"No terms except unconditional and immediate surrender can be accepted. I propose to move immediately upon your works."
-Letter from Ulysses S. Grant to General Simon Bolivar Buckner
At the Battle of Fort Donelson, General Simon Bolivar Buckner offered his army in an "unconditional surrender," becoming the first Confederate General to do so in the Civil War. Surrender brings conflict to an abrupt halt, and goes by many other names depending on the venue. In the stock market, we call it capitulation. After the Dow gave up 300 points and all the major indices took it on the chin, one would be tempted to say investors capitulated, but I'm just not sure. Obviously, buyers are staying away, but have all would-be sellers dumped...the answer seems to be not yet.
I think we are very close, however.
Investing Basics
The mindless concession of our rights to government over the years has put government in a position to dictate so many aspects of our lives. Consequently, this has mitigated the role and responsibility we should still have. For the government, the trick is to look as though the power given up was well worth it, which appears in the form of an easier life. This means we take fewer risks, make fewer investments, but expect less pain and more reward. Toss the Federal Reserve into the mix, and we have a lot of money being moved from one pocket to another, all in a grand scheme to make things look like a better reality.
When the facade falls apart, the reservoir of pain comes gushing out, making us wish we had taken it in smaller doses along the way.
Recommended
We are in such a scenario now, and yet I can't say investors have offered an unconditional surrender. There were enough investors holding on into the close that might have sold if the sessions had run another thirty minutes. We have to be nearing an exhaustion of sellers in a sane world, but then it gets back to a serious issue of would-be buyers stepping up to the plate. These buyers are smart enough to know they can't turn a free falling market, and are just looking to catch the turn.
Sane World...Insane Outcomes
In the market you want stocks to move up on good news and down on bad news, but after a huge rally last year bad news is magnified in part, because of mounting unanswered questions.
What's going on overseas and what's the real risk to the US economy and stock market?
What's going on with the domestic economy...has it turned the corner?
Did the easy part of the recovery happen already, like autos and home prices coming off significantly oversold positions?
Will Washington muck-up a fragile recovery and frisky stock market?
On emerging markets I think the bigger risk is to US corporate profits, rather than regional contagion. There is no doubt investors have treated the space as one giant homogenous market, rather than individual stories with individual challenges. I think the risk in most of these markets is more geopolitical than economy, although the former can influence, even wreck the latter. Just like gold last year; I think ETFs have played a negative role by exaggerating selling.
The US economy could grow at 3.5% this year with second half momentum. Headwinds include the new healthcare law, and the avalanche of regulations that greeted the country this year. I think the wildcard will be banks finally loosening their grip on cash, making loans available to potential home and business owners. I also think business investments have to improve, and should after two years of massive stock buybacks and dividend hikes.
Yes, the easy part of the recovery has occurred, but it did so without most of Main Street. Autos were 12 years old on average, so easy money and need, along with fewer yet more expensive used autos have pushed a lot of people to see their local dealer. But the housing rebound hasn't triggered confidence in those fortunate enough to have kept their homes; professional investors and overseas buyers were more likely to have caught the bottom. Knowing the easy part is over actually puts pressure on banks and businesses to step up to the plate.
As for Washington DC, I think what Jack Lew did tossing in dire warnings about the debt ceiling, was like tossing kerosene on a bonfire. That said Republicans are going to roll over with less drama than those seen in those old, daytime soap operas.
Technical Parameters
* Dow: broke key support points: vulnerable to 14,803; on the upside, a close above 15,400 would be constructive.
* S&P 500: sees key support at 1,705 with resistance at 1,750.
* NASDAQ: barely closed below 4,000 a critical number (we could argue this is still within margin of error) below here the next support point is 3,772.
I continue to see this as a washout and also a message that is being sent to the new Federal Reserve chairman. There is general anxiety, which comes after an outsized year and with its overreactions. These are the moments that make or break investors over the long-term. There will be painful losses that must be taken, and buys made when your heart is in your throat. I feel good asking everyone to raise more cash early in the year, but know we have to take a few lumps.
With that being said, I'm not afraid and see opportunities developing quickly.
The Floodgates
For all the scuttlebutt over the new direction of the Federal Reserve - assuming it's any different-the bigger question for Main Street is when will banks begin to lend?
Lost in yesterday's carnage was the quarterly survey of senior loan officers by the Federal Reserve. The good news is that lending standards for business is easing, along with spreads and premiums. The news is mixed for consumers, where demand for residential loans shrank for the second straight quarter, while lending standards got tougher at large banks. On the other hand, standards eased on credit and auto loans.
Perhaps, the silver-lining in the Great Re-Rotation back into bonds will be lower mortgage rates. Of course, it helps to have a stable stock market and actual job growth. I'm not sure all three can co-exist at the same time, hence just another conundrum.
At some point money has to make its way to the masses, especially with the Federal Reserve concerned about deflation, which continues to be more of a threat on both sides of the Atlantic, despite all the pump priming. How the Federal Reserve makes this happen is beyond me, and apparently beyond them as well. Other than overwhelming the system and hoping the dam breaks, which has been tried, maybe taking away accommodation will do the trick.
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