Market Probing for a Level that Discounts Euro-Uncertainties

George Brooks |

European Central BankBrooksie's Daily Stock Market blog  - an edge before the open

Friday, December 16, 2011     9:14 am ET

DJIA: 11,868.81      S&P 500: 1215.75

Both the DJIA and S&P 500 reversed abruptly when they hit resistance levels at DJIA 11,960 (S&P 500: 1226) and gave up most of the day’s gains that were prompted by unexpectedly good economic reports. The market will try to penetrate those resistance levels again today, but odds favor a rally failure with a sell off at the close.  Without something positive out of Europe, I think the DJIA needs to slide further to the  DJIA 11,500 (S&P 500: 1190) area near-term.  Europe still calls the shots.  However, if we get believable assurance that the eurozone can survive with its present membership or three or four fewer members, the stock market is going to rip !

With all the attention on Europe, the press has stopped beating up on the good old USA, which may account for a more upbeat consumer, ergo economy.

Both the Empire State Manufacturing Index, reflecting business in New York, northern New Jersey, and southern Connecticut and the Philly Fed report, reflecting business in southern New Jersey and Delaware posted solid gains. Jobless Claims for the week ending Dec. 10 dropped 19,000, the fewest in three years. After a 0.7 percent jump in October, Industrial Production posted a 0.2 percent drop in November, partly due to an interruption in auto supplies from flood ravaged Thailand.

All in all, the U.S. economy is not sliding into a recession as feared this summer, it is gaining traction.

Remember, the economic recovery underway since the recession ended in mid-2009 has been achieved without any contribution from a major sector – housing, home building, furnishing, maintenance, and related accessories. Generally, homebuilding accounts for 15% of GDP.  According to the Home Builders Institute, the construction of 1,000 single-family homes generates 2,248 jobs, which puts money in workers pockets that will be spent immediately. Even if a person buys  a home on the market, the economy benefits, since the seller now has money to invest or spend and the new home owner the need for furnishings, painting, remodeling, etc. What’s more, a pick up in the housing market restores confidence and the “wealth effect” as prices stabilize, even increase.

What could be more basic to the consumers’ life than housing ?  The industry has been in a depression for some four years, it is overdue to recover.

Today is Quadruple Witching Friday when all four stock-index options, futures, stock options and single stock options expire simultaneously.  The four expire on the 3rd Friday in March, June, September and December. Traditionally, it has been associated with volatility as investors on both sides of these derivatives square accounts with buys and sells. Yesterday’s rebound, following economic news that suggested a firming in the economy may have stolen some of its thunder.

December can be a wretched time of the year to trade.  Good stocks can underperform, as investors take profits before year-end. Poor performers can shine as investors  take advantage of  bargain prices that tax selling and exasperation creates.  It is a time money managers dress up portfolios for year-end reports. Then too, year-end trading can be impacted by light trading caused by Christmas and New Year’s holiday weekends. The market is closed the Monday after Christmas and New Year’s Day, taking two of the year-ends six trading days off the table.  For years, I remind myself not to expect stocks to do what is expected of them during December.

CONCLUSION: The market is probing for a level that discounts Europe’s uncertainties. I think money managers would like to be more aggressive with longer term commitments, but are wary of a worsening picture in Europe, possibly a meltdown of the euro the consequences of which are unknown.

Greece, Italy and Spain are on the ropes, overburdened with debt and facing credit downgrades and a sinking economy that won’t bail them out.

If the Street knew the answer the stock market would immediately find a level that discounts the worst case scenario. In the interim, it will probe for that level.

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 = 1.3449 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

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. 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

Dec. 8,   DJIA: 12,196,  “Getting Close to Tectonic Shift- Pessimism to Optimism.”

Dec. 9,   DJIA: 12,184,  “Good Summit – Uncertainties Linger”

Dec.12,  DJIA: 12,184,  “Summit’s Success Questioned – Market Seeks Comfort Level”

Dec.13   DJIA: 12,021,  “Money Managers Pondering Risk/Reward”

Dec.15, DJIA:  11,954   “More Consolidation Needed”

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.

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