Tuesday, October 25, 2011 9:16 am EDT
DJIA: 11,913.62 S&P 500: 1254.19
As I see it, three things can come out of Wednesday’s summit meeting of European leaders, central bankers and finance ministers – two of them are bad.
The Europeans can agree to tough measures with a long-lasting impact, which is what is needed, or they can settle for measures that buy time (until the next crisis), or they can fail to agree.
With the S&P 500 index ahead 14% since October 3, mostly in anticipation of a European accord on these issues, there is no room here for disappointment. Some traders can be expected to sell into the news no matter how good it is.
Until recently, two negatives have prevented a sustained move up in the stock market. Obviously, the uncertainty of the European banking and sovereign debt crisis and its potential for a crippling international domino affect have dominated investor sentiments.
The risk of a double-dip recession has been the other roadblock. But economic reports suggest a more slowing, not a plunge. Without a catastrophe in European financial circles, it looks like a recession here will be avoided.
As I noted Friday, economic and job recoveries are a product of the economic crunch that preceded them. Since the 2007 – 2009 Great Recession and accompanying bear market were the worst since the 1930s, it stands to reason, a recovery in the economy and jobs will take more time than the Street is accustomed to looking at recoveries over the last 50 years.
The hot topics for debate tomorrow are too complex to even summarize here. Worth noting however is the fact that German Chancellor Angela Merkel must gain support from her lawmakers in the Bundestag for increasing the euro bailout fund prior to Wednesday’s summit meeting.
Yet to be resolved is the size of the discount that must be applied to Greek bonds, which over the objections of the banking community will probably work out to 50% - 60%. The financial situation in Greece is becoming more and more dire, and it is imperative that default by Greece be avoided, since it could set off a chain reaction in Spain, Italy and elsewhere. Wednesday’s meeting will be the 14th crisis summit meeting in 21 months.
CONCLUSION: The potential exists for both of these negatives to recede, yielding to another leg up in the bull market that started in March of 2009, but has been in a consolidation since May.
Corporations in general are reasonably liquid and profitable and their stocks are really the only alternative an investor has seeking the potential for a return. I think money managers entrusted with investible funds will opt for stocks, which suggests buyers on dips and going forward as the economic recovery gains traction.
Disappointment out of the Wednesday’s European meeting will hammer stock prices taking the DJIA down to at least 11,250 (S&P 500: 1190), lower if more bad news follows. The only constant here is volatility, however I do think we are closing in on OPPORTUNITY.
The SuperCommittee has been lost in the shuffle, upstaged by international financial worries and the state of our economy here at home. Nevertheless, it will raise its ugly head to remind us whether our government is, or is not, dysfunctional.
12-member SuperCommittee timeline:*
Oct. 1- Dec. 31: Both houses of Congress must vote on a Balanced Budget Amendment.
Oct.: 14: Deadline for House and Senate Standing Committees to submit recommendations.
Nov. 23: Deadline for both houses to vote on a plan with a 10-year deficit reduction goal of $1.5 trillion Dec. 2: Deadline for committee to submit report and legislative language to President Obama andCongress.
Dec. 23: Deadline for both houses to vote on committee bill.
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:
Oct. 3, DJIA: 10,913, “Almost Ugly Enough for a Buying Juncture”
Oct. 4, DJIA: 10,654, “ Marching to Europe’s Drumbeat – October Opportunity Looming”
Oct. 5, DJIA: 10,808, “ News Whipsaw Becoming Problem for Bottom Watchers”
Oct. 6, DJIA: 10,939, “Rally Entering Area of Resistance. Euro-Rally a Fake out”
Oct. 7, DJIA 10,939 , “Traders’ Sell – Investors - Defer Purchase”
Oct. 10, DJIA: 11,103, “Euro-Fog Lifting – Street Looks to Q3 Earnings”
Oct. 11, DJIA: 11,433, “Easy Does It – Market Needs BIG Buying to Advance From Here”
Oct. 12, DJIA: 11,416, “Looking Beyond This Mess”
Oct. 13, DJIA: 11,518, “180-Degree Change in Expectations – No Room for Surprises”
Oct. 14, DJIA: 11,478, “Europe Still the Key – Q3 Earnings Run a Close Second”
Oct. 17, DJIA: 11,644, “Snags En Route to Euro-Solution to be Expected”
Oct. 18, DJIA: 11,392, “Test of the October 4 Rally’s Strength”
Oct. 19, DJIA: 11,577, “Best Six Months Looms, But Volatility to Continue”
Oct. 20, DJIA: 11,504, “All Eyes on Euro-Summit this Weekend”
Oct. 24, DJIA 11,541, “DJIA 12,000 “IF” the Europeans Can Get It Right”
Oct. 24, DJIA 11,808, “Euro-Solution Announcement After Wednesday’s Meeting”
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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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