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Friday, December 30, 2011

Market Thought... new year set up

Today should be a blah day with an upward bias, but going into the new year seems to be far more interesting. Over the past few days some EU chatter has been growing, and the market pretty much ignored the news.  IMO, this is a good thing as it adds evidence to the fact that headline risk is minimal right now. (I just do not know for how long this lasts.)

Things we know:

1. The ECB talks tough, but its in there preventing a credit event. (ECB expands balance sheet.)

2. Greece looks to have hit a economic threshold. Increasing taxes is not working. Either the country keeps evading taxes or the economy can not handle the taxes. (I am sure its a bit of both.)

3. Greece's reforms are moving slower than anticipated, if at all. (This being the most annoying development, or lack there of.)

I think next year will be very interesting, and the conspiracy theorists out there will have a field day with developments if certain leaders do not get their act together.  The powers-that-be I think are done dealing with Greece's inaction and opposition of productive reform every step of the way. (Even though this year was not with out its drama to discuss for years to come.)

Potential short-term catalysts going into the new year:

1. Rating agencies downgrade France and/or Germany. (Negative)

2. China cuts rates. Expected to happen before Jan 23rd, their new year. (Positive)  Also to not, the Chinese HSBC PMI progressed from last months 47.7 to 48.7. (But still below 50, and indicating contraction.)

3. The above may bring back headline risk.

Some key economic developments I am paying attention to is the EuroZone PMI in relation to the Euro.

Technically speaking, things look okay. The DAX has held up fairly well considering it is much more effected by the above issues.

The 10yr yield has also bounced off its resistance, and is ready to potentially push higher.

The SP500 looks fairly good too, hovering just above the 200SMA.

The SP500 should have an EPS of 100 for 2012 (that is 8-10% lower than current estimates). With a PE of 12-14, the potential range could be 1200-1400.  With a credit event fear, we can see the lower PE range. With out a credit event, we should see a trailing PE of 13-14 throughout this period of austerity.

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