If you remember, a month or so ago, when they announced the 50% haircut on European debt, I noted that there would be some unintended consequences if they did not consider this haircut a "credit event", which would have triggered credit default swaps. Well, the ISDA ruled this was not a "credit event" because it was "voluntary" (sort of like someone holding a gun to your head, then asking you to voluntarily give them your wallet). Now the unintended consequences are beginning to materialize as investors are asking for a much higher return from European countries, as they can't "hedge" their position with credit default swaps. This is across the board, at both the stronger countries (Germany, Belgium) and the weaker countries (Spain, Italy).
Also, I want to point out that with yesterday's announcement from S&P that they were putting Eurozone countries on credit watch, this could mean big problems for Euro banks which are far larger (assets as a % of GDP) then American banks. Cutting the countries sovereign ratings will increase bank funding costs, at a time when people are already nervous of the safety and soundness of these banks in Europe. Once again, starting to play out like it did in 2008 in US...
Here's a quick snapshot of Wall Street's S&P 500 2012 target. Once again, the analysts are bullish, and all of them believe if Europe can have a moderate downturn that we could see some real price improvement next year. Couple of things to note.....1st point, there isn't that much disparity in the operating EPS from the analysts, but the biggest factor in the 2012 target is the forward P/E multiple they place on the earnings. For instance, BASML has a lower operating EPS than GS, but their price target is 100 points higher. My 2nd point is that although this isn't reflected in the chart, this is each analysts base forecast, but when you look at their bearish estimates, S&P target moves down to 900 - 950 for almost all of the ones that provided this detail. So, once again, as long as the US can keep chugging along, Europe can get its act together and China doesn't have a "hard landing", we could see 3 straight years of price appreciation (assuming we end this year in the black).
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