U.S. & Euro Outlook Shaping Up - Game Changers?

George Brooks |

Wall Street SignBrooksie's Daily Stock Market blog - an edge before the open

Friday, December 2, 2011    9:12 am EST

DJIA: 12,020.03    S&P 500: 1244.58

It’s really NOT all about Europe after all.

The U.S. economy is gaining traction, as evidenced by solid economic reports this week, namely the ADP Employment, the Purchasing Managers Index and Pending Home Sales, and the ISM Manufacturing Index reports, all exceeding projections.

St. Louis Fed president James Bullard announced yesterday, he doesn’t think Fed policy needs more easing at this time in light of the increasing strength of the U.S. economy.

 

The only sector that didn’t contribute was Jobless Claims, up 6,000, but they were trumped by the employment numbers and an Unemployment rate that has dropped to 8.6% from 9%.

What’s more, repeating what I said Wednesday, our economy is gaining traction without help from a key sector – housing. In fact, housing has been a huge drag on the economic recovery in terms of jobs, spending on construction materials and its drag on consumer sentiment (the wealth effect). The home is too basic to our existence, it will return.  It will be helped when buyers  realize prices have stopped coming down and start competing for targeted homes, paying up for a house because someone else is bidding. Cycles, cycles, cycles – they repeat again and again. This one is near lift off.

TODAY:  Hit ‘n run Traders  can use today’s strength to lock in  quick profits.  A technical correction, could take the DJIA down to the 11,875 (S&P 500: 1239) area, and that would be signaled by a one-day reversal today [doubtful].

Next week has all the ingredients of  a feast for  the media covering events leading up to and including the Brussels summit on   Friday December 9 – egos, acronyms, posturing, confusion, hope,  fear and paranoia all present for the spin of one’s choice.

Failure to agree on a framework to address banking and sovereign debt issues sends the  prospect for saving the euro back to Square One and  puts this week’s stock market  rally in jeopardy.  The Europeans do not have to produce a done deal, but the “Merkel/Sarkozy vs. the rest of  the world” issue needs to be resolved.  “My way or the highway” doesn’t flush here and it clearly doesn’t flush there what with a financial meltdown in the wings.

This is much too complex to boil down in a 600-word blog and the metrics change by the day, even by the hour.    Seventeen  European nations have one thing in common – the euro.  Beyond that they differ in numerous ways – lifestyle, economics, politics, mentality and history. Getting on the same page is next to impossible.

Briefly, Germany’s Chancellor Angela Merkel is holding out for more definitive action by euro-zone’s problem countries to employ  strict austerity programs  and fiscal oversight that is binding and punishes countries that violate debt and deficit  rules  before she will agree to outside help  by the European Central Bank, or ECB. Merkel believes euro-bonds would  not solve the problem, but actually worsen it, that borrowing to solve debt problems doesn’t solve anything and she has held to that position for the two years this crisis has been alternating between a simmer and a boil.

On the other hand, ECB president, Mario Draghi, believes the central bank can do more to address the crisis in return for “fiscal union.”

Earlier this week, the U.S. Federal Reserve, the ECB  and four major central banks united to lower the interest rate on dollar liquidity swap lines in an effort to reduce strained financial markets and facilitate lending to households and businesses. Euro-area finance ministers are seeking a greater role for the International Monetary Fund, or IMF.

As I see it, what is needed is a short-term fix to avoid contagion, but one that is  in lock-step with concrete steps to bring the budgets of problem countries (Portugal, Italy, Ireland, Greece Spain) in balance enough to begin reducing their ration of debt to GDP.

Before we cast Merkel as the baddie here, let’s give her credit for the fact new leadership has taken over in Greece, Italy and Spain, resulting in pledges to cut budgets.

As I said in Tuesday’s “Game’s On !” blog, When the stakes are high enough, people in power dig in their cleats and do what has to be done. We did it in 2008  and 2009 when the U.S. economy and stock market was on the brink of meltdown. Unfortunately, national leaders often wait until the late innings to solve problems.  We don’t want to see this one go into extra innings – risks are unthinkable.

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. 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 !”

Nov. 17, DJIA:  11,905,  “Time for European Leaders to Avert Contagion – European Central Bank to the Rescue ?”

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”

George  Brooks

 *Headlines 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.

 

 

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