Election Day (finally!)

Tuesday, November 07, 2006 | 11:08 AM
in RR&A

NOTE:  This Maarket Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Mon 11/7/2006 11:08 AM EDT;

This is posted here not as investing advice, but rather as an example of a trading call for potential subscribers. We expect to post future advisories in a similar manner -- after the call, but in the correct chronological location on the blog.


I wanted to direct your attention to a few recent factors worth reviewing. As we noted in Technicals Improving, Economics Souring -- we continue to watch the disconnect widen between the charts and the macro-economic environment. Even Fed officials have noted that the data is much worse than originally believed.

If the disconnect was wide before, its a chasm now. 

Since we last noted the improvement in the technicals, things have firmed up even further. Dollar flow into Domestic equity funds have picked up. More importantly, the May highs in the Nasdaq have been topped. By itself, that usually has very Bullish connotations.

Juxstaposed against that has been the deteriorating macro environment, and the Housing complex in particular.

Be sure to read today's What We Are Watching for a significant review of the overall sector. Its ever more apparent that not only are we not bottoming in Housing, but we are likely just getting started downwards. I would estimate that we are barely one third to one half way downwards into a typical down cycle -- and this cycle has been no where near typical.

This week becomes an intriguing one for traders: Whatever mad bidding for equities that took place in anticipation of the election should expire with the end of today's votiong. In the event of a loss of one GOP chamber (likely the House), we should expect some longer term repercussions for tax policy and stocks that may be less investor friendly.

Further, the "preternatural" bid that has tongues wagging all over Wall Street about the Not-So-Invisible Hand of the Plunge Protection Team should be assumed to be finished with their task. While we do not believe the markets have been manipulated, we have watched some of the harder to explain stock futures trading. To the trained eye, it sure did look like someone was on a mission. But it is not our job to delve into these shadowy conspiracies, but rather, to try and suss out how all the many elements will impact markets over the near and long term.

The most obvious one is "Gridlock." Most of the Street seems to be keying on the meme that "Gridlock is good."

That presupposes the present state of affairs is a desirable one, that trends are not moving us to a negative state, and that the expiring market-focused tax stimulus doesn't matter much. I disagree with all of those statements. Additionally, in the vent of a GOP loss, I cannot imagine that 2 years of subpoena driven investigations will produce a rosy environment for consumer sentiment and markets. Consider the psychological impact of non-stop televised hearings into 9/11, WMD, Halliburton, Katrina/NOLA, War Profiteering, etc.

At the same time, we can expect as major battle between Congress and the White House over subpoenaed documents -- and witnesses -- to end up in court.

As a political independent, I cannot say that I am impressed with the job done by the current Congress. But I also cannot say what awaits is any better (at least from a market perspective), and from a sentiment standpoint, could be much much worse.


Under normal circumstances, the penetration of the May 2006 highs would have ordinarily flipped us Bullish, at least for a trade for the rest of the year. But given the elections, the economic slowing, and the generally straight up condition of the markets -- note that we have yet to have a down 1% day since this rally started over the Summer -- we remain cautious.

This entire combination of factors remains rather unusual -- so we find ourselves holding off on that decision, at least for the moment. We will be waiting until after the elections, in particular waiting to see how this plays out for the rest of this week.

Go vote.

-Barry Ritholtz
November 7, 2006

Tuesday, November 07, 2006 | 11:08 AM | Permalink | Comments (2) | TrackBack (0)
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I"ll post this again here for emphasis. Be curious to get any feedback.

Now that Rummy is out, I expect Bush to escalate big-time in Iraq.

Listen to what McCain had to say last night on Fox: "Tell the American people the truth. The present strategy isn't working. The going is going to get tough. We need more troops in Iraq."

I don't know where Lieberman stands on all of this, but the fact he won big with (mostly) Republican support is a portent.

Oh, sure, the Demos will try to stop Bush by cutting off funding, or whatever. But as long as the Repos stay united behind the war effort, the end result of their efforts will be to split the Democratic majority in Congress between the "old lion" liberals in their safe districts and the more "moderate" recent arrivals who will not want to be booted out of their swing districts for being weak on Iraq.

Then, the 2008 Presidential election will be all about whether escalation was right (McCain) or wrong (Hillary?).

For me, the question now is: what are the investment implications of the coming escalation.

Posted by: GRL | Nov 8, 2006 3:21:25 PM

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