Sequestration: The Crisis Du Jour

It’s crisis time again in Washington, D.C.  Having just barely avoided a swan dive off the fiscal cliff, the leaders of our country are now locked in battle over the pending sequestration.

“Locked” is the operative word here, as the deep freeze that’s hit New England this week is likely to thaw well before the freeze in progress over sequestration.

If nothing else, this standoff has added to our vocabulary.  “Sequestration,” as we’ve learned, is a procedure that triggers automatic spending cuts.  It also means “the seizure of property for creditors,” as in, “China will begin sequestering U.S. property if we can’t control our debt and pay our bills.”  That definition may be more appropriate in years to come, but for now, let’s concentrate on the immediate future.

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Europe – The Weakest Link

With the election, sequestration showdown and other pressing domestic news, we’ve hardly had time to think about Europe.  Yet the continent is as troubled as ever and is crying out for attention again.

Keep in mind that, in this era of a global economy, our fates are intertwined.  Europe and America are heavy trading partners and our multinational businesses are located throughout each other’s continent.  Our banks own European bonds.  So when Europe is in trouble, so is the U.S.

Well, Europe is in trouble.  We’d say “in trouble again,” but it’s never really gotten out of trouble; at least not since Greece triggered the sovereign debt crisis.  The popular British game show, “The Weakest Link,” could serve as a metaphor for the whole continent, except that what’s happening in Europe is not nearly as entertaining.

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Investors Are Back … So Expect a Correction

Individual investors are moving in.  And the smart money is moving out.

With the Dow Jones Industrial Average pushing past 14,000, individual investors jumped back into the stock market, it looked like happy days were here again.  But were they really?

When average investors are pouring money into the market, it’s a sign that a correction, or even a bear market, is coming.  Likewise, when corporate insiders are selling their shares, look out below.

Individual investors have pulled more than $150 billion out of U.S. stock mutual funds since 2009, but they were coming back in January with a net investment of $10.3 billion.  Include exchange-traded funds and a record $77.4 billion was invested in January, according to TrimTabs Research.

Conversely, there were more than nine insider sales for every buy last week, among insiders whose stocks are listed on the New York Stock Exchange.

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The Incredible Shrinking Economy

Only in today’s America would a shrinking economy cause the stock market to rise.

The federal government reported this week that the U.S. economy contracted by -0.1% in the last quarter of 2012. That helped the stock market finish its best January performance since 1994, with the Dow Jones Industrial Average up 7% since November (it was the best performance since 1989 for the S&P 500).

As the chart shows, S&P 500 performance since November has been eerily similar to last year’s performance at this time.

So why did a shrinking economy produce a rising stock market?  Because it all but guarantees more quantitative easing (QE), as well as resistance to federal spending cuts, which would reduce gross domestic product (GDP).

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