Sterling Market Commentary for Thursday October 4th, 2012
A Look at Wednesday’s Market: The overall market moved moderately higher in a relatively broad based move. There were a few notable exceptions as the commodities based indices moved lower. A lot of this move lower was sparked by a sharp sell off in Oil, which was lower by $3.75 to $88.14 per barrel. In searching the news reports related to the sharp drop in the price of Oil, I found that it was attributed to 2 primary factors. The 1st being a slowing of the global economy, and the 2nd being a slowing of the Chinese economy. Neither of these things is good for the U.S. Economy and the overall market. In looking at a chart on the price of Oil it appears to me that their is a reasonable chance that the price of Oil could continue to move lower and test its support level of $79.01 per barrel set on June 28th of this year. While the lower price of Oil would be good for consumer’s pocket books, my concerns are that with all the computerized trading, the lower price Oil would be a sign of a significantly weakening global economy.
Gold was higher on Wednesday by $4.20 to $1,779.80 per ounce. In the Grain markets, Wheat was higher by $0.014 to $$8.730 per bushel, and Corn was lower by $0.014 to $7.566 per bushel, while Soybeans were higher by $0.012 to $15.316 per bushel.
A Few Thoughts on Thursday’s Market: I watched the Presidential debate last night. I, and I think the vast majority of Americans, thought that Mitt Romney was the clear winner of the debate. He demonstrated a strong command of the facts and conveyed his message in a manner that left Barrack Obama unable to defend his track records or make a solid case for why he should have another 4 years. As a result the futures are higher this morning based upon expectations of a Romney victor and an improved post election economic climate. I think this creates a perverse situation in the market where it is basically Heads you win, Tails they loose.
Every child at some point is tricked into a game of Heads I win, Tails you loose. They very quickly figure out there is no way for them to win and quit playing the game. I think the market right now is the opposite. If Barrack Obama wins the election, then the Fed will continue with its Quantitative Easing programs until they have monetized so much debt that the US Economy either collapses due to taxes and interest payments or until hyper inflation sets it. If Mitt Romney wins the election, then the anti-business climate of the Obama administration will be over and new pro-business climate will allow the U.S. Economy to start growing and creating jobs again.
However, there is a downside to this scenario. As I stated several times before, the Fed’s Quantitative Easing programs are actually creating a climate of business uncertainty that I believe is holding back economic growth. Worse yet, no country has ever used and combination of higher taxes, deficit spending, higher regulation, or deficit monetization to produce economic growth and prosperity. It has always resulted in economic ruination. There is absolutely no reason in the world to believe that the United States will be the 1st country in the world to escape this outcome. So if Barrack Obama wins the election, I ultimately see an economic crisis on the horizon where it does not matter how much money you made between now and then.
If Mitt Romney wins the election, then I foresee a scenario where the real pain of dealing with the balancing the budget and bringing the Fed’s Quantitative Easing programs to an end will significantly prolong the amount of time it takes to restore the U.S. Economy to a healthy and vibrant state far longer than we have seen in the past. One of the main problems I see is that as interest rates return to normalized levels the enormous amount of Federal Debt that the country now has will increase interest payments on the Federal Debt and despite spending cuts the deficit will remain stubbornly high. Unless massive reform can be done to the entitlement programs the debt increase of the Obama administration may have pushed our annual deficit beyond the point of no return. This will still be a very painful outcome; the only good news would be that it will probably not be as painful as another four (4) years of an Obama presidency.
The Dow Jones Industrial Average: The Dow Jones Industrial Average closed at 13,494.61 I continue to see upside resistance on the Dow at 13,558.92. With last Friday’s close of 13,437.13 the Dow Jones Industrial Average broke our support level of 13,345. I now see downside support coming in at 13,279.32 Current Expectations: I am expecting the Dow to continue to trend lower and test 13,279.32 on a closing basis.
Dow Jones Transportation Average: The Dow Jones Transportation Average closed at 4,966.10. Despite yesterday’s close above our stated upside resistance level of 4,951.07 I am just not ready to call for a move higher in the Dow Transports. I continue to see upside resistance on the the Dow Transportation Average at 4,951.07 and downside support at 4,873.76 and then at 4,795.28 This is obviously a very narrow trading range. Current Expectations: The Dow Transports appear to be in a downward trend. I am expecting Dow Transports to continue to move lower and test 4,873.76 on a closing basis.
The Bottom Line: I think the market will continue to trend sideways to lower for the next few trading sessions.