Friday, November 25, 2011 9:12 am EST
DJIA: 11,2575 S&P 500: 1161.79
Wednesday’s market accommodated my post with a big drop to DJIA 11,300 (S&P 1165) where it spent most of the day trying to stabilize. “It would have to be a big flush, I wrote,” accompanied by good news (or hint thereof) to generate a playable rally, and then only for sound sleepers with a tolerance for high risk.” Good news was not forthcoming and the market sold off in the last hour of trading.
That said, a rally can develop at any moment, but the Street needs a catalyst. It really needs to know Europe is NOT going to melt down.
Either something very positive is about to break in Europe, or leaders there have given up the fight to avoid potential contagion and are waiting to see what happens.
I do not know what the solution to Europe’s banking/sovereign debt problems is – I am not euro-savvy enough.
It’s not even an area I can find a source that appears reliable. What’s worse, the situation over there changes by the day, sometimes several times a day.
Usually, leaders of a country or countries leave no stone unturned in an effort to avoid a potential disaster with multiple meetings and desperate ploys to work out solutions. I just don’t see that here. Or, now that higher rates and the inability to raise funds have hit Germany maybe that will prompt a new attempt to head off a meltdown.
Decades of experience tell me, when conditions get ugly enough, when fear crosses the ouch point en route to the “I can’t stand it any more” point, it is time to prepare for opportunity. If we get good news out of Europe, or just good reason to expect good news (a leak), this market will rip.
Higher borrowing costs are plaguing a growing list of European countries threatening the euro itself and ensuring a slowdown in global economies, most likely ensuring a recession. Euro-denominated assets are being dumped.
The European Financial Stability Facility (EFSF) , created to safeguard financial stability in Europe, provide loans to countries in financial trouble, intervene in primary and secondary debt markets and finance recapitalizations of financial institutions through loans to banks may not have the funds to do its job.
The European Central Bank (ECB) disclaims any responsibility to intervene here, which doesn’t make sense since its role in addition to regulating money supply and controlling interest rates, it is as a lender of last resort to banks during a financial crisis.
CONCLUSION: Either we get a surprise announcement out of Europe that meaningful efforts to avert a meltdown are being taken, or the situation runs its course with uncertain consequences. Obviously, Europe is at high risk of a recession. That would adversely impact the United States.
The question is, do stock prices currently discount these negatives ? Or how much further down do stock prices have to drop to discount a European meltdown.
What’s really strange about this whole European situation, as dire as it is, why aren’t stocks in an outright free-fall ?
Super Committee: While the committee failed, I am keeping this up FYI, since it will continue to get press coverage.
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 and Congress. They blew it !
Dec. 23: Deadline for both houses to vote on committee bill – There’s none to vote on.
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”
Nov. 15, DJIA: 12,078, “European Outlook Tentative – U.S. Outlook Picking Up”
Nov. 16, DJIA: 12,096, “Europe – Surprise Us for a Change – Get the Job Done !”
Nov. 17, DJIA: 11,905, “Time for European Leaders to Avert Contagion – European Central Bank to the Rescue ?”
Nov. 18, DJIA: 11,770, “Stock Market a Coiling Spring ?”
Nov. 21, DJIA: 11,796, “Occupy Washington”
Nov. 22, DJIA: 11,547, “Uncertainty Rules – But Trader’s Opportunity Looms Wednesday Morning Early”
Nov. 23, DJIA: 11.493, “Darkness Before the Dawn ? Germany Starting to Feel the Heat “
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.