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VERSACE: Looming ‘fiscal cliff’ demands attention
Question of the Day
This week there was more than idle conversation about Facebook's pending initial public offering, an IPO likely to be one of the largest in history. While it's hard to argue with the company's sheer size, several filings with the Security Exchange Commission reveal some concerns over its mobile strategy and growth prospects. More questions were raised this week when General Motors Co., one of the largest advertisers in the U.S., announced that it plans to stop advertising with Facebook.
While many investors have been dissecting Facebook's filings and assessing whether or not they are inclined to try and participate in the offering, the concerns that have led the stock market to its lowest level in three months — uncertainty over Greece and the impact on the euro as well as slowing global growth — continued to grow.
Earlier this week, Greek depositors withdrew $898 million from the country's banks, raising fears of a bank run amid the growing political disarray. Also this week, the Bank of England raised its short-term outlook on consumer-price inflation, and lowered its outlook for British growth, citing "the single biggest threat to the recovery stems from the challenges within the euro area."
While the Greek caretaker government eventually agreed to new elections, probably on June 17, the reality is that this ongoing Greek tragedy will continue for at least another four weeks if not longer.
Despite some improvement in domestic housing starts and factory output measured by industrial production data, the conversation surrounding the fiscal cliff we face continues to get louder.
"Fiscal cliff" refers to the impending expiration of Bush-era tax cuts and the payroll tax holiday, as well as the end of extended unemployment benefits and the automatic spending and budget cuts mandated by Congress if lawmakers fails to reach deficit reduction goals.
This week, Goldman Sachs issued a report saying the U.S. economy could shrink as much as 4 percentage points in the first half of 2013 if Congress fails to address the expiration of $600 billion worth of tax breaks and jobless benefits by the end of this year.
That would put us back into a recession if a resolution is not reached. Compare that to the moderate growth currently expected in 2013. The latest from Blue Chip Economic Indicators, which polls 50 forecasters, currently calls for growth near 2.5 percent in 2013, which is on par with 2012. Currently it looks like there is no resolution in sight.
Add this to other uncertainties that include the fate of Obamacare, a tax overhaul and the outcome of the presidential election later this year, and I continue to see the stock market moving sideways at best in the coming weeks.
That said, we could get an up day in the market here or there as traders look to capitalize on a positive data point. An example of such a data point was this week's read on April housing starts. On its face, the housing starts data was better than expected but focusing on that lone data point fails to paint the full picture. When we view the data in the context of more than 1.3 million foreclosed homes and more on the way according to RealtyTrac, it looks more like the housing market may be bottoming instead of rebounding.
As I always say, it takes at least a few points to draw a straight line and this applies to investing. We need to examine a number of data points to understand what is really going on rather than simply listen to the barrage of headline-only news reiterated and regurgitated on TV and elsewhere.
After all, how we can we make informed decisions if we don't know what is really going on?
More as it develops.
• Chris Versace is editor of the PowerTrend Brief and PowerTrend Profits newsletters. Visit them at ChrisVersace.com, or follow him on Twitter @_chrisversace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.
About the Author
Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...
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