Investor’s first read – Brooksie’s edge before the openHere comes Europe again.
Friday, January 20, 2012 9: 19 a.m. ET
DJIA: 12,623.98 S&P 500: 1314.50
The market will tell us if it cares or not. So far, it looks like institutions are steady buyers of blue chips regardless of what happens in Europe. The only reason for not buying reasonably priced stocks would be the potential adverse impact of contagion in European bank and financial markets. Fear of that, has forced a lot of investors to buy U.S. government securities for the safety they offer even though yields are next to nothing.
Safety is the only reason to hold those securities. Remove the European contagion risk and that money will move out of bonds into stocks. I think some of this year’s buying reflects investors anticipation of that.
Negotiations between Greece and its private creditors continues as the beleaguered country faces the payment on March 20 of 14.4 euros, in order to avoid default and enable financial help from the EU and IMF. This affects only private investors, who hold 59% of Greece’s billion euro net government debt. The ECB, IMF and official creditors aren’t’ involved in the negotiations.*
According to “Bloomberg View,” Greece’s woes will continue regardless of the outcome of negotiations, its debt burden is too large. Greece would have to reduce its debt burden by 20 billion euros a year, equal to two-thirds of its spending on social programs.
European finance ministers meet Monday to address bank and sovereign debt issues in general, as well as clauses in new bond issues that would prevent certain investors from blocking restructuring. The World Economic Forum meets next Wednesday following the World Bank’s dire economic forecast for 2012. Expect the headlines next week to be dominated by “Europe.”
The only thing that HAS NOT CHANGED in this European crisis is its persistence to resurface after it appears that the imminence of a meltdown is fading. I have only touched the surface of events here, Its complexity defies reasonable conclusion regarding the outcome – solutions or contagion.
There are currently 17 eurozone nations. My “guess” is that 17 will become 16 or 15 via a “controlled” defaults. Just a guess. I do think the urgency to avert a widespread meltdown will force European leaders to employ some tough love solutions and that may come without a scary shakeout or with one, a catharsis of sorts. Just too much at stake, globally to let “uncertainty” persist at the expense of world economies
TODAY: We are going into the weekend with a Monday meeting of the European Finance Ministers and a Wednesday meeting of the World Economic Forum. Both will feature press coverage and commentary by pundits that could cast a pall on global stock markets.
Without the “European” problems, our stock markets would press upward, gaining traction as money moves in from the sidelines. It may do so even if Europe’s problems continue.
If buyers just step back for a few days to get a better handle on what comes out of next week’s meetings, the DJIA could slip back to 12,410 (S&P 500: 1289).
THE ECONOMY:
What’s important for U.S. economic indicators going forward is that they continue to show traction. Much of the stock market’s positive tone since mid-December is based on the improvement in our economy and the hope that its strength can override Europe’s bank and sovereign debt woes.
This week’s economic reports need to confirm the positive trend.
Tuesday:
- (8:30 a.m.) Empire State Manufacturing Survey of 175 manufacturing executives regarding regional business. It has been rebounding following an April to October slump.
Wednesday
- (8:30 a.m.) Producer Price Index: Has been bumping along sideways for a year. Today’s report for December showed a 0.1 percent drop at an annual rate vs. a 0.3 percent rise in November.
- (9:15 a.m.) Industrial Production. Declined in 0.2 percent in November after October surge of 0.7 percent. December’s report show a gain of 4.0 percent.
- (10 a.m.) Housing Market Index a survey concerning the economy and housing market conditions including current house sales, six months projected sales and the traffic of prospective buyers of new homes. It jumped two points in December for the third straight gain.
Thursday:
- (8:30 a.m.) Jobless Claims
- (8:30 a.m.) Consumer Price Index: Was unchanged after declining 0.1 percent in October.
- (8:30 a.m.) Housing Starts: Rebounded 9.3 percent in November, suggesting a flicker of light in this beleaguered industry.
Friday:
- (10 a.m.) Existing Home Sales: Jumped 4 percent in November though included some distortion caused by an annual revision.
CONCLUSION:
I MAY BE ALONE ON THIS, and WRONG, but there is tooo much at risk here globally for the euro-area countries NOT to develop a solution that strengthens the European Union. I sense this problem is heading at warp speed for a solution that removes the risk of a global meltdown, and that solution most likely means a reduction in euro-area members. That could mean a week of turmoil and confusion somewhat on the order of a stock market selling climax. It could also be the best buying opportunity since early March 2009. It could be devastating to long-term bond values as investors bail out and buy stocks. Then too, solutions could be agreed on that reduce the risk of meltdown without the carnage. This needs to be considered as possible, especially because too few people are seeing it happen.
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 = 1.3035 U.S. dollar (12/21)
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
SEQUESTRATION – TRIGGER SPENDING CUTS
While the SuperCommittee failed to agree on cuts, 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:
Jan. 3, DJIA: 12,224 “Good Start, but Follow-Through Key”
Jan. 4, DJIA: 12,397 “Buyers Expected on Any Weakness”
Jan. 5, DJIA:12,418 “U.S. Economy Gaining Traction”
Jan.6, DJIA: 12,415. “Long-Term Bonds at Risk Via Euro-Meltdown/Solution –Money Out of Bonds Into Stocks”
Jan.9 DJIA: 12,359 “Flight From “Safe” to “Risk” Assets BIG News of 2012?”
Jan.10 DJIA: 12,392 “Odds of 600 to 1,000-Point Surge in DJIA Improving”
Jan. 11 DJIA: 12,462 “Buyers on Dips”
Jan. 12 DJIA: 12,449 “Big 2012 Story: Stampede Out of Treasuries Into Stocks?”
Jan. 13 DJIA: 12,471 “Europe: Catharsis or Solution = Buying Opportunity”
Jan. 17 DJIA: 12,422 “Market Defying S&P Downgrade – But Rally Must Hold”
Jan. 18 DJIA: 12,482 “World Bank Forecast to Test Bull’s Resolve“
George Brooks
*Bloomberg.Com
**National Journal
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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.
