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Tradeoff: U.S. Economic Recovery vs European Contagion

Investor’s first read      - Brooksie’s edge before the openTuesday, May 29, 2012        9:15 a.m. ETDJIA:  12,454.83S&P 500:   1317.82Nasdaq Comp.: 2837.53Russell 2000: 

Investor’s first read      – Brooksie’s edge before the open

Tuesday, May 29, 2012        9:15 a.m. ET

DJIA:  12,454.83

S&P 500:   1317.82

Nasdaq Comp.: 2837.53

Russell 2000:  766.41

Looks like investors’ are faced with a tradeoff  between the prospects for a sustainable recovery in the  U.S. economy and the potential for  at least severe financial disruption  in Europe if Greece abandons the euro.

Tough call !  The resolution of  both situations are big unknowns at present.

Bulls are relying on a rebound in the U.S. housing situation, bears claiming  a Greek departure from the euro would inflict collateral damage as Spain and Portugal would then enter an era of high risk  where bailouts would be necessary or an exit from the euro likely.

I have been expecting a two-legged decline from the May 1 peak in stock prices, or depending on news flow, just a continuing slide further until the  market discounts negatives and uncertainties.

If a second leg down is to develop it will have to be after a rally and that stands to develop as a result of  several good economic reports this week and/or news out of Europe either that Greece will not exit the euro, or that European leaders have devised a plan to limit such a move’s collateral damage.

Could we hold at current levels ?

Yes, but both the European dilemma and direction of the U.S. economic recovery  must take a turn for the better.  The BIG money may be able to foresee in advance one or both of those developments happening  and jump the gun running stock prices upward as the individual investor awaits solid news.

FACEBOOK:  The bungling of Facebook (FB) IPO has created a lot of sellers. I still see 24-26, but would wait until then before considering  buying. It is symbolic of our times – a case for graduate students for decades – problem is, no one ever learns.

CONCLUSION: Obviously this is a news sensitive market, especially with respect to developments out of Europe.  There is a risk in loading up now since  a rally here could be a fake-out and followed by another leg down.

It would surprise me if European leaders have not put measures in place to reduce the severity of fallout should Greece abandon the euro. This crisis has been on-and-off for more than two years, they have NO EXCUSE WHATSOEVER for not planning for a worst case – NONE !

The “human” reaction will be to chase a rally, who wants to miss an opportunity to make money or recoup losses after a decline ?  Buyers at current levels should limit commitments to partial positions and  sit close to the exit in the event this is just a rally prior to another leg down or a test of last week’s lows.

Resistance starts at DJIA 12,695 (S&P 500: 1346).

ECONOMIC REPORTS: One of the biggest worries facing investors is the direction of the U.S. economic recovery. This is a big week for reports. The more important reports are noted here. Investors will be awaiting Thursday’s ADP Employment and Friday’s Employment Situation reports, though commentary from Fed  officials Dudley and Fisher tomorrow stand to carry weight.


S&P Case Shiller Home Price Index (9:a.m.):Rose 0.2% in March after a 0.1% drop in February. The drop was 3.5% in March vs. a year ago, an improvement  over 3.9% last month.

Consumer Confidence (10 a.m.): Declined 0.3% in April, but remains high at 69.2.


Pending Home Sales (10 a.m.); Jumped 4.1% in March confirming a rebound in this vital industry


ADP Employment Report (8:15 a.m.): April was a disappointing gain of 119,000 hires vs. 201,000 in March.

Q1 – GDP (8:30 a.m.) the second estimate for Q1, showed a gain of 2.2% vs. a gain of 3.0% in Q4. Government spend was a major contributor to the softness.

Jobless Claims (8:30): for the week May 19 declined 2,000 to 370,000  bringingt the 4-week average  to 370,000.

Chicago PMI (9:45 a.m.): The Index slowed to 56.2 in April from 62.2 in March.


Employment Situation: increased by 115,000 in April after gains of 154,000 in March and 259,000 in February.

ISM Manufacturing Index (10 a.m.): Rose 1.4% in April to 54.8. New orders were ahead to 58.2 from 54.5.

Construction Spending (10 a.m.) rebounded 0.1% in March after a drop of 1.4% in March.

George  Brooks


The writer of  Investor’s first read, 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.

Long-shot third parties are everywhere this season. That says something about Americans’ perspective on the economy.