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Real Time Insight

At Zacks, the editors get together now and again to discuss the state of the markets and exchange ideas.  This week, we did this.  I took down some notes on what concerned the editors.

Yes, we are in a strong rally that is now close to five months old.  The last two event-driven rallies lasted six months.  This market could hit some negative pothole to bring a correction on at any time.  Such events we don’t wish for.  But we urge, as good investors -- be on the lookout.

Collectively, we identified six possible means for this rally to find its way into a leg down, or a correction, however you want to term it. 

Six Ways to a Leg Down:

(1) Possible Federal government shutdown on March 27th
.  Is this the time when budget dysfunction reaches market fundamentals? The Republican-controlled House approved legislation Wed., March 13 to prevent a government shutdown on March 27 and blunt the impact of newly imposed spending cuts on the Defense Department. The 267-151 vote sent the measure to the Senate.  Democrats hope to give additional Cabinet agencies similar flexibility in implementing their share of the $85 billion in cuts.

(2) The European economy in real GDP terms is to shrink -0.3% this year.  When does a new raft of bank loan problems emerge from the lengthening period of stagnation in activity and mass jobless-ness? The so-called “strong” German economy, in the lead in Europe, is set for a pathetic +0.7% y/y real GDP growth rate. Yes, the Spanish 10-year sovereign bond rate is pricing at 4.84%, well below the 5% threshold.  It last saw the 6% threshold in Sept. 2012.   That sounds great.  Perhaps authorities serve up even more stimulus.  But Germany has a Sept. election, and may not be willing to move forward now.

(3) Jobs numbers could slow to +100K a month, as in summer’s past.  Yes, we are doing a +200K a month pace now, but is that going to slow?  Budgets in companies for hiring may now close out the high level of hiring activity early in the year and cause job growth to settle back.

(4) Steep downward revisions to annual 2013 earnings projections are coming.  What happens when estimates start to come down?  This is the bread and butter of the Zacks Rank.  Many long-time and astute observers of earnings inside Zacks on revisions think the current projections for growth in the second half of 2013 and 2014 are way too high. 

(5) Investors take profits.  Does the spring rally get tired, as it nears a six-month threshold, much like the last two event rallies? This is yet another negative cycle for the market.  More profit taking, and the lower go the stock markets, and the lower go consumer sentiment numbers. It feeds on itself. 

(6) Upward Fed revisions, to a +3.0% growth rate or more for the U.S. economy, pull forward the end of $85B a month in QE.  We know the Fed is planning to begin to taper its purchases of bonds in Q1-2014.  If the economy is so strong the unemployment rate of 6.5% is reached by the end of this year, the timing will change.  Members of the FOMC could vote to begin tapering bond purchases much sooner.  Then, once the bond market stalls, the stock markets follow.  The Fed can’t close out the stimulus without a negative feedback loop in financial markets.

Two Questions: 

What are you on the lookout for?  Which of these possible events listed above concerns YOU the most

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