Monday, December 3, 2012
The apparent stalemate in the Fiscal Cliff talks is most likely
part of tactics from both sides. It is only reasonable to expect
them to haggle over each component of the final deal as one would
do in a bazaar. Perhaps that's the reason why the market isn't
overly concerned about the positions staked out by the two
We should be mindful, however, that the incentives for both
sides are not perfectly aligned. As such, the odds of not
reaching a deal in time to avoid the 'cliff' are not non-trivial,
though they are small.
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'Cliff' aside, we have a busy week on the economic calendar, with
the November manufacturing ISM report coming out a little later.
The expectation is that we will get a modest pullback from the
October's level of 51.7 due to Hurricane Sandy, but the index
should remain in expansionary territory.
The most important economic report this week of course is the
November non-farm payroll report on Friday. But as we saw with
the weekly Jobless Claims data in November, the Friday jobs
report will also most likely be distorted by Sandy. It is perhaps
fair to assume that the market will look past even a very weak
reading on Friday.
We will get a sense of the extent of hurricane distortions in the
Friday payroll data from Wednesday's jobs report from
Automatic Data Processing
). The service sector ISM survey on Wednesday likely will have
limited storm related effects and should be around the same level
as the month before.
The 'Cliff' debate will likely continue to monopolize the
market's attention most of this month. But at some stage, the
focus will have to shift to the fourth quarter earnings season.
The preponderance of negative guidance for the quarter has helped
bring down expectations for fourth quarter earnings growth, but
we haven't seen much downward adjustment for full-year 2013
estimates which still show growth expectations in excess of 10%.
Given the broad economic weakness all around the world, it is
unlikely that we will get growth anywhere near that level. My
sense is that estimates for 2013 will start coming down as
companies provide guidance on the fourth quarter earnings calls.
As such, while Fiscal Cliff is justifiably the big issue for
investors at this stage, we shouldn't lose sight of the
deteriorating earnings picture, either.
Director of Research