Investor Sentiment

In a world in which the Fiscal Cliff, including headlines, rumors, leaks, and mere whispers thereof, is the main show, all other data points are at best supporting data actors. There was a lot of support overnight - for the futures, which once again closed the prior session at the lows - with a battery of PMIs released, starting with the December HSBC China Flash PMI which printed at a excel picture perfect 50.9 vs an expectation 50.8 and above 50 for the second straight month, which sent the Shanghai Composite up 4.32%, and wiped out the bitter aftertaste from the Japan December large manufacturer Tankan index which tumbled to -12 on expectation of a -10 print, confirming the Japanese recession is deteriorating at the worst possible time. Then after China, Markit released a bevy of European PMI data which came in mixed: Services PMI rose from 46.7 to 47.8 in December, beating expectations of a 47.0 print, while the Manufacturing PMI rose modestly from 46.2 to 46.3, missing expectations of a 46.6 result. The biggest wildcard once again was Germany, where the Service PMI, like in the US, posted a sizable rise, posting above 50 for the first time in months, or at 52.1 on expectations of 50.0, and up from 49.7 last, although more disturbing was the ongoing collapse in German manufacturing which dipped from 46.8 to 46.3, on expectations of a rise to 47.2. French manufacturing data did not help posting a tiny rise from 44.5 to 44.6, missing expectations of a 45.0 print. Economic data was further confounded when Spain released its quarterly home price update, which dipped 3.8%, accelerated last quarter's -3.3% drop, and sliding by a massive -15.2% in Q3, faster than the -14.4% drop in Q2, and confirming Spanish housing has a long way to go before it is fixed.

There are still plenty of opportunities out there.

Add extreme selling by corporate insiders to last week's list of worries.

When trying to get a handle on investor sentiment, the benchmark of choice for many market-watchers is the CBOE S&P 500 Volatility Index, or VIX. However, this popular “fear gauge” only offers a snapshot of implied volatility, or relative pricing levels, for equity index options, which might not necessarily tell us all we need to know about the mood on The Street.

The problem with this market is that it can't seem to sell off enough to produce a sustainable rally. There are not enough bears or bulls.

Why ever sell? Such is our markets where investors have been conditioned that they will not experience the pain of deep (any?) losses for any length of time.

After all in this singular issue world of ours, the only thing holding the market back is the fiscal cliff and Washington's inability to deal with it.

By blaming this week's sell off on the coming fiscal cliff is another belief by market participants that Washington can fix our economy and our markets.

Barclays' Barry Knapp has joined the growing crowd of 'sub-1400 year-end S&P 500 target' realists among sell-side equity strategists. With Morgan Stanley's Adam Parker at 1167 and Goldman's David Kostin at 1250, Knapp just reduced his target to 1325 as he notes "the election scenario that unfolded was the one with the most risk, the status quo outcome." In a brief but densely packed interview on Bloomberg TV (the likes of which we suspect we will not see on CNBC), Knapp summarizes his non-rose-colored-glasses view: "In the longer term, while U.S. growth ... remains constrained by policy uncertainty and balance sheet deleveraging. Financial repression has limited the Fed’s effectiveness... We believe a period of significant equity market valuation improvement can’t begin until the Fed initiates the exit strategy process, which is unlikely to occur until Federal government debt sustainability is addressed." From lame-duck impotence to tax-selling pressures, Knapp nails our new reality and explains, as we have been saying, that the only solution lies in a market-forced move: "We suspect, absent a market correction large enough to force compromise, the two sides will not agree on the starting point for tax rates." Must Watch...

Less than impressive macro data from the Eurozone failed to depress investor sentiment and as such, equity markets in Europe traded higher as market participants looked forward to US elections. Heading into the North American open, all ten equity sectors are seen in the green, with technology and financial stocks leading the pack. Still, despite the choppy price action and lack of progress on the much desired Spanish bailout, peripheral bond yield spreads are tighter, with SP/GE and IT/GE tighter by c. 6bps. EUR/USD failed to break below 1.2750 barrier level earlier in the session and since then stages an impressive recovery, partly helped by weaker macro data from the UK.

• Obama and Romney Deadlocked, Polls Show (WSJ)
• NYC Commuter Week Faces Uncharted Ground as Storm Brews (Bloomberg)
• New York region struggles to move on a week after Sandy (Reuters)
• Europe's Bank Reviews Collateral (WSJ)
• Less circuses to pay for the bread? Time Warner Cable misses on falling demand (Reuters)
• Spanish unemployment total jumps by 128,242 as recession continues to take its toll on economy (Independent)
• Goldman Sachs Partner List Drops 31 Since February, Filing Shows (Bloomberg)
• China's mission impossible - a date for Hu's military handover (Reuters)
• German-Iranian trade booming (Jerusalem Post)
• Russia supplying arms to Syria under old contracts: Lavrov (Reuters)
• Russia endorses Egyptian-led regional group on Syria (Reuters)
• Election Winner Must Win Over Wall Street (Bloomberg)
• On Google, a Political Mystery That's All Numbers (WSJ)
• Richard Koo: explain to Americans why $22 trillion in debt in 4 years is good for them.. or something (FT)

By my calculations, the SP500 will bottom near the 1260 level, which is nearly 150 SP500 points from today's prices.

No wonder mom and pop investor are soured on Wall Street. Just when "they" tell you it's a can't miss market, well the market stumbles.

Earlier this week two former Merrill colleagues, since separated, were reunited on several media occasions, and allowed to spar over their conflicting views of the world. The two people in question, of course, are Gluskin Sheff's David Rosenberg, best known during the past 3 years for not drinking the propaganda Kool-Aid, and systematically deconstructing every "bullish" macroeconomic datapoint into its far more downbeat constituent parts, and his ebullient ex-coworker, Richard Bernstein, formerly head of equity strategy at a firm that had to be rescued by none other than Bank of America and currently head of RBA advisors, who just happens to be bullish on, well, everything. And since any attempt at holding an intelligent conversation on CNBC is ultimately futile (as can be seen here) and is constantly broken up by both ads, and interjecting anchors and show producers who care far less about facts than keeping the presentation 'engaging' (and going to such lengths to even allow Jim Cramer to have his own TV show), Rosenberg decided to dedicate his entire letter to clients today to "providing a rebuttal" of the slate of reasons why according to Bernstein the "we are on the precipice of a 1982-2000 style of secular market." What follows is one of the most comprehensive "white papers" debunking the bullish view we have seen in a while. Read on.

The markets are all about timing. In this case, 55 weeks.