Brooksie’s Daily Stock Market blog – an edge before the open
Tuesday, December 6, 2011 9:12 am EST
DJIA: 12,097.83 S&P 500: 1257.08
As a “discounting” mechanism, the stock market tends to adjust to known and anticipated developments.
It topped out in early May even in face of a flow of impressive earnings reports as it anticipated legislative paralysis in Congress and mounting fears of a double-dip recession, none of which were visible at the time. Over the last six days the market soared more than 9% in anticipation of a resolution of Europe’s bank and sovereign debt problems at its Dec. 9, summit in Brussels, as well as affirmation by economic reports that the U.S. recovery is intact.
Two questions bear consideration:
1-How much of a favorable outcome from the summit has the market discounted ?
2-How vulnerable is the market to an unfavorable outcome ?
A favorable outcome on top of a firming U.S. economy spells higher prices. An unfavorable outcome, solutions but not for many months, or more of the same uncertainty spells a big tumble.
A favorable outcome is almost a given, as all Hell breaks loose without it – the euro comes apart at the seams, credit ratings nosedive, the European economies plunge, and a few countries default.
Seventeen eurozone countries must get on the same page in terms of the way they run their operations. Realistically, only half of them have to, the rest can follow along. So far, the eurozone is a great idea, but flawed because countries differ in so many ways (culture, economies, governments, mentality, values, life style, politics).
Late yesterday, Standard & Poor’s credit rating agency put 15 euro nations on review for possible downgrade. Germany and France and four other eurozone countries (Luxembourg, Netherlands, Finland, Austria) may lose their AAA rating depending on the outcome of Friday’s summit meeting. Such a downgrade would affect the credit rating and interest rates on the bonds of the European, Financial Stability Facility, the EFSF, which serves as the bailout fund for financially troubled eurozone countries (ugh !)
While Germany and France are using S&P’s move as a lever to press their position for closer fiscal union within the eurozone and automatic penalties for deficit violators and establishing limits for debts within each nation’s constitution, shorter term measures will be needed to avoid big trouble, stopgap measures will be necessary to avoid big trouble.
Let’s hope S&P knows what is doing and is without an agenda.
CONCLUSION: Expect UNCERTAINTIES to mount creating a sudden increase in volatility as the direction of the stock market swings down and up depending on statements out of Europe and on Friday out of the summit. With the market currently at its six day rally highs, new buying has some risk – short-term. A pullback to DJIA 11,750 (S&P 500: 1218) would be normal.
EUROPEAN UNION/EUROZONE
The European Union, the 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, the eurozone, is an economic and monetary union, the 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, the 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, the 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.
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 = 1.3449 U.S. dollar (12/5)
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.
Timeline of eurozone crisis – this is well worth reading for perspective.
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. 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”
Dec. 2, DJIA: 12,020, “U.S. & Euro Shaping Up – Game Changers ?”
George Brooks
*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.
