Volatility Likely Prior to European Summit

George Brooks |

Merkel SarkozyBrooksie's Daily Stock Market blog: An edge before the open

Monday, December 5, 2011     9:08 am EST

DJIA: 12,019.42     S&P 500: 1244.28

Looks like the week of the December 9  European summit meeting is off to a good start, thanks to a proposal today by Italy’s Prime Minister, Mario Monti, for its reduction of debt.  But the DJIA is up 1,000 points (8.9%) in 5-days in anticipation of  the Europeans solving its problems at this summit and avoiding the dissolution of the euro as a currency.  Do not be surprised if volatility sets in this week if doubt surfaces either that problems don’t have a solution or that a solution will take many months.

German Chancellor Angela Merkel and French President Nicolas Sarkozy meet in Paris today to discuss their plan of attack, which generally presses for enforceable fiscal responsibility by troubled member nations. U.S. Treasury Secretary  Timothy Geithner will arrive in Frankfurt to press for more aggressive action and prior to the European Central Bank meeting on December 8.

Most likely the doomsters are in a  short squeeze and will do everything they can to create doubts about the summit’s outcome. What’s more, this is a media’s dream, so stories and speculation will fly hot and heavy.

So, going into the week, investors are expecting great things, which means anything negative, if only a statement by one of the big hitters, could trigger a sharp drop. Personally, I think a lot more good will come out of this summit than bad. Too much is at stake. Saving the euro would cost far less than its dissolution.

My point here is that the big surge discounted a lot of the good news, making new buying in stocks that have had a good run, a little risky short-to-intermediate-term.

Nevertheless, the big picture is shaping up, especially insofar as the U.S. economy is concerned.

Again, keep in mind, recoveries following severe recessions, take longer than ones occurring after more moderate recessions. Obviously, this one is challenged since the 2007-2009 debacle nearly sank our ship.

One other point which I will mention for the third time. Our economy is recovering without any help from a vital component- housing.  Both house prices and mortgage rates at incredibly attractive levels, it stands to reason, this area is getting very close to having a very positive impact on our economy – AND EMPLOYMENT.  Yes, close to 9% of our workforce is un-or under-employed, but 90% IS, and they both need and want to live in a home.  Obviously some will sell faster than others, but, relatively speaking, we should be getting very close to a “sellers’ market.”

CONCLUSION: Support is DJIA 12750 (S&P 500: 1218). The upside in the next few days is limited due to uncertainties surrounding the outcome of the summit and news coverage of heated debate. I expect a pullback to support tomorrow or Wednesday. We have 17 member nations attempting to get on the same page – not easy, never has been. There is a possibility  it will take another meeting, maybe several, before anything definitive is agreed on. That would prompt some aggressive selling down below DJIA11,400 (S&P 500: 1180).

 

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, or 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.

The European Financial Stability Facility [EFSF]: created by eurozone members to safeguard financial stability in Europe. Authority includes loand to countries in need, intervene 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 of780 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,

 

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”

Dec. 2,   DJIA: 12,020,   “U.S. & Euro Shaping Up – Game Changers ?”

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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