Europe - Time to Bite the Bullet

George Brooks |

Jose BarrosoBrooksie's Daily Stock Market blog  - an edge before the open

Wed, November 16, 2011      9:13 am EST

DJIA: 12,096.16       S&P 500: 1257.81

The stock market has been locked in a tight trading range [consolidation] for the last 18 days as analysts and money managers grapple with  Europe’s  capability of  reducing, hopefully solving, Its banking and sovereign debt problems.

Every day, sometimes every hour or two, brings conflicting commentary from key officials about an outcome.  Unfortunately, most of the views are negative.

Morning readers of Bloomberg.com were treated to a negative assessment by Jose Barroso, European Commission President, that the region is facing a “truly systemic crisis.” He added that “Each day that goes by the situation is getting worse…There’s unbelievably difficult decisions that lie ahead…There is no way out of the crisis without economic growth in Europe.”

Mr. Barroso, why don’t you tell us how you really feel ?

CONCLUSION:  No one to my knowledge can articulate within reason, what the impact of a  default by one or two European countries would be on corporate America. Odds favor an initial plunge in stock prices, possibly  below DJIA 10,000 (S&P 500: 1150).  But the fear of default has been with us for many months, and European leaders have taken steps to address the risks with the Oct. 27 rescue plan and changes in leadership in Greece  and Italy.

What’s more, the U.S. stock market has hung tough throughout this mess, suggesting it has discounted at least part of the risk, maybe most of it.

So one may ask, “Where could a surprise come from ?”

If a “pleasant and enormously unexpected”  surprise in the form of concrete and far reaching action  comes out of Europe to dispel the fear of an uncontrolled meltdown,  sideline sitters have a green light and the market is off and running.

Buying opportunities don’t trumpet their arrival in advance; they often come when the news having the most adverse impact on stock prices seemingly couldn’t get worse   - and of course, doesn’t !

THE SUPERCOMMITTEE:  7-Days to a deadline!

With a key deadline looming on November 23, the actions of the SuperCommittee will soon come to the forefront, the press has begun to hype it.

The big roadblock is increased taxes.  Reportedly, the committee is now considering a two-step process, small increases to be followed by larger ones to be debated by Congress  - hmmmmm. Now who’s kicking the American citizen down the road ?

Parts of President Obama’s “American Jobs Act” may be used as a bargaining chip.

I have been publishing the following info on the SuperCommittee for weeks in an effort to highlight its importance, because it will gain traction on Page One as Europe’ s crisis eases.

The deadline for the SuperCommittee to vote on a plan that addresses a 10-year deficit reduction of $1.5 trillion is  9 days away, and it is uncertain how much progress has been made.

Credit that to a “don’t ask, don’t tell” policy of the committee, which is designed to take the pressures of the press and lobbies out of the decision process.

But get ready, this issue will shortly hog center stage and dominate the TV, print, and radio media,  and political blogs.

If  the “committee” reminds us after more than a month of silence just how dysfunctional it is, it will have a negative effect on the U.S. markets.

If  it surprises us, and  demonstrates the ability to craft a balanced approach to revenue raising/deficit reduction, it could add another arrow to the Bull’s rapidly filling quiver.

According to HuffingtonPost.com, Democrats have proposed a $3 trillion deficit reduction plan, including $1.3 trillion in new tax revenues; the Republicans  are proposing a $2.2 trillion plan but with no new taxes.

Failure to agree on a plan triggers autonomic cuts a year hence in domestic and military budgets. In addition to the Nov. deadline there are two other key dates.  The full Congress must vote on  the bill by Dec. 23 and the bill must be enacted into law by Jan. 15, 2012.   Have a good one!

The press will start talking about a budget “sequestration” if  the SuperCommittee can’t agree to a bill. This is another term for automatic cuts to make up the difference between the “net” cuts that are made and the $1.3 trillion target. But “automatic cuts” are not cast in steel, Congress can (and has) altered laws to reduce the cuts as it did in 1990.**

The sticking point here is revenue raising.

Most House Republicans have signed a public pledge not to raise taxes, however a Nov. 3 Bloomberg News report noted 40 Republicans have  indicated support for revenue increases.

O.K., my point here is to alert you to yet another hurdle for investor and consumer sentiment, as we get a groundswell of debate as the proposals becomes available, or is leaked in advance of the deadlines.

What the committee does can have a huge impact.  Everyone knows deficit reduction must be achieved or there will be serious consequences to pay.

The SuperCommittee has been lost in the shuffle, upstaged by  international financial worries and the state of our economy here at home. Nevertheless, it will raise its ugly head to remind us whether our government is, or is not, dysfunctional.

12-member SuperCommittee timeline:***

Oct. 1- Dec. 31: Both houses of Congress must vote on a Balanced Budget Amendment.

Oct.: 14: Deadline for House and Senate  Standing Committees to submit recommendations.

Nov. 23: Deadline for both houses to vote on a plan with a 10-year deficit reduction  goal of $1.5 trillion

Dec. 2: Deadline for committee to submit report and legislative language to President Obama andCongress.

Dec. 23: Deadline for both houses to vote on committee bill.

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:

Oct. 21, DJIA 11,541,    “DJIA 12,000 “IF” the Europeans Can Get It Right”

Oct. 24, DJIA 11,808,    “Euro-Solution Announcement After Wednesday’s Meeting”

Oct. 25, DJIA 11,913,    “Short-Term Euro-Solution Doesn’t Cut It”

Oct. 26, DJIA 11,706,    “Ball’s in Europe’s Court”

Oct. 31  DJIA 12,208,    “Buyers on Dips. Euro-Deal to Hit Some Snags

“Doomsters and Shorts Out in Force”

Nov. 2  DJIA: 11,637,     “Risk-Taker’s Buy Shaping Up”

Nov.3   DJIA: 11,836,    “Again – It’s  All About Europe”

Nov.4   DJIA: 12,044,    “Easy Does It !  Traders to Take Some Profits”

Nov. 7  DJIA: 11,983,    “SuperCommittee Will Soon Take Center Stage”

Nov. 8  DJIA: 12,068,    “Stock Market Hanging Tough – Would Love to Run…. but…”

Nov. 9  DJIA:  12,170    “Italy’s Turn to Crunch Prices, But the SuperCommittee is in the On-Deck  Circle”

Nov. 10,  DJIA:  11,780, “ OK Greece and Italy – Cut the Crap – Decision Time !”

Nov. 11,  DJIA:  11,893, “Potential for an Upside Breakout Looms, Absent New Negatives”

Nov. 14,  DJIA:  12,053, “SuperCommittee and Economy Taking Center Stage”

Nav. 15,  DJIA:  12,078, “European Outlook Tentative – U.S. Outlook Picking Up”

George  Brooks

*Bloomberg.com

**Council for Foreign Relations (www.cfr.org): “Defense Spending and the Deficit Debate”

***National Journal

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The writer of Brooksie’s Daily Stock Market blog, 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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