Debt Crisis Solved

Jim Brown
 
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Washington claims it has solved the debt crisis and the Dow raced to a +205 point gain before the votes even took place. It was clearly a case of buy the rumor. Let's hope there is not a sell the news response to the actual votes.

The Senate is pushing a bill that will finance the government through January 15th and suspend the debt ceiling until February 7th. I would hardly claim the Washington problem solved. They simply kicked the can farther down the road because they hit the debt ceiling without a resolution. There was no time left to continue waging the headline war.

The spending levels would be maintained at the sequester levels so the democrats did not gain anything in that area. The bill requires the two sides to hammer out a longer term bipartisan budget deal by December 13th. If they can't agree on a budget then the government will shut down again on January 16th. By keeping the dates close the republicans keep the pressure on the democrats to agree on a budget. Unfortunately the democrats agreed to the short dates because they think they can gain some extra spending in the negotiations. Otherwise they would have held out for a longer drop dead date.

The important part of the deal is that it removes the shutdown and debt ceiling from the headlines for the rest of 2013. That should allow the market to move higher BUT the initial earnings have not been good.

Ebay plunged tonight after posting results that beat by a penny but warning on a "soft" Q4. The company said Q4 earnings would be in the range of 80 cents compared to analyst estimates of 83 cents. The Q3 metrics were good with revenue rising +12% to $18 billion. The fourth quarter is normally the best of the year for Ebay so the warning caught everyone off guard.

IBM posted earnings of $3.99 compared to estimates of $3.96. However, revenue declined -4% to $23.7 billion and -$1.1 billion below analyst estimates. Services revenue fell -3%. Systems and technology revenue fell -17%. Software revenue rose +1%. Revenue for Internet based services rose +70% year to date. Cloud computing is exploding for everyone from Amazon to Verizon. The monster earnings miss caused the stock to drop -$10 in afterhours trading.

If the Q3 earning continue to surprise negatively the market outlook for the rest of the year could also be negative. We know a lot of companies are going to warn on Q4 as a result of the government shutdown. That will be the "kitchen sink" excuse to get them past some potentially weak earnings from a slowing economy.

Iran

The P5+1 talks with Iran began again on Tuesday and nobody in attendance will say what was discussed. Iranian negotiators said they presented a new plan to the UN group and another meeting has already been scheduled on Nov 7th to discuss a "possible breakthrough" in the talks. That is Iran's term and UN negotiators were unexpectedly mum on the details of the proposal. The comments from the P5+1 nations did seem to indicate they had interest in the proposal but they were keeping the details secret. By not telling the world and having the press beat them up they can continue to talk without Iran feeling the need to justify its comments in the press. When you are negotiating it is better not to have outside influences impacting the talks.

Iran's negotiator said the six nations "welcomed Iran's new approach" and called on the six nations to also show a "new attitude." Compared to the bellicose comments from Iran after prior meetings that was very tame.

Crude prices rose $1 on the news.

EIA Inventory Report

The EIA suspended operations at the close on Friday as a result of the government shutdown. The normal weekly inventory report was cancelled for this week so there are no inventories to report. If the government reopens on Friday as expected we should have a new inventory update next week but it may be delayed.

OPEC Oil Embargo

Forty years ago on October 16th, 1973 the Arab members of OPEC plus Egypt, Syria and Tunisia, proclaimed an oil embargo against the USA. Global oil prices rose +300% as a result. The embargo was the result of the Yom Kippur War where Egypt and Syria launched a military strike against Israel on their Yom Kippur holiday. Israel went on full nuclear alert and loaded warheads into planes and long range missiles. The U.S. sided with Israel and supplied them with emergency arms. In response to the help the OAPEC (Arab countries in OPEC) decided to launch the embargo. It lasted until March 1974.

With global oil exports drastically reduced several European nations and Japan quickly sought to disassociate themselves from the USA and the U.S. policy in the Middle East. President Nixon immediately launched diplomatic efforts with Arab producers to end the embargo and with Egypt, Syria and Israel to agree on settlement talks. By January Henry Kissinger had negotiated an Israeli troop withdrawal from parts of the Sinai. The promise of a peaceful end to the hostilities was enough to convince the Arabs to lift the embargo in March 1974.

At the same time the OAPEC members agreed to use their leverage over global oil production to raise world oil prices. The resulting high prices coupled with the rampant inflation lasted for years and created the largest persistent economic effect since the Great Depression and the stock market crash of 1973-1974. At the time the U.S. was increasing oil consumption by more than 5% per year.

As a result of the oil shortage the U.S. began rationing gasoline using the even-odd days system based on the last number on the car's license plate. In January 1974 the U.S. printed gasoline rationing coupons but they were never distributed because of success in negotiating an end to the embargo. As a result of the embargo and shortage of oil and gasoline a 55 MPH national speed limit was passed.

While nobody would expect a repeat of the embargo it is always possible. What would keep it from being effective today is the dependence of OPEC countries on revenue from oil exports to keep their countries funded. This is their main source of revenue and it would take a major event to make them cut their own throats by shutting off the oil supply.

Market

The Nasdaq and Russell 2000 rallied to close at new highs on Wednesday. The Dow is still lagging and the -$10 drop in IBM after the bell is going to be a major drag on the Dow on Thursday.

In theory the successful passage of a budget bill on Thursday will reopen the government on Friday. Also in theory the removal of the Washington headlines should allow the markets to rally higher. That assumes the current Q3 earnings cycle does not disappoint so badly that investors flee equities.

Crude prices continue to remain stable with WTI showing solid support at $101 and Brent holding on to the $110 level. While the majority of factors suggest prices should be declining the solid support suggests the next move will be higher as winter demand picks up.

Jim Brown

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