Europeans Seeking Long-Term Economic Cure

George Brooks |

Key EU meetings this week may set the tone to the MarketInvestor's first read: Brooksie's edge before the open

Monday, January 23, 2012    Written Sunday evening 6:30 p.m.

DJIA: 12,720.48    S&P 500: 1315.38

Friday’s post, “Two European Meetings Next Week to Set the Tone of the Market,” referred to today’s meeting of finance ministers in Brussels and the Wednesday meeting of the World Economic Forum.

The spirit of the meeting is best expressed by German Foreign Minister, Guido Westerwelle,  who  told Bloomberg Television, “We have to erect a firewall.. we have to show solidarity; we have to support those countries that are in serious trouble,” emphasizing, a “long-term solution is being sought.

I’m not sure what can be read between the lines here, but solidarity and a long-term solution is exactly what  global investors want to see, clearly the short-term solutions were destined to fail to gain the confidence that is needed to attract investors and spring bank lending.

If it’s any comfort, the last out of the Greek negotiations is that  progress was made over the weekend.

TODAY: I think Europe has already started to set the tone as evidenced by Friday’s market action. However, I did detect some internal weakness Friday in spite of  appearances.  While the DJIA was up 0.76% (96 points), the S&P 500 and Nasdaq were flat, a minor warning that a couple down days may be in the offing.

We are seeing buying here that does not appear to be short-term oriented or intimidated by the potential for a European meltdown.  A sideways consolidation for a week or so here would be healthy

THE  ECONOMY THIS WEEK:

This is a big week for economic indicators, because much of this year’s strength has been derived from the expectation of our economy gaining enough traction to counter the economic drag that is “expected” from a European recession.

This week’s economic reports need to confirm the positive trend.

Tuesday:

  •  ICSC Goldman Store Sales (7:45 a.m.): For theweek ending Saturday Jan. 21 covering same and comparable store sales.

Wednesday 

  • (8:30 a.m.) Producer Price Index: Has been bumping along sideways for a year. Today’s  report for December showed a 0.1 percent drop at an annual rate vs. a 0.3 percent rise in November.
  • (9:15 a.m.) Industrial Production. Declined in 0.2 percent in November after October surge of 0.7 percent. December’s report show a gain of 4.0 percent.
  • (10 a.m.) Housing Market Index a survey concerning the economy and housing market conditions including current house sales, six months projected sales and the traffic of prospective buyers of new homes. It jumped two points in December for the third straight gain.

Thursday:

  • Jobless Claims (8:30 a.m.): Initial claims fell 50,000 for the week ending Jan. 14 to 352,000 the biggest gain since Sept. 2005 when the economic expansion was in full gear. It will be interesting if this is revised downward. If not, it lends support to an acceleration in our economy.
  • Durable Goods (8:30 a.m.): New orders  jumped 3.7% in November after three months of stagnation.
  • Leading Indicators (10 a.m.):  A composite of 10 leading economic indicators. It will include majors revisions to the Conference Board’s index. Prior releases are NOT comparable hmmm!
  • New Home Sales (10 a.m.): Rose 1.6% in Nov. to an annual rate of 315,000. It has firmed up since August as mortgage rates continued to edge down.

Friday:

  • (8:30 a.m.) GDP: Q4 GDP growth is expected to show a pickup of 3% after a 1.8% increase in Q3.
  • (9:55a.m.) Consumer Sentiment: This survey of 500 households rose to 74.0 in mid-January  from 69,9 in December and 55.7 in August.

CONCLUSION:

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:

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?
Jan. 13 DJIA:  12,471   “Europe: Catharsis or Solution = Buying Opportunity
Jan. 17 DJIA: 12,422   "Market Defying S&P Downgrade – But Rally Must Hold"
Jan. 18 DJIA: 12,482    "World Bank Forecast to Test Bull’s Resolve"

George  Brooks

*Bloomberg.Com

**National Journal

Note: I will be in orthorpedic surgery today. I may not post Tuesday, but hope to post the rest of the week.

………………………………………………………………………………………………

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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