Getting Close to Tectonic Shift - Pessimism to Optimism

George Brooks |

EU summitBrooksie's Daily Stock Market blog -   an edge before the open

Thursday, December 8, 2011     9:11 am EST

DJIA: 12,196.37     S&P 500: 1261.01

Stepping back and looking beyond the short-term clutter to a much bigger picture, there is a chance of a huge tectonic shift from gloom to optimism, arising from the realization global contagion is no longer imminent, that solutions are possible, even being employed, and a coiled spring of business and consumer spending is about to unwind.

Can’t happen – right ?

Wrong !

No one to my knowledge is writing about it and when sentiments are skewed that far in a direction, a change is often imminent.  Investors must be prepared, because the BIG money will see it in advance and run stocks up to the disbelief of sideline sitters whose tunnel vision blocks out acceptance of a change.

Currently, we are getting volatility, but within narrow bands, as stock prices react to hopes that the European summit will produce viable solutions to the areas bank and sovereign debt problems and fears that it will not.

If only the European “situation” would  get off Page One news and give corporate success stories and the prospect for a renewal of our economic recovery a chance is what most investors are wishing now.

Up 9% in  8 days, the market is obviously anticipating good news coming out of the summit.

What’s more, expectations run high for the ECB to unveil measures to stimulate Europe’s economy, following a quarter percentage point  cut in its benchmark interest rate to 1 percent. Other action may include:  ECB bond purchases,  along with  the loosening of collateral criteria to create access to less costly cash for lending.

That said, we cannot afford a disappointment, or even a muddled outcome from the summit that leaves the hard decisions to a future date. Such a failure would hammer stock prices short-term.

The charts look like the market wants to run, but this is a news sensitive market.

Europe’s flirtation with contagion and its Summit tomorrow to seek definitive solutions to their problems has masked one of the pillars of the stock market’s recent strength – the U.S. economy where reports regarding manufacturing, sales and employment have waved off the prospect of a recession, and in fact support a firming. Just today, Jobless Claims were  reported down 23,000 last week, a positive.

What’s more, the U.S. economy received high marks from international investors in a recent quarterly poll taken in the Bloomberg Global Poll.

As December progresses, expect those deadly New Year 2012 forecasts.

I don’t take them seriously, since I don’t think anyone can forecast that far in advance -  just too many  variables.

Next year  is a presidential election year, historically good, but not as good as a pre-election year, which so far is unchanged.

O.K., on the one hand my headline refers to a possible positive tectonic shift, but then I warn of a drop in the stock market if tomorrow’s summit fails to yield definitive action to confront Europe’s problems and employ solutions going forward.  The latter is short-term, the former is the bigger picture. There is too much at stake for the Europeans to blow this opportunity, too many big people, institutions and governments stand to lose lots of money if this problem doesn’t go away. They will get it right, hopefully, this time around.

EUROPEAN UNION/EUROZONE

The European Union, the 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, the eurozone,  is an economic and monetary union, the 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, the 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, the 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.

The European Financial Stability Facility, the 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 = 1.3449 U.S. dollar (12/5)

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.

Timeline of eurozone crisis – this is well worth reading for perspective: www.bbc.co.uk/news/business-13856580

Super Committee:    While the committee failed, 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:

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”

Nov.25,  DJIA :  11,257,  “Europe, Where Art Thou ?”

Nov. 28, DJIA:  11,231,  “Finally ! The European Leaders Act”

Nov. 29, DJIA: 11,563,   “Game’s On !”

Nov. 30, DJIA: 11,600,   “Full Court Press to Address Europe’s Problems”

Dec. 1,   DJIA: 12,020,   “New “Tradable” Trading Range DJIA Emerging”

Dec. 2,   DJIA: 12,020,   “U.S. & Euro Shaping Up – Game Changers ?”

Dec. 5,   DJIA: 12,019,   “Big European Week Spells Volatility”

Dec. 6,   DJIA: 12,097,   “Mounting Uncertainties Call for a Pullback of 200 – 300 Dow Points”

Dec. 7,   DJIA: 12,150,  “Easy Does It ! No Room For Disappointment at Euro Summit

George  Brooks

*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.

 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
FISV Fiserv Inc. 103.44 -0.19 -0.18 129,730

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