Brooksie’s Daily Stock Market blog – an edge before the open
Tuesday, December 13, 2011 9:16 am ET
DJIA: 12,021.39 S&P 500: 1236.47
Let’s add a little confusion to uncertainty here as investment professionals sift through the trade-offs of owning or disowning U.S. stocks.
Yesterday, the driver of stock prices was disappointment that the Europeans did not do enough to head off the demise of the euro, and the result – another recession abroad, one that could cross the Atlantic to our shores. The rating agencies, Moody’s and Fitch have demonstrated their disappointment with threats of downgrades for eurozone nations’ credit.
Today, early trading is a smidge more upbeat after fiscally strapped Spain sold more debt at auction than expected and investor confidence in Germany jumped unexpectedly. What’s more, the European Financial Stability Facility (EFSF) sold 1.97 billion euros of 91-day bills at an average yield of 0.2222 percent. Bids were more than 3 times greater than the amount sold. At 6:34 New York time, the euro was ahead to $1.3219 after dropping to $1.3161, the lowest since October 4.*
The Federal Open Market Committee (FOMC) meets today with an announcement expected at 2:15. No change in policy is expected today, though it may allude to a change next year suggesting the economic recovery is back on track. The FOMC is the policy-making arm of the Fed. In addition to setting the interest rate on federal funds, it decides whether to add or subtract liquidity in the credit markets to spur or cool off economic activity.
November Retail Sales were up 0.2 percent vs. up 0.6 percent in October, not bad, but not overly bullish. QE3 is less and less likely.
CONCLUSION: It looks like money managers are still crunching numbers after last week’s European summit meeting. Initially, the sentiment was negative – that not enough was done at the summit to address bank and sovereign debt problems among eurozone nations and, of course, the angst that Moody’s and Fitch rating agencies will lower the boom on eurozone nations’ credit.
So, does a money manager sit on cash until these issues are resolved, a problem that is already more than two years old ?
Was enough done Friday to head off a meltdown, or was enough of a framework established to enable the Europeans to quickly respond in the event a meltdown appeared imminent ?
This question MUST be answered before we can expect a surge of buying. Trading rallies, “Yes,” but a sustained move up, “No.” That does not preclude, the BIG money or well-informed money from knowing something the rest us don’t know. They may know more about what the European Central Bank (ECB) is able to do to prevent the demise of the euro than most investors. Clearly, saving the euro would be less costly than its dissolution.
I just don’t think the Europeans are so inept that they would let everything collapse.
Today’s rally will encounter resistance at DJIA 12,100 (S&P 500: 1247). While the market held at yesterday’s support levels, I am not convinced the market has found a “comfort level” yet and see the risk of a drop to DJIA 11,735 (S&P 500: 1210) by Friday.
That’s not because I am bearish, I just sense the money managers need time to think this through.
TAKE A EURO-MELTDOWN out of the picture and the stock market stands to rip on the upside.
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”
George Brooks
*Bloomberg.com
**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.
