Time for European Leaders to Avoid Contagion - European Central Bank to the Rescue?

George Brooks  |

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

Thursday, November 17, 2011  9:03 am EST

DJIA:  11,905.59      S&P 500: 1236.91

Yesterday’s late-day plunge in stock prices following a warning by Fitch Ratings that unless the euro zone debt crisis is resolved  in a timely and orderly way, U.S. banks are at risk.

Extreme volatility has characterized trading for months.  Without defining it, Fitch used the word “contagion” in its assessment, and they aren’t the first to use it. I assume it refers to tumbling dominos with wide spread damage of incalculable magnitude.

This decline did some technical damage, not so much from the amount of the plunge, but from  its timing.  On Oct. 21, the stock market broke out of an 11-week, wide-swinging  trading range [consolidation] in expectation that Europe would soon resolve its bank and sovereign debt problems. A new trading range [consolidation] was established, one capable of supporting a sustainable uptrend.

However, a technical pattern that was positive is now turning negative, a “greenstick fracture” of sorts.

A further drop below DJIA 11,820  (S&P 500: 1228) would hoist a big red flag.

What is needed is meaningful and believable assurance that European leaders have the capability and political willingness to avert contagion.

That would prevent a plunge to DJIA 11,000 (S&P 500: 1150) – or worse.


Yesterday, October Industrial Production was reported to have climbed 0.7 percent  from September’s 0.1 percent drop [revised].  Today, Jobless Claims for the week ending Nov. 12 were down 5,000, bullish since the Street was expecting an increase of 5,000. While Housing Starts declined 0.3 percent, Building Permits were up 10.4 percent (!!).   The Philly Fed regional economic survey is expected to show a modest increase.

The likelihood of a recession is becoming less and less, unless Europe implodes.

Fatigue!  Every day, it is something new out of Europe, unfortunately, most of it negative, sometimes “chilling.” I feel it, I read about it, they talked about it yesterday on CNBC – fatigue.  It has come to dominate the market, much like “fear” dominates the market under adverse conditions.  The problem is, stock prices are NOT at rock bottom, so fatigue can do some damage, it only takes a trigger.

I am shocked that Europe has taken so long to address problems that have been ongoing for two years.  A good part of the problem is politics, as is the case here in the U.S..  When things can’t get worse, they usually don’t, so I expect a photo finish to solving problems here and abroad.

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THE SUPERCOMMITTEE:  7-Days to a deadline !

With a key deadline looming on November 23, the actions of the SuperCommittee will soon come to the forefront, the press has begun to hype it.

The big roadblock is increased taxes.  Reportedly, the committee is now considering a two-step process, small increases to be followed by larger ones to be debated by Congress  - hmmmmm. Now who’s kicking the American citizen down the road ?

Parts of President Obama’s “American Jobs Act” may be used as a bargaining chip.

I have been publishing the following info on the SuperCommittee for weeks in an effort to highlight its importance, because it will gain traction on Page One as Europe’ s crisis eases.

The deadline for the SuperCommittee to vote on a plan that addresses a 10-year deficit reduction of $1.5 trillion is  9 days away, and it is uncertain how much progress has been made.

Credit that to a “don’t ask, don’t tell” policy of the committee, which is designed to take the pressures of the press and lobbies out of the decision process.

But get ready, this issue will shortly hog center stage  and dominate the TV, print, and radio media,  and political blogs.

If  the “committee” reminds us after more than a month of silence just how dysfunctional it is, it will have a  negative effect on the U.S. markets.

If  it surprises us, and  demonstrates the ability to craft a balanced approach to revenue raising/deficit reduction, it could add another arrow to the  Bull’s rapidly filling quiver.

According to Huffington Post.com, Democrats have proposed a $3 trillion deficit reduction plan, including $1.3 trillion in new tax revenues; the Republicans  are proposing a $2.2 trillion plan but with no new taxes.

Failure to agree on a plan triggers autonomic cuts a year hence in domestic and military budgets. In addition to the Nov. deadline there are two other key dates.  The full Congress must vote on  the bill by Dec. 23 and the bill must be enacted into law by Jan. 15, 2012.   Have a good one !

The press will start talking about a budget  “sequestration” if  the SuperCommittee can’t agree to a bill. This is another term for automatic cuts to make up the difference between the “net” cuts that are made and the $1.3 trillion target. But “automatic cuts” are not cast in steel, Congress can (and has) altered laws to reduce the cuts as it did in 1990.**

The sticking point here is revenue raising.

Most House Republicans have signed a public pledge not to raise taxes, however a Nov. 3 Bloomberg News report noted 40 Republicans have  indicated support for revenue increases.

O.K., my point here is to alert you to yet another hurdle for investor and consumer sentiment, as we get a groundswell of debate as the proposals becomes available, or is leaked in advance of the deadlines.

What the committee does can have a huge impact.  Everyone knows deficit reduction must be achieved or there will be serious consequences to pay.

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. 21, 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”

Oct. 25, DJIA 11,913,    “Short-Term Euro-Solution Doesn’t Cut It”

Oct. 26, DJIA 11,706,    “Ball’s in Europe’s Court”

Oct. 31  DJIA 12,208,    “Buyers on Dips. Euro-Deal to Hit Some Snags

“Doomsters and Shorts Out in Force”

Nov. 2  DJIA: 11,637,     “Risk-Taker’s Buy Shaping Up”

Nov.3   DJIA: 11,836,    “Again – It’s  All About Europe”

Nov.4   DJIA: 12,044,    “Easy Does It !  Traders to Take Some Profits”

Nov. 7  DJIA: 11,983,    “SuperCommittee Will Soon Take Center Stage”

Nov. 8  DJIA: 12,068,    “Stock Market Hanging Tough – Would Love to Run…. but…”

Nov. 9  DJIA:  12,170    “Italy’s Turn to Crunch Prices, But the SuperCommittee is in the On-Deck  Circle”

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 !”


George  Brooks


**Council for Foreign Relations (www.cfr.org): “Defense Spending and the Deficit Debate”

***National Journal


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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