell 8.  The Financial Index lost a fraction to 211. The MLP index dropped 4+ to the 393s & the REIT index was up 1+ to 261. Junk bond funds fell & Treasuries eased back.  Oil & gold lost much of the AM gains.

AMJ (Alerian MLP Index tracking fund)

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CLF13.NYM...Crude Oil Jan 13...89.12 ...Up 0.21  (0.2%)
Live 24 hours gold chart [Kitco Inc.]

Fitch Ratings warned in a special outlook that the impending tax increases & federal spending cuts that make up the US "fiscal cliff" pose the most significant credit risk to states in 2013.  "The risk that the fiscal cliff presents to the overall economy is the biggest concern for state credit, as state revenue systems quickly reflect changing economic conditions," said Laura Porter, managing director at Fitch.  DC's attention has recently focused on the tax section of the cliff but political leaders in states, cities & other parts of the public sector are growing increasingly alarmed about the spending side.  The automatic spending cuts set to take effect early next year are spread throughout the entire federal budget.  This would slice funds for states, many with revenues still bruised by the 2007-09 recession, & programs such as Medicaid that states operate with federal reimbursements.  "Decisions that shift cost of services from the federal to state governments, while requiring the states to provide the same level of services, would be most concerning," the report warned.  The fiscal cliff threat is enormous & that is not recognized by the stock market.

Fitch: Fiscal Cliff Significant Risk to States Reuters

US builders increased spending on construction projects in Oct by the largest amount in 5 months, led by a surge in housing.  The Commerce Dept said that construction spending rose 1.4% in Oct, the largest gain since a 1.7% increase in May.  The increase raised spending to an annual rate of $872B, nearly 17% higher than a 12-year low hit in Feb 2011.  Still, even with the gain, the level of spending on construction remains only about half of what's considered healthy.  Housing construction spending jumped 3% & nonresidential building rose 0.3%.  Superstorm Sandy had only a minimal effect on the figures.  Sales of new homes fell slightly in Oct, dragged lower by steep declines in the Northeast partly related to Superstorm Sandy.  New-home sales were still 17% higher in Oct than the same month a year ago.  Even though home building has been one of the bright spots for the economy this year, overall construction is still being offset by weakness in commercial real estate & tight state & local gov budgets.  The strong 3% increase in housing construction spending in Oct left the rate of annual spending 19% above the level of Oct 2011.  The pace of spending on nonresidential construction is now 10.7 % above its level a year ago.  Spending on hotel construction & shopping centers both rose in Oct.  Gov construction spending barely rose, to a level that's still below its rate of a year ago.  Public projects have been under stress because of budget problems at all levels of gov.
  • <p>               In this Thursday, Nov. 8, 2012, photo, a Toyota dealership signs glows over a car lot in Tustin Calif. A better economy and extra demand after Superstorm Sandy lifted U.S. auto sales in November. (AP Photo/Chris Carlson)
Photo:    Yahoo

Superstorm Sandy gave an extra boost to already strong US auto sales last month, although carmakers warned that uncertainty over the fiscal cliff could undo some of those gains.  Most major companies, from Toyota (TM) to Chrysler, posted impressive increases from a year earlier.  Only General Motors (GM) was left struggling to explain its 3% sales gain & large inventory of unsold trucks.  Americans were already willing to buy a new car or truck last month because they're more confident in the economy.  Home values are rising, hiring is up & auto financing is readily available.  Also, the average age of a vehicle is approaching a record 11 years, so many are looking to replace older cars.  And Sandy boosted that demand.  The storm added 20-30K sales industry wide in Nov, mostly from people who planned to buy cars during the Oct storm but had to delay their purchases, Ford (F) estimated.  People who need to replace storm-damaged vehicles are expected to drive sales for several more months.  GM estimates that 50-100K vehicles will eventually need to be replaced.  Nov sales, when calculated on an annual basis, are likely to be 15M or more, the highest rate since Mar of 2008, according to LMC Automotive, higher than the 14.3M annual rate so far this year, even though Nov is normally a lackluster month due to cold weather & holiday anticipation.  Both GM & Chrysler predicted Nov sales would run at an annual rate of 15.3M.  Sales end up at 15M for the year, a vast improvement over the 10.4M during the recession in 2009.  But sales would still fall short of the recent peak of around 17M in 2005 & the ongoing fiscal cliff negotiations could derail the industry's recovery.  "Exactly how much growth we can expect next year will depend in part on how Congress and the president resolve the fiscal cliff issue," said Kurt McNeil, GM's US sales chief.  "Markets and consumers hate uncertainty."

Storm delays lift already strong US auto sales AP

Once again nothing was decided by the markets.  But the bears look like they want to take control after the markets pulled back in the PM.  The manufacturing data was disappointing & fiscal cliff worries are growing.  Make no mistake, both sides are far apart.  Obama's idea of compromise is higher taxes for the rich & more stimulus spending, something the Rep won't buy.  Be prepared for the debate to drag on for weeks, likely until Xmas at a minimum.  Dow continues to take the fiscal mess well, but closed below 13K.  Maybe this time it will prove significant.

Dow Jones Industrials

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