Actionable insights straight to your inbox

Equities logo

Flight From “Safe” to “Risk” Assets BIG News of 2012?

Investor's First Read: Brooksie's edge before the openMonday, January 9, 2012        9:12 a.m.  ETDJIA: 12,359.92       S&P 500: 1277.81Given the right developments, money could

Investor’s First Read: Brooksie’s edge before the open

Monday, January 9, 2012        9:12 a.m.  ET

DJIA: 12,359.92       S&P 500: 1277.81

Given the right developments, money could flee out of “safe” investments  into “risk” investments.

A catharsis to the euro-problem or controlled solution could remove the need to hide out in treasuries yielding next to nothing and pour into attractively valued equities.

Such a move would bump interest rates up a smidge, creating losses in long-term bond values. It is a long shot given the seriousness of Europe’s banking and sovereign debt issues, but it must be considered as possible. What needs to happen to make it work is the reduction of the “meltdown” risk. Tough love solutions, selective and substantial losses for some, but no meltdown.  If it happens, bonds drop and stocks explode.

Clearly, investors in mutual funds don’t agree with this theory.  Last year, investors withdrew an estimated $132 billion for mutual funds investing in U.S. equities. Driving their exodus was fears of a European meltdown and dismay for Congresses  threats of  default by not raising the nation’s debt ceiling. This is a “contrary investor’s” dream, a situation where a consensus decides to move en mass to one side of the equation. If they have done all their selling,what could their next move be but to buy ?

Short-term, it looks like the January Early Warning indicator (market action first five days of year) will signal a January gain, per the January Barometer,* which bodes well for the tone of the market for the year.

Sequestration’s trigger for automatic spending cuts as a result of the SuperCommittee’s inability to agree to cuts  will grab news headlines between now and Jan. 15. At that point, cuts of  $1.2 trillion  will be set to go into effect Jan. 2, 2013.  However, both Congress and President Obama have the ability to amend the  sequestration process, so debate about the size and nature of the cuts at this time are premature.

Alcoa (AA) will report earnings after the close, kicking off  the season for Q4 earnings. A slowing European economy (50% of AA revenues) and lower aluminum prices  caused analysts to project a loss of $0.01 a share vs. projections a month ago of a gain of $0.07.   Alcoa is down from an April 2011 high of 18.47

Slower earnings growth can be expected for many companies this year. For one, the U.S. economy’s growth slowed last year, for another, with a jump in earnings following the recession, year ago earnings will get tougher to beat by as wide a  margin going forward as when they were going up against recession-depressed earnings.

So far, the market as a whole is not reflecting concern for a generally slower earnings growth, in particular Q4 earnings.


After last week’s upbeat economic  reports, we get a breather. Comments arising from the Beige Book release may have some impact. Jobless Claims are important in the current cycle to confirm or raise doubts of an economic expansion. Consumer Sentiment reflects the mood of the consumer.

Monday (3 p.m.) Consumer Credit. A 2.8% jump in November auto sales stands to bump non-revolving credit higher.

Tuesday:  Wholesale Trade (10 a.m.) Indicates sales and inventories held by merchant wholesalers.


   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.”

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.


   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.

   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%.

   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.


   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.

Looks like the Merkel/Sarkozy euro-duo is at it again. This


Germany’s Chancellor Angela Merkel and France’s President Nicolas Sarkozy met today to hammer out some details  related  to Dec. 9 summit.  The two will sponsor new guidelines by March. The meeting will be followed by discussions between  euro-area leaders pursuant to a Jan. 30 summit.

“Europe is slowly but surely mastering the debt crisis, even if a solution has taken longer than we hoped for,” EU President Herman Van Rompuy says, adding “We often acted a bit late and our decisions were often a bit too weak.”**

All of this suggests a increased effort to head off the demise of the euro and rightly so.

The numbers are not good for Greece, warns IMF’s  chief economist, Oliver Blanchard told CNBC, “There’ll have to be substantial haircuts.”**

I have referred to a “catharsis” of the euro-area’s problems. The situation is dire enough for a shakeout, and it appears Greece could be part of it.

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 reduces the risk of meltdown without the carnage. This needs to be considered as possible, especially because no one to my knowledge is seeing it happen.


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


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


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

George  Brooks


*Stock Trader’s Almanac:  The January Barometer was developed by Yale Hirsch in 1972 four years after he began publishing the Almanac in 1968. He and son Jeffrey publish it today. (Must buy – loaded with info that will help make money and preserve capital. –

**Bloomberg News

***National Journal


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.

The Fed model compares the return profile of stocks and US government bonds.