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Posted 14 November 2011 - 04:57 PM

November 14, 2011, 08:00 EST Dr. Joe Duarte's Market I.Q.

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Next Market Worry: The Super Committee. And Oh Yeah, Europe Again.

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What's Hot Today:

U.S. stocks are pointing to a flat open on Monday.

Today's Economic Calendar

U.S. T-bill auctions.
News For Thought:

Report: Germany runs "scenarios" to prepare for Greek exit from Eurozone. According to their Spiegel: "The German government is preparing for Greece's possible exit from the euro zone in the event that the country's new government decides not to continue with the previously agreed austerity programs. Experts at the German Finance Ministry have been simulating a variety of scenarios based on different assumptions, SPIEGEL has learned. " Raid in Rio. According to The Wall Street Journal: "Police in Rio de Janeiro early Sunday occupied its biggest slum in a carefully orchestrated predawn raid hailed as the culmination of a recent crackdown by local authorities over lawless, long-neglected parts of the city." The report added: "Using tanks, helicopters and almost 3000 heavily armed police officers, authorities entered Rocinha and two other nearby shanties that together remained a symbolic holdout against a drive by the state government to stabilize neighborhoods controlled by criminals."

Super Committee is giving no hints about outcome of negotiations. Time is running out on the Super Committee, the group of 12 legislators, six Republicans and six Democrats that have been charged with reducing spending by $1.3 trillion or more over the next ten years. According to The Washington Post: "The co-chairman of Congress’s special debt “supercommittee” said Sunday that the panel’s 12 bipartisan members remain hopeful that they can reach a deal before their Nov. 23 deadline." But that's about all anyone has said. It could mean that they are close to something, or that they're not. There have been a few leaks and trial balloons of late, but nothing concrete has emerged.

Hensarling added: "that even if the panel falls short in that effort, the resulting $1.2 trillion across-the-board cut that would be triggered in January 2013 will ensure that the target set out in August’s debt-ceiling legislation is reached."

Reuters: Romney has "clear lead" in poll. According to Reuters: "Twenty-eight percent of Republicans backed the former Massachusetts governor, giving him a lead of 8 percentage points over his nearest challenger Herman Cain in the poll, taken November 10-11. Romney was 5 percentage points ahead in a survey November 7-8. Newt Gingrich, the U.S. House of Representatives speaker in the mid-1990s, solidified a recent rise among conservatives seeking an alternative to the more moderate Romney, coming in third place in the current poll with 16 percent. Gingrich, who is seen as having performed well in recent debates, was viewed as the second-most "presidential" of the Republican hopefuls, according to the poll."

Obama, Romney "even" at Rasmussen. According to Rasmussen Reports.com: "A new Rasmussen Reports national telephone survey of Likely U.S. Voters shows Obama picking up 43% of the vote, while Romney draws support from 42%. Eight percent (8%) prefer some other candidate, and seven percent (7%) are undecided."

Intrade.com gives Romney a 70.4% chance of getting GOP nod. Obama gets re-elected. According to intrade.com, an online betting house, the odds of a Mitt Romney GOP nomination were 70.4% on early afternoon Sunday. Intrade gives Obama a 52.8% chance of being re-elected. Romney gets a 33.8% chance on Intrade.

Next Market Worry: The Super Committee. And Oh Yeah, Europe Again.

Congress Is Playing With Fire By Not Coming Up With A Credible Plan To Cut Spending

European governments in Greece and Italy made changes at the top last week. And while that won't happen in the U.S., if at all, until November 2012, the Congressional Super Committee could show that it can go with the flow. Right?

That's not exactly obvious. Italy and Greece changed governments, although no one really admitted why they did it, at least not more than in a generic fashion. More specifically, they were forced by the E.U., read: Germany and France, to change governments so that they could put austerity measures in place.

In the U.S., it's more complicated. In the U.S. the parties in power are too busy blaming the problem on the other side. This blame game obscures that there is a need to make significant changes in the way Washington does business. In Europe, at least for now, they understood that unless they make some changes, even if they are only superficial, worse things could happen. In the U.S., neither the Democrats or the Republicans seem to care what happens as long as they become the dominant force in politics, and thus have unrestricted access to the purse strings.

In other words, in Europe, Italy and Greece, to some degree bent to the will of the Germans and the French. In the U.S., there is no one that can make Congress and the establishment blink, except the voters. And that won't happen for another year. Indeed, the parties in power are so far out of touch with reality that they have lost their ability to understand that the markets and the people eventually will have more power than the government, barring a repealing of Democracy in the U.S.

That's why the Super Committee's actions will likely move to the front of the "what to watch" and "what to bet on" parade in the coming ten or so days. They are the canary in the coal mine. If they can't do something somewhat credible under the current circumstances, it will be the clearest sign so far of how those in power have lost touch with reality, the circumstances of the moment, and the people that they govern. Those twelve people, locked in their secret negotiation room in the basement of the capitol, are the most concentrated and visible symptom of what Washington has become, and whether Washington wants to change its stripes.

What's at stake are $1.2 trillion in "savings" or "spending cuts", which will likely lead to higher taxes accross the board for working peoople, rich or poor. What's not clear is what will be cut and how much taxes will go up, either if the Super Committee comes to an agreement, or if the automatic $1.2 trillion cuts go into effect if the group fails. What's at stake is whether Washington can even make cosmetic changes to its unparalleled arrogance and self-interest driven, lobbyist fueled pyramid scheme.

Perhaps that's why the stock market rallyed last week. Europe has cried "Uncle" at least for the moment. And in the U.S., if the Super Committee fails to agree, an automatic set of cuts will go into effect anyway. That, of course, depends on how much weasel language Congress stuck into the agreement for the Super Committee. There have been reports that if there is no agreement, there is a clause that will let Congress fight over cuts and taxes for another year without any actual cuts going into place.

Some are suggesting that some kind of partial deal which will be complemented by the automatic cuts may be reached. The two hot potatoes are defense and Medicare.

One cut that seems ready to go into effect is the 27.4% decrease in reimbursement to physicians who receive money from Medicare. That seems to be the consensus in the health care community. We were at a medical meeting in Dallas this weekend, and almost everyone we spoke to seems to think that it will happen. For more on that, we recommend reading our recent column on the subject. You can find it at: "http://www.joe-duart...arket_IQ.html."

Still, if the stock market starts to falter this week, it wouldn't surprise us. We've been very cautious of late as the market's technicals haven't been very encouraging. It's just not a good time to be taking big risks. There are too many weirdos with too much power in too many places right now. And each and everyone of them is out to further their own little feifdom. That makes for a climate in which there is too much danger floating around in the air.

Europe Isn't Out Of The Woods Or Alone

Europe has made some changes in the leadership of Greece and Italy. That's not all that needs doing. But it's some sort of start. The next problem could come if there is an MF Global type event in Europe. If a major bank goes down in Europe, there could be as much as $4 trillion at risk.

According to Reuters, the Federal Reserve is stepping up its efforts to make sure that U.S. banks are prepared in case of such an event. According to a weekend report, U.S. policy makers "are digging deep into the books of American banks to find out how exposed they might be to euro zone creditors and the plunging value of sovereign debt." The trigger for the latest alarm was the demise of MF Global, a fact that has made the Fed start to piece together "contingency plans" in case of another such event, especially one that is centered in Europe and spreads.

Reuters added: "U.S. banks had about $180.9 billion of debt from Greece, Ireland, Italy, Portugal and Spain on their books at the end of June, based on Bank for International Settlements data. Italy accounted for the largest chunk, more than $250 billion. Guarantees and credit derivatives added another $586.6 billion, bringing the total to $767.5 billion." But that's only the first layer of worry. There is more based on how much money is being lent by one international bank to another. According to Reuters: "International bank claims on Italy total $939 billion, and French banks account for well over one-third of that, BIS data show. French banks also rely heavily on short-term loans from other international banks for their daily operations. If Italian debt slumps even further, causing deeper losses for French banks, international banks could stop lending to France. The losses would ripple through the whole global financial system."

The report added: 'European banks hold some $3.5 trillion of euro-zone sovereign bonds and U.S. banks have significant direct exposure to their European peers, the IIF said in a report. Federal Reserve Chairman Ben Bernanke was frank last week about the risks: "It is not something that we would be insulated from ... I don't think we would be able to escape the consequences of a blow-up in Europe."'

The problem with all these figures is that no one really knows how many off the books bets, or credit default swaps, ie. insurance contracts, are on the books of each bank, as well as hedge funds and speculators. When the "dude, you owe me" phone calls start, all hell could break loose.


Stocks could well continue their rally. There was momentum building last week, albeit with an asterisk. Volume and market breadth were suspect. Yet, it could all crash and burn in a moment, given the political climate.

The situation in Europe may be improving. But, this is a fickle time. And anything could happen. The conventional wisdom is that the collective eyes of the market are turning to Washington and the "Super Committee." Think loose cannons, self interest, and an upcoming election. Think, these people don't live in the world that the rest of us do. Think, they're crazy and they don't care about what happens to anyone but themselves.

These people don't have a good record. That means that anything that comes out of the group which can be construed as an agreement may be so surprising that it adds to the rally. It could be so momentous that stocks could rally for the next several weeks.

We'd be just fine with that, with one caveat. We would trade the rally, if it persists. But we wouldn't believe that it could last for long, given the precarious situation in Washington and the prevalence of people in power who don't understand what they're doing or the effects of their actions.

Since all they seem to care about is to stay in power, we would expect another political crisis at some point in the future.

What's the bottom line? We trade. But we know that eventually, not even the market can be fooled all of the time. Visit our individual trading sections for more details.

When you understand the big picture, the next step is how to survive and profit from what lies ahead. That's why we recommend: "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for All Seasons. Also Available As Kindle Books.

Market Moves

Mastercard (NYSE: MA) Delivers A Chart Breakout

Shares of Mastercard (NYSE: MA) delivered a nice looking chart breakout on Friday.

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Chart Courtesy of StockCharts.com

The financial stocks have been less than rosy all year. But the action in Mastercard suggests that big money, such as mutual funds and perhaps some hedge funds have been putting some money to work.

Friday's breakout came on low volume. But it was a low volume day because of the Veteran's Day holiday. The stock has been moving steadily higher of late, though, with the break out coming on a close above 368.

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The key to what it does next depends both on the market, and on the volume as the week progresses. If volume continues to drop, even though the stock gains ground, we would expect a failure of the breakout.

If there is a failure, then we'd see if support holds up near 350-360. There is no hurry to buy just yet, unless volume starts picking up steam.

For more details on how analyze intermarket relationships and how to use technical analysis in your daily portfolio managmement buy "Market Timing For Dummies" and "Trading Futures for Dummies." Visit our bookstore.

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