What Happens If All That Money Parked in a "Safe" Haven Pours Into Stocks?

George Brooks |

Investor's first read    - Brooksie's edge before the open

NYSEThursday January 19, 2012    9:12 a.m. ET

DJIA: 12,575.95     S&P 500: 1308.04

“Outta my way World Bank with your dire forecast” is what the stock market said yesterday, posting a gain of 97 points in the DJIA.  The bank slashed growth rates across the globe in its “Global Economic Prospects” report.  At first, it appeared its forecast upstaged the IMF’s announcement that it is proposing an increase in its lending capacity by $500 billion to head off a global meltdown.

Not so, the IMF news was just another indication that when enough  big boys get threatened with a big enough risk, they muster to cover their butts.  While Greece may eventually experience a controlled default, and the press headlines trumpet a further deterioration in the financial condition of  some banks and  problem countries, it looks like the BIG money is looking out ahead of this mess to a time when the engines of economic growth start to hum.

As usual, they run ahead of the curve when the wall of worry is too steep for others to even try to climb.

What happens if  all that money “in hiding” moves from safe-bond-havens, which yield next to nothing,  into stocks which suddenly offer an attractive return ?

A buyers’ panic is one possibility, but I’d expect that to come later at higher prices when the “I can’t stand it anymore” mentality overwhelms sideline-sitters, prompting them to stampede into stocks (just when the BIG money starts to lock in some nifty profits).

Out of the woods – time to bet the ranch ?

Never bet the ranch  -   unless you own three of them.

Historically stocks are cheap, but  it takes money to move them. Well the  money is there, it is parked in safe instruments. All it needs is a reason to come out to play.

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.

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