Europe: Catharsis or Solution = Buying Opportunity

George Brooks |

Wall Street SignInvestor's first read  - Brooksie's edge before the market opens

Friday, January 13, 2012     9:11 a.m.

DJIA: 12,471.02    S&P 500: 1295.50

Following a selloff the market rebounded a second time from Wednesday’s support levels, to close on a positive note. So far, the market’s strength must be attributed to new 2012 buy programs, not from the kind of overwhelming enthusiasm that would mark an explosion in prices.

But, the action has been steady and impressive and only needs a spark to set it off. That spark would have to come from Europe, and assurance that contagion is off the table.

Yesterday’s jobless  and retail sales numbers were disappointing. While seasonal adjustments this time of the year are questionable, the market barely blinked. The next test will be Q4 earnings which aren’t expected to be nearly as robust as in the prior three quarters of 2011. But this is expected, so “surprises” stand to be good, not bad.

European news is good for a change. Italy sold 4.75 billion euros of bonds in its second auction this week, 3 billion of its benchmark securities due 2014 to yield 4.83% vs. 5.62 at a December sale. This auction follows the sale of 12 billion euros  of t-bills, 8.5 billion one-year bills at a rate of 2.735% vs. 5.952 in a preceding auction  Spain and Germany also had successful auctions this week. The reception for all countries was better than expected.*

As noted in my Conclusion later in this post, I think the European “situation” will be mostly resolved in coming months, or at least the risk of an uncontrolled contagion eliminated.

This may result in a reduction of the 17-member eurozone. Any changes could temporarily jolt stock prices, as investors worry about repercussions. Complicating the issue is the likelihood Europe will soon slip into a recession.  Nevertheless, the problem is more than two years old and too much is at stake for European leaders to delay solutions.

What is overlooked here is, are institutional and individual investors ready for an announcement of a solid plan that vastly lessens the risk of contagion ?

It appears everyone  is expecting the worst. What if it doesn’t happen ?

Again, look for news headlines trumpeting the potential casualties and fall out from sequestration, $1.2 trillion in automatic spending cuts “triggered” by the SuperCommittee’s inability (or unwillingness) to decide on which programs get the cuts.  Both the President and Congress can still have an impact on the ultimate outcome before they become effective in January 2013.

TODAY:  Look for a drop at the open, possibly to DJIA  12,395 (S&P 500: 1288 ) followed by a rebound with some selling in the last 30 minutes of trading.

THIS WEEK’S ECONOMIC REPORTS

Monday (3 p.m.) Consumer Credit. Surged 10% in November for the biggest one-month increase since Nov. 2001. Revolving credit – credit cards up 8.5% and non-revolving credit (auto loans, etc.) up 10.7%. This suggests an important change in consumer sentiment which can only add to an accelerating economy.

Tuesday:  Wholesale Trade (10 a.m.) Indicates sales and inventories held by merchant wholesalers. Inventories increased well below projections in November with a gain of only 0.1 percent vs. a 1,2 percent gain in October.

Wednesday

   MBA Applications (7 a.m.) Measures applications at mortgage lenders a reflection of consumer intent in the housing area and economy as a whole, ergo it has a “multiplier effect.”  Applications for U.S. home mortgages for the week ended Jan. 6  jumped 4.5%.  Refinancings as a percent of the total dropped to 80.8%  from 81.9%.

Fed’s Beige Book (2 p.m.) Released two weeks before FOMC meeting, it provides insight into business conditions in 12 Federal Reserve districts, which stand to have an influence on policy decisions at the next meeting. Sentiment expressed in the Beige Book were mixed with some opposed and some in favor of further asset purchases.  Balance is good.

Thursday:

   Jobless Claims (8:30) Declined 15,000 for the week ending Dec. 31. Economic bulls want this number to keep declining. Doomsters praying for a big jump. Doomsters get their wish, the claims jumped 24,000 to 399,000 for the week ending Jan. 7. This was worse that expected, though seasonality adjustments are difficult this time of the year.

   Retail Sales (8:30) Comprised of the total receipts at stores that sell merchandise and related services to final consumers. Retail Sales grew at a  0.2% rate in Nov., following growth rates of 0.6% in Oct. and 1.3% in Sept.. Growth rates have been bumping along sideways at an annual rate of 4% to 9% since soaring in the last four months of  2009 from recession lows of minus 11%. December retail sales were reported today at 0.1% vs. 0.4% (revised up from 0.2). December was marked by heavy discounting at stores.

   Business Inventories (10 a.m.) Comprised of the dollar amount of inventories held by manufacturers, wholesalers and retailers. Obviously, a rising inventory to sales ratio suggests a decline in sales or alarming rise in inventories which will have to be worked off at the expense of production. To-date the ratio  is steady and not of serious concern.

   Treasury Budget (2 p.m.) Monthly account of the surplus or deficit of federal government. December expected to run close to breakeven.

Friday:

   International Trade (8:30) Comprised of merchandise (tangible goods) and services. International trade balance has posted a deficit since 1980s. Trend to smaller balance adds to GDP growth, increase is drag on growth.

   Import/Export Prices (8:30) Can indicate inflationary trends.

  Consumer Sentiment (9:55 a.m.)Reuter’s/Univ. of Michigan’s survey of 500 households and is directly related to consumer spending. Improved to 69.9 in Dec. from 64.1 in Nov..  The latest reading implies a strong 72.1 over the last two weeks suggesting momentum will carry into 2012.

CONCLUSION (Repeated):

I MAY BE ALONE ON THIS, and WRONG, but there is tooo much at risk here globally for the euro-area countries NOT to develop a solution that strengthens the European Union.  I sense this problem is heading at warp speed for a solution that removes the risk of  a global meltdown, and that solution most likely means a reduction in euro-area members. That could mean a week of turmoil and confusion somewhat on the order of a stock market selling climax. It could also be the best buying opportunity since early March 2009.  It could be devastating to long-term bond values as investors bail out and buy stocks.  Then too, solutions could be agreed on that reduce the risk of meltdown without the carnage. This needs to be considered as possible, especially because too few people are seeing it happen.

EUROPEAN UNION/EUROZONE

The European Union (EU) is an economic and political union of 27 sovereign member states    with origins going back to 1958, but which was officially established by the Maastricht Treaty in 1993.  Its goals are a free movement of goods, services, capital and people differing in  life style, language, economies, geography, religion, politics and history.

Its 27 Members include: Austria, Belgium Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.  The EU comprises  a population exceeding 500 million people a GDP exceeding 16.2 billion USD, some 20% of the world’s GDP.

Important components of the EU include: European Parliament, European Commission, Council of European Union, European Council  Court of Justice and European Union, and the European Central Bank.

The euro area (eurozone)  is an economic and monetary union (EMU) of 17 member nations that use the “euro” as their common currency and sole legal tender. Its members include: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain.

While  the goal of single currency originated with the European Economic Community (EEC) in 1969,  it was not until 1993 that members were legally bound to start the monetary union no later than January 1, 1999. At that point,  the euro was launched after which it  was an “accounting” currency until January 1, 2002 when euro notes and coins were issued and national currencies phased out in the eurozone.

The European Central Bank (ECB) is the central bank for the eurozone.  Governed by  its president, Mario Draghi,  and a board of the heads of national central banks, the ECB’s primary responsibility is to maintain the euro’s purchasing power and price stability within the eurozone.

The Eurosystem is the monetary authority of the eurozone comprised of the ECB and the central banks of its member states, which are charged with applying the  ECB’s  policy.

The European Commission, comprised of one commissioner from each  of the 27 member states,  represents the interests of the EU, drafts proposals for laws, and manages the day-to-day business and disbursement of funds.

European Banking Authority (EBA): Established on Jan. 1, 2011 as a regularity agency to conduct stress tests of banks in order to detect weaknesses in capital structure. It has the power to overrule national regulators if necessary to prevent unfair competitive advantages between jurisdictions. It issues a report, Common Reporting Framework (COREP) covering capital requirements regarding credit risk, market risk, operational risk, fund and capital adequacy ratios.

The European Financial Stability Facility (EFSF): created by eurozone members to safeguard financial stability in Europe. Authority includes loans to countries in need, intervention in primary and secondary markets pursuant to ECB analysis, finance recapitalizations of financial institutions. It is backed by guarantee from the eurozone members for  a total of 780 billion euros and has a lending capacity of 440 billion euros. (not considered adequate)

One euro = 1.3035 U.S. dollar (12/21)

Prominent names:  European Union  President:  Herman van Rompuy, European Central Bank President: Mario Draghi, European Commission President: Jose Manuel Barroso, German Chancellor: Angela Merkel, French President: Nicolas Sarkozy, Italy Prime Minister: Mario Monti,  EFSF President: Klaus Regling

 SEQUESTRATION – TRIGGER  SPENDING CUTS

While the SuperCommittee failed to agree on cuts, I am keeping this up FYI, since it will continue to get press coverage prior to the “trigger” in January.

Jan. 15, 2012: Date that the “trigger” leading to $1.2 trillion of future spending cuts goes into effect if   the committee’s legislation has not been enacted.

Feb. 2012: Approximate time when first $900 bn of debt ceiling runs out.

Feb./Mar.2012: Deadline for Congress to consider a resolution of disapproval for the second tranche  ($1.2 – $1.5 trillion) of debt limit increase.

Fall/Winter 2012: When additional $2.1 - $2.4 trillion of borrowing authority from this law runs out.

Jan.2, 2013: OMB orders sequestrations for defense and non-defense categories of spending necessary  to meet spending cuts required by the “trigger.”

Recent blog headlines:

Dec. 19, DJIA:  11,866  “BIG Week: Economic Reports – Watch Housing”

Dec. 20, DJIA:  11,766  “ The U.S. Economy – Last Man Standing ?”

Dec. 21, DJIA:  12,103  “ Housing Turnaround = Wealth Effect Rebound = Economic Expansion”

Dec. 22, DJIA   12,107, “Trading Range Intact

Dec. 23, DJIA  12,169  “Don’t Take the Day Off”

Dec. 27, DJIA: 12,254  “Selective Opportunities”

Dec. 28, DJIA: 12,291  “Market Attempting to Break Out of Trading Range”

Dec. 29, DJIA  12,151  “Opportunities, Even in this Muddle”

Dec.30,  DJIA  12,287  “ Strong Stocks Today = Winners Next Year

Jan. 3,    DJIA: 12,224  “Good Start, but Follow-Through Key”

Jan. 4,    DJIA: 12,397  “Buyers Expected on Any Weakness”

Jan. 5,    DJIA:12,418   “U.S. Economy Gaining Traction”

Jan.6,    DJIA: 12,415.  “Long-Term Bonds at Risk Via Euro-Meltdown/Solution –Money Out of Bonds Into Stocks

Jan.9     DJIA:  12,359  “Flight From “Safe” to “Risk” Assets BIG News of 2012 ?”

Jan.10   DJIA:  12,392  “Odds of 600 to 1,000-Point Surge in DJIA Improving”

Jan. 11  DJIA:  12,462  “Buyers on Dips”

Jan. 12  DJIA:  12,449  “Big 2012 Story: Stampede Out of Treasuries Into Stocks ?”

George  Brooks

*Bloomberg.Com

**National Journal

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The writer of  Investor’s first read, George Brooks,  is not registered as an investment advisor.  Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

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Companies

Symbol Name Price Change % Volume
EW Edwards Lifesciences Corporation 82.49 -0.86 -1.03 1,975,862

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