Seeds for Catalysts in 2013?

Key economic indicators and market events for December by Joe Terranova, Chief Market Strategist
Heading into December, the S&P 500 has likely seen both the years high of 1474.51 on September 14 and low of 1258.86 on January 3, incidentally the rst trading day of 2012. Odds are against that happening again in 2013. The focus for December will be mostly about avoiding going over the scal cliff and watching for potential seeds that could ower into market catalysts for 2013. Among the potential seeds would be evidence that the goods, or manufacturing, side of the U.S. economy is returning to favor over services; the further cheapening of global currencies and the reemergence of the missing carry trade; and signs that Chinas stimulative monetary policies are beginning to play out and the country is returning to growth. If any of these seeds start to take root, that would be a clear positive for the markets in 2013.

December 2012
Sunday Monday Tuesday Wednesday Thursday Friday
Nov. 30 9:00 PM:

Saturday
1

China Mfg. PMI

2 3:45 AM:

4 8:15 AM:

7 8:30 AM:

European Mfg. PMIs

10:00 AM: ISM Mfg. Index 12:40 PM: St. Louis Fed

ADP Employment Report

10:00 AM:

ECB Meeting Announcement Draghi Press Conference

8:15 AM:

7:45 AM:

U.S. Unemployment

ISM Non-Mfg. Index

11 12 12:30 PM:

President Speech
9 6:50 PM: 10

13

14

15

Japan GDP & Current Account Balance

Joes Fiscal Cliff Clock Ends China Trade Report

FOMC Mtg. Begins

FOMC Mtg. Announcement

2:15 PM:

8:30 AM: U.S. Retail Sales

ECB-IMF Reforming EU Fiscal Governance Conference

FOMC Press Conference OPEC Meeting

16 17 8:30 AM: 18 19 10:00 AM: 20 21 22

Japan Election

Fiscal Cliff Deadline

Empire State Mfg. Survey

Philly Fed Mfg. Survey

23

24 1:00 PM: Bond and Equity

25

26

27

28

29

Markets Close Early

30 31

Markets Closed for Christmas

Bush Tax Cuts Expire Get Set for New Swap Rules

Times shown are Eastern Time.

December indicators / events of note:

China Manufacturing PMI China manufacturing PMI (purchasing managers index) is released on the last day of the month. This monthly gauge of Chinas manufacturing sector, combined with the monthly U.S. ISM Manufacturing Index value released the next day, gives a clear picture of global manufacturing health. An index value above 50 indicates growth, below 50 contraction. European Manufacturing PMIs A countrys PMI is a key measure of the state of its manufacturing sector. An index value above 50 indicates growth, below 50 contraction.

You should be watching:

Expectations are for Novembers China PMI to rise to 50.8. Ive stated before that I do not pay particular attention to the HSBC Flash PMI, however, I must acknowledge that the jump in the November Flash PMI from 49.5 to 50.4 was clearly a positive sign. China PMI continues to trend higher with 49.2 in August, followed by 49.8 in September, and 50.2 in October. If the November PMI is strong, it would be four months in a row of positive readings. Of all the European PMIs, I want to pay particular attention to two Germany and France. Last month, PMI for Germany was 46.8 and 44.7 for France. I am focused on these economies because the prevailing message from one of them will go a long way to telegraphing what happens in Europe and how quickly it can move out of the current recession. There are signs that Germany is once again the pillar of strength and beneting from the decline in the eurodollar. Conversely, I still think that one of the best hedges against a renewed crisis in Europe is to short the French Treasury market. The downgrade of Frances credit rating in November provides credible evidence for that, and yields are uncomfortably low relative to Frances economic conditions. These are distinctly different economies with the unemployment rate for Germany at 6.9% and Frances close to 10%. ISM Manufacturing was 51.7 last month, and it is expected to moderate to 51.3 this month. This reading is going to be important in determining where we go in 2013. People may have forgotten that 2012 began with very strong ISM readings before the advent of the scal cliff. The April gure was the highest for the year at 54.8, but decelerated down to 49.6 in September. Investors need to pay attention to this speech. Not only does Mr. Bullard strongly believe in continued easing, he is against tying monetary policy to the unemployment rate, something other Fed members have wanted to do. Most importantly, were looking to see if he hints at what the Fed plans do to once Operation Twist expires. Last month, ADP reported that 158,000 private jobs were added to the economy, This month, expect that gure to drop to about 150,000.

ISM Manufacturing Index Issued by the Institute of Supply Management, this report provides an inuential monthly measure of the health of U.S. manufacturing based on an in-depth survey of 300 manufacturing rms. An index value of 50 is the dividing line between an expanding or slowing economy. Data released is for the previous month. St. Louis Fed President Speech St. Louis Federal Reserve President James Bullard will address the Little Rock Regional Chamber of Commerce annual meeting. The presentation starts at 12:40 p.m., followed by media Q&A at 1:45 p.m. ADP Employment Report This monthly report, which is based on U.S. private payroll data (excluding government), is released two days ahead of the U.S. Labor Departments monthly employment report, and is used for the advance read it gives on the labor market.

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December indicators / events of note:

ISM Non-Manufacturing Index The index is based on surveys of nearly 400 rms from 60 sectors across the U.S., including agriculture, mining, construction, transportation, communications, wholesale trade, and retail trade. The index provides the economic backdrop for the various markets, and consists of data on business activity, new orders, employment, and supplier deliveries. ECB Meeting Announcement / Draghi Press Conference The ECB sends out its monthly rate announcement following its regularly scheduled monetary policy meeting for eurozone countries, and President Mario Draghi conducts his follow-up press conference.

You should be watching:

Were looking for a decline in the index from 54.2 to 53.5. The nonmanufacturing, or service, component of the U.S. economy has been more resilient than the manufacturing, or goods, side. This month, however, we expect to see a bit of a slowdown in this gure.

More important than the interest rate decision is Draghis press conference. ECB actions are limited at this point, and it cant take rates much lower. We need more commentary from Draghi that he stands ready to do whatever is necessary to implement the OMT (outright monetary transactions) program as quickly as possible. Think back to late July when Draghi announced with such force that the ECB intended to be an aggressive buyer of bonds and the impact his words had on the Spanish 10-year Treasury, which traded as high as 7.75% on July 25, then fell to below 5.50% and now sits at 5.52%. Expect the unemployment rate to stay unchanged at 7.9%, however, we are looking for a falloff in the jobs numbers, all related to the scal cliff, the election, and the end-of-year pause in capital spending by companies. Last months headline jobs gure was 171,000; 100,000 is expected this time around. Last month, private payrolls came in at 184,000; consensus is for 120,000 this month. I included Japan on this months calendar because the countrys worsening economic condition may turn into a global concern for 2013. Japan is heading into recession, which should be conrmed with the next GDP report, which comes out one week before Liberal Democratic Party candidate Shinzo Abe is expected to be elected prime minister. A signicant monetary stimulus plan is also likely for 2013, probably in the range of 800 billion to one trillion yen. Japans current account has moved from surplus to decit. While Japans 2012 GDP will probably rise about 1.5%, further deceleration in growth is expected over the next few years. The OECD recently forecast Japans GDP at a modest 0.7% for 2013 and 0.8% for 2014, and its gross debt is expected to hit 230% of GDP by 2014. If Congress has not reached a deal by this date, I would expect markets to react negatively.

U.S. Unemployment Report Private payroll data is part of the Labor Departments monthly U.S. Employment Situation report. This data gives the true employment story, is the best gauge of the economys direction, and has the power to move markets. Japan GDP and Current Account Balance Japans gross domestic product (GDP) is the total of all goods and services in all sectors of its economy, while its current account balance is the difference between exports and imports of goods and services. If imports exceed exports, the current account is in decit, and if exports exceed imports, the current account is in surplus. The decit or surplus is typically measured as a percentage of GDP.

Joes Fiscal Cliff Time Clock Ends Monday, December 10, is my deadline for Congress to nd a way to avoid going over the scal cliff.

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December indicators / events of note:

China Trade Report Chinas monthly trade report provides important import, export, and interest rate data on the Chinese economy. FOMC Meeting Announcement / Press Conference The Federal Open Market Committee (FOMC) releases its December monetary policy announcement, as well as the annual economic forecast, and Chairman Bernanke follows up with his press brieng.

You should be watching:

Last month, Chinas exports were up 11.6%, and imports were up 2.4% year over year. Im mostly concerned with the exports side; there are indications that its beginning to trough. Now that Chinas government transition is complete, I think well see an acceleration of less conventional stimulative efforts. Operation Twist is coming to an end in December, and the Fed will probably continue to buy $45 million a month in assets, both long-dated Treasuries and mortgage-backed securities. If the Fed were to let Operation Twist expire at the end of the year, that would be viewed as an automatic tightening of monetary policy. I would also look for Chairman Bernanke and the Committee to moderate their longer term growth expectations for the U.S. economy. I dont expect much of a quota change in either direction for crude oil production. 2012 is the rst year that Brent will have traded more than WTI on a volume basis. In 2013, investors should begin to use Brent as the global benchmark for oil and disregard WTI. In January, I expect the weighting of WTI in commodity index funds to be reduced and the weighting for Brent to be increased. That may widen the spread and distance the premium that Brent trades over WTI. Bottom line for retail sales in December: Will the American consumer continue to prove resilient? Did the combination of Super Storm Sandy, the election, and the scal cliff cause retail sales to moderate? If consumer spending were to slow in December, wed be looking for the manufacturing side to offset that, otherwise there would be an unfavorable balance. Investors should look at this meeting to learn whether any signicant austerity measures are planned for Europe in 2013. I would also watch for any concerns related to the scal situations of Spain and France.

OPEC Meeting The next ordinary meeting of OPEC, the Organization of Petroleum Exporting Countries, will be held on Wednesday, December 12, in Vienna, Austria.

U.S. Retail Sales Retail sales data is released monthly by the U.S. Department of Commerce. Retail sales measure total receipts for sales of durable and nondurable goods. Consumer spending accounts for two-thirds of GDP and is therefore a key element in economic growth. Each report is based on the previous months data. ECB-IMF Reforming EU Fiscal Governance Conference The Fiscal Policies Division of the ECB and the International Monetary Fund will host a joint conference on scal governance, to be held at the ECB premises in Frankfurt, Germany. Japan Election Japan will elect a new prime minister on December 16, its seventh in the past six years.

Liberal Democratic Party candidate Shinzo Abe is viewed as the likely winner. If thats the case, we can expect very easy stimulative monetary policy from his administration that will target ination and seek to cheapen the yen as much as possible. Longer term, investors should be asking, at what cost? The answer can found in Japans debt-to-GDP ratio, which is forecast to rise to 230% by 2014.
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December indicators / events of note:

Empire State and Philly Fed Manufacturing Surveys >  Empire State Manufacturing Survey: The Federal Reserve Bank of New York conducts this monthly survey of manufacturers in the State of New York across a variety of industries. Report data is for the month in which it is released. >  Philly Fed Manufacturing Survey: This monthly survey provides useful intelligence on manufacturing conditions within the Philadelphia Federal Reserve district and is an indicator of broad manufacturing sector trends. Fiscal Cliff Deadline Capitol Hill breaks for the holiday recess on Friday, December 21.

You should be watching:

Regional manufacturing reports will be the most important indicators to watch. Last month, the Empire State survey came in at -5.22, and the Philly Fed survey at -10.7. Watch these surveys for any Sandy effect. For those wondering about housing, even though various housing data also comes out this week (i.e., starts on the 19th and existing home sales on the 20th), its no longer necessary to include them. We know the housing story is good. A trough is in place, the recovery has begun, and the impact on markets is priced in. Nothing new can be added at this point. Hopefully, at a bare minimum, a deal is in place by this date that will help us avoid going over the scal cliff. For me, this is the point when the junior varsity takes the eld and nothing of consequence happens for the rest of the year. I would encourage investors not to make any major decisions after that date and to instead spend their time on vacation and reection. Having briey looked at the CFTCs new swap rules, I expect there may be more volatility in the commodities market in the rst quarter until people get comfortable with the rules.

Bush Tax Cuts Expire / Get Set for New Swap Rules December 31 marks the day when the 2001/2003 Bush tax cuts end, and new DoddFrank swap trading rules for the commodities market prepare to go into effect for the rst trading day of the new year.

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JOSEPH M. TERRANOVA, Chief Market Strategist, Virtus Investment Partners Joe Terranova is chief market strategist for Virtus Investment Partners. He was elevated to that position in June 2009, having started with the company in the role of chief alternatives strategist. In his current role, Mr. Terranova works with Virtus regional sales teams and the nancial advisors who sell the companys investment products, providing insight into the domestic and global investing landscape and has represented Virtus as a keynote speaker for several nancial institutions. He is a member of the Virtus Investment Oversight Committee. Prior to joining Virtus in 2008, Mr. Terranova spent 18 years at MBF Clearing Corp., rising to the position of director of trading for the company and its subsidiaries. In this capacity, he managed more than 300 traders and support staff for MBF, one of the New York Mercantile Exchanges largest rms. His work was highlighted as the feature story in the June 2004 issue of Futures magazine. Mr. Terranova is perhaps best known for his risk management skills, honed while overseeing MBFs proprietary trading operations during some of the most calamitous times for the U.S. markets, including the rst Gulf War, the 1998 Asian Crisis, 9/11, and the collapse of Amaranth Advisors. In 2003, he was one of the rst Wall Street professionals to make an early call for higher energy, natural resources, and commodity prices. In June 2008, he cautioned investors to move to the sidelines in commodities and, in March 2009, he encouraged investors to ignore the global embracement of pessimism and overweight equities. Before joining MBF, Terranova held positions at both Swiss Banking Corp. and JP Morgan Securities. Mr. Terranova is a regular panelist on CNBCs highly rated program Fast Money and a frequent panelist on CNBCs Fast Money Halftime Report. He is the author of Buy High, Sell Higher (Business Plus, 2012), a book about the new rules of investing based on his years as a professional trader. In 2007, Mr. Terranova and Hockey Hall of Fame player Mike Bossy established Bossys Bunch, a program that rewards excellence in the classroom for elementary school students. Mr. Terranova earned a bachelors degree in nance from the Peter J. Tobin College of Business at St. Johns University in New York.

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This commentary is the opinion of Joe Terranova. Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates, or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.
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