The Election Countdown

October 18, 2012

The final countdown to the election has begun, with less than three weeks and one debate to go until the official ballot casting. The town hall style debate on Tuesday night was memorable because of three items.  First, the moderator, Candy Crawley, was so blatantly biased that at one point she confirmed that the President had called the Libya terrorist event a "terrorist attack" just hours after it occurred, when in fact the actual transcript disagreed with her.  She had no control over the candidates, and the event resembled a Jerry Springer episode, with the President interrupting Mr. Romney 83 times (not my count) and Mr. Romney interrupting the President 22 times (again, not my count).  Second, true to his law professor and political background, Mr. Obama proved that he is much better at lecturing than dealing with direct confrontation as he so ineptly did in the first debate.  Finally, Mr. Romney showed that he is unable to leap through the door when Mr. Obama leaves it open by telling half truths and in some cases outright lies.  The race is tight, it should be entertaining, with the future of the United States hanging in the balance. 

Speaking of the election, while the candidates dicker and both the House and Senate are on break, the fiscal cliff looms ever closer.  This is a real issue that threatens any type of recovery.  After the 2010 election, during the lame duck session, the President did reverse course on the Bush tax cuts and extend them for two years in exchange for some increased social spending. Whether Obama wins or not, look for some type of action during the lame duck session and partial relief from the cliff.  The question is how large will that relief be and will it help?

How about some investing discussion (since this is a market blog)?  The S&P 500 continues to climb the wall of worry, and is now up almost 16% for the year and 19% for the past twelve months.  Those are great numbers and well above any reasonable estimates from the beginning of the year.  What's driving the market?  How about an extremely accommodative Fed, a slowing economy, low rates, and, let's face it, the best major economy on the planet.  If the economy doesn't fall into a recession next year, look for this run in equities to continue, albeit at a much slower pace as earnings growth has markedly slowed. 

What about 2013?  Remember, it is the first year of a Presidential cycle, historically the worst of the President's four year term for market returns.  The later years are typically better because the President has pulled out all of the fiscal stops that he possibly can to make sure the economy is roaring, or limping as it is this year, heading into the election.  By the time the first year of the cycle rolls around, the stimulus has run its course.  The biggest difference this cycle is we never experienced any true fiscal boost, but instead the markets have been fueled by Fed stimulus. 

We have discussed the possible exit of some of the southern European countries from the Eurozone.  Research firm Prognos estimates that a Greek departure would have little impact, but if it led to a chain reaction where Spain, Portugal, and Italy also left it would result in a plunge in global GDP of $22 trillion. I haven't seen the full study yet, but am skeptical of the conclusion.

China reported Q3 GDP of 7.4%, down from 7.6%% in Q2 and 8.1% in Q1.  This is the seventh consecutive quarter of declining growth.  Recent data points suggest Q4 may be stronger as housing seems to have stabilized (sound familiar?) and both retail sales and industrial production picked up in September.

Speaking of housing, US housing starts hit 872K in September, a 15% jump, the biggest since July 2008.   I've actually heard of a brewing shortage of construction workers as many have left the industry over the past four years to find other employment.  From a market standpoint, home-builder shares have been the best performers this year.

The Apple (AAPL) debate rages on.  Will the iPad mini take away from the company's successful iPad and crimp margins or will it expand the market for the devices?  When I look back at 2002/2003 when the company began  broadening its iPod line to include simpler, lower end models, investor concerns were comparable to those of the iPad mini today.  What was the end result of the iPod line extension?  A rapid uptick in penetration rates and complete dominance of the MP-3 market.  I'm not saying that history repeats itself, but it often rhymes. 

No one is more surprised than I am about the start for Notre Dame.  The Irish are now 6-0, ranked 5th in the country, and actually have a tough schedule this year.  I have always been critical of the Gold Domers because of their typically panzy schedule and the pollsters infatuation with them.  This year they are winning the close ones, and while I still expect them to end with two losses, I am more impressed with Chip Kelly's willingness to schedule a season of opponents worthy of the Notre Dame tradition. 

Have a great afternoon

Ned