Countdowns

The fall rally has been sputtering after a promising if unexciting start. Q3 2012 earnings season was expected to show a few percent decline in earnings across the S&P 500. Not the sort of thing to have traders on the edge of their seats.

So far the overall earnings projection has been fairly accurate. What traders were not prepared for was the companies that were missing estimates.

It wasn’t the obscure names at the bottom of the list this time. The largest companies, historically most dependable about hitting or exceeding guidance are the dogs this time. If companies like Google, GE, Microsoft and (egad!) Apple can’t see forward well enough to hit targets what chance does anyone else have?

In addition to some headline misses there has been a singular lack of transparency in forward looking statements from management. Companies that do a lot of their selling to other companies like GE and Microsoft have repeated the refrain that overall uncertainty is thinning their order books. Companies in Europe are waiting for resolution on several fronts and US based companies are fretting about the Fiscal Cliff. CEOs are unwilling to commit to new investment or hiring while the uncertainty remains. We’re all left waiting, again, for news on several fronts. Here’s a selection of this month’s countdowns.

US Election/Fiscal Cliff

Though HRA suspects many are waiting for the outcome of the US election we don’t see how it would change much in the short term. Unless there is a swing large enough give one party or the other control of both houses and the Presidency we’ll still be dealing with gridlock. There is a slight chance the Republicans could pull off a sweep and almost no chance the Democrats could.

For all the bluster by both parties there won’t be a wholesale change in spending or revenue collection in Washington. How the Fiscal Cliff gets dealt with will depend on who has the majority and how much blame politicians think they can assign to their opposite members if the negotiations go wrong. It seems amazing that representatives would try to game something as serious as the automatic cuts that kick in on January 15th but we won’t be shocked if they do.

If one of the parties does particularly badly in the election and thinks they can get voters to blame their opponents they might be willing to let the US economy go over the cliff. There have been rumors for a couple of months that the Democratic caucus was thinking about doing this.

HRA still believes the can will get kicked down the road no matter who wins in November. Politicians in Washington have never shown a willingness to make tough budget decisions. Far simpler to just pass a Band-Aid plan that puts the decisions off—again.

Greece Again, Pain in Spain—Still; Send in the Clowns in Rome.

It is now at least a month past the expected timing of a decision on the next tranche of Greek aid. Clearly, things are not going well. HRA stopped caring about Greece a long time ago. It’s only important because it impacts the mood of EU politicians and the electorate. The more Greece annoys everyone the harder it gets for European politicians to convince their voters to grant aid to other countries that deserve it more.

Our main interest in the Greek situation is the impact it may have on a Spanish bailout. Spain’s Prime Minister continues to insist his country doesn’t need a rescue but no one is buying that.

With a 25% unemployment rate and a contracting economy Spain needs a break on debt payments or stimulus spending, and probably both. Spain doesn’t want new debt conditions and it may be waiting for provincial elections to be over. Most of the debt issues are at the provincial level.

The political capital needed to force through a rescue package is dissipating in most of the creditor countries. If rumors are true, there will be a deal with Spain as soon as there is one with Greece so that only one omnibus deal has to be voted on, especially in Germany and the Nordic countries. Politicians fear they will only be able to get one more vote on a new package through before the population revolts and refuses more funds for any reason.

The Greek decision is being held up by a minority party in the coalition that doesn’t want to vote for labor law changes. The vote can be won without it. Apparently, they want to scrap the law that gives everyone a 10% raise when they marry (you can’t make this stuff up).

Confidence levels in Europe remain low. We don’t know when decisions about Spain and Greece will be made but it has to be November in the case of Greece. They run out of money again next month unless the next tranche of EU money is released.

In Italy, Prime Minister Monti is threatened by a vote of non-confidence by the party of Silvio Berlusconi. Yes, the guy booted out earlier this year and just sentenced to five years for tax evasion (see “you can’t make this up” above). Some decisions will get made in Europe because they have to be.

The best case scenario for gold is a Greek/Spanish debt deal that unleashes ECB bond buying. In a rational world this would drive down the Euro. We’re not in one. HRA expects monetary expansion would lead to a higher euro thanks to relief buying. That would have traders going short Dollar and long gold.

Chinese Hand Off

The new Chinese Central Committee will be announced in two weeks. Most of the members are known already, including Premier-in waiting Xi Jinping. Xi has a reputation for being tough on corruption and straightforward about the need for more economic reform in China. Whether those traits survive his ascension to top job remains to be seen.

Like most of the top power brokers in China he is a descendent of Long March communists and has had a charmed life and rapid rise to power. He ran Shanghai, one of the most successful cities in China, property bubble notwithstanding.

It remains to be seen if he will open the spigot and increased spending to goose the Chinese economy. The most recent statistics out of Beijing already show some acceleration. Bank lending, exports, retail sales and purchasing managers indices all rose more quickly in September. While Q3 growth came in at the expected 7.4% the quarter over quarter GDP growth of 2.2% was the best in a year. Beijing may add some stimulus to ensure a smoother power transition but a soft landing already appears underway.

People, Come on, Get Happy!

In the face of so many uncertainties, one would expect consumers to follow the example of corporations, stop spending and put off buying decisions until some clarity is achieved. That seems logical but it’s not what happened, in the US in particular.

Consumer spending in the US increased 0.8% in September, far higher than the 0.5% consensus. It was also a lot higher than the 0.4% growth in incomes. US consumers were dipping into savings to make purchases. That implies some confidence things will get better.

Consumer spending accounted for the slight pickup in growth in the US in Q3, coming in at 2% rather than the expected 1.8%. The biggest of big ticket items also finally showed improvement. Sales of new houses were at a two and a half year high and existing home sales stayed near a two year high. Outside of a bump in equity and gold prices this may be the most concrete example of the effects of QE3 driving down mortgage rates.

It’s unlikely the housing sector will ever see its pre-crash size. If estimates about housing adding a percent to growth in the US next year prove true that will be a major turnaround.

After the Credit Crunch, company spending and investment did all the heavy lifting for the economy while consumers repaired their balance sheets. The situation is reversing, with consumers buying and companies fretting. If the dysfunctional political system can remove some of the uncertainties holding companies back we might actually see a decent growth rate for the first time in five years.

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2012 hasn’t been an easy year for explorers but HRA has been calling for a fall rally since early in the summer. Thanks to a surging gold price that rally appears to have arrived. It’s not a broad rally yet. Traders are looking for companies with discoveries and management that knows how to add shareholder value. HRA is your key to uncovering and profiting from extraordinary resource shares by getting ahead of the crowd. At HRA, we look for companies with the potential to at least double over one or two years based on asset growth and development of metals deposits for production or take over by larger companies.

To watch Eric Coffin’s latest video presentation titled “Fall Rally Falling Into Place?”, from the Vancouver 2012 Subscriber Investment Summit, click here now.

Eric Coffin

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