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7 Short-Term Issues the Market Is Facing

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While the S&P 500 has seen a good deal of bullish action in the intermediate term, there are some issues to be aware of in the short-term.

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From The Roaring '80s by Adam Smith:

I asked [Warren] Buffett whether he worried about the trade deficits and budget deficits and all the other problems that upset the financial community.

"We would certainly be happier and our growth rate would be higher if we could close the deficits," he said, "We've traded consumption – those cars and VCRs – to the foreigners and they have claim checks on us and they can cash those claim checks. So every few weeks the Japanese buy another office building. When they bought the ABC building in New York, that one hundred and seventy-five million dollars was one day's trade deficit. So we're trading real estate for trinkets like VCRs, but there's a certain amount of justice in that because Peter Minuit originally got Manhattan by trading trinkets for it. It took just three hundred years to complete the circle."

So how will we come out, then?

"Either we will make the IOUs the foreigners hold considerably less valuable by having a lot of inflation, or eventually we will produce more than we consume.

"I like the gas tax because oil is a resource we're running out of. We keep sucking it out of the ground like a giant soda we've stuck straws into. If we don't close these gaps, there's real intergenerational unfairness. We consume more than we produce, the foreigners have the claim checks, and they can present them to the next generation."

So for the moment you're not pessimistic?

"It's an enormously rich country, and we can continue trading it away for a very long time. It's a powerful machine, and it can take a lot of abuse."

Our friend Jerry Goodman, whose nom de plume is Adam Smith, authored the book The Roaring '80s in 1988. The aforementioned quip is a quote from that book; I find it interesting that if you substitute the word "the Chinese" for "the Japanese," the aforementioned quote is as valid today as it was 25 years ago. To be sure, "It's an enormously rich country, and we can continue trading it away for a very long time. It's a powerful machine, and it can take a lot of abuse."

I revisit said quote this morning because today my firm is releasing this month's report wherein we try to discuss what could actually "go right" with the economy and the stock market. As for me, I have remained constructive on stocks for some time, a stance that was called naïve by certain folks as we approached the "orchestrated drama," aka the "cliff dive." Nevertheless, I remained convinced that a last-minute solution would be achieved because that is the way Washington works. As stated in previous missives, it was interesting to me that the media, once the drama passed, immediately refreshed the headlines to focus on the next Armageddon regarding the "debt ceiling." What was lost in "the cliff's" aftermath was that Congress came together and consequently our government became just a little bit less dysfunctional. Having railed against the government's dysfunctionality, this is not an unimportant observation. Accordingly, if our elected leaders can show the same resolve in the "debt ceiling" debate, a lot of things could go right in the months ahead.

Clearly, the stock market "thinks" something good can happen given the action so far this year. To wit, we ushered in the New Year with a 90% Upside Volume Day on December 31, 2012 followed by another 90% Upside Volume Day on January 2 (90% of total volume traded came in on the upside). Such back-to-back Upside Days are pretty rare, especially at the beginning of the year. Two weeks ago, when this occurred, I wrote that my notes show the last time this happened was in 1987 right before the Dow Jones Industrials (INDEXDJX:.DJI) commenced a 24.5% rally that would peak in early April, not that I am predicting a similar sequence here. However, the history of 90% back-to-back Upside Volume Days is that the average gain one month later for S&P 500 (INDEXSP:.INX) is 6.8% (83% of the time) and an average gain of 12.8% three months later 100% of the time.
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No positions in stocks mentioned.
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