The equity market is on tear today (currently up over 3%) and traders have all turned bullish. In yesterday's blurb, I noted that if European central bankers would announce some measures to stop the contagion, and we had a decent jobs #, then watch out for a solid rally to end the year.....well, today all the global central banks (Federal Reserve, Bank of England, European Central Bank, etc.) agreed to lower the pricing on liquidity swaps (eg temporary dollar loans to banks) by a half % point. What this has done is to add liquidity into the banking system in Europe by increasing the access to US dollars. What started in Europe as a solvency problem, has begun to make its way into a liquidity problem (similar to what happened during the 'credit crunch' in US in 2008). What this measure does is to add liquidity (e.g. credit) into the banking system in Europe. Then we had an outstanding ADP jobs report which blew away expectations, so now "risk is on" and the market is moving higher.
The one thing to note is that this move by the central bankers doesn't in any way solve the fact that their countries are over leveraged (eg too much debt), but it does give them more time to resolve this issue. Then, China came out and reduced its reserve requirements by 0.5%, which is a measure to loosen monetary policy (e.g. drive GDP growth).
I look for a continued rally in equities going into the year-end, with your cyclicals outperforming (eg Caterpillar, Deere, FedEx, any mining stock, e.g. 'Rio Tinto' etc.). Investors will put the European sovereign debt issue on the back-burner for now, but it will come back, I just look for it to be back on investors minds after earnings in Feb 2012. Until then, hopefully we can enjoy this rally.
Tuesday, December 6, 2011
Tues 11.29.11
One item I thought was interesting from Oppenheimer, especially after last week's blood bath.....From 1990 - 2010, the fourth quarter has produced gains on average near 5%....that nets a return higher than the cumulative return of the first, second and third quarters.....Santa Claus rally in the cards??? I think if Europe can even resemble like it won't blow up, and they announce some measures to stop the contagion, and we get a decent jobs number on Friday, look for a nice rally to end the year.....
Thurs 11.10.11
No comment today, so just my take.....First off, the market is looking green today as Italian bond yields have dropped below 7%, and investors look to take advantage of yesterday's huge sell-off. However, investors are starting to circle France, as the spread b/w French 10-year bonds and German bunds is rising to a high of 170 basis points. The higher the market prices France's bonds, the more worried investors become, thereby increasing the bond yields, eventually making higher future borrowing costs a "self-fulfilling prophecy". However, France has more levers than other European countries, including eliminating tax loopholes for businesses, and cutting spending, although this would not be viewed favorably by its citizens. But, enjoy today's rising stock market, and tomorrow Veteran's Day.
Wed 11.9.11
Kevin didn't put out a Comment today, so all you will get is my quick bantering. Today's short theme is Italy. The problem with what has happened with Italy is that to quote Ezra Klein -- it's too big to fail, and too big to save. If Italy goes, then there's no reason to save Greece. Here's Ezra Klein's quote from today's Washington Post
The problem, put simply, is that Italy is both too big to fail and too big to save. It’s the eighth-largest economy in the world. At $2 trillion, it’s about seven times as large as Greece’s $300 billion economy. France and Germany’s banks alone have $600 billion in exposure to Italian debt. But Barclay’s says Italy is “now mathematically beyond the point of no return.” Silvio Berlusconi might be out, but changing governments does not change arithmetic. And so the question is simple, and stark: If there wasn’t the will to really save Greece, where would the will -- and the money -- come from to save Italy?
Here's the Barclays Bullet Points that Ezra Referenced: 1) At this point, it seems Italy is now mathematically beyond point of no return
2) While reforms are necessary, in and of itself not be enough to prevent crisis
3) Reason? Simple math--growth and austerity not enough to offset cost of debt
4) On our ests, yields above 5.5% is inflection point where game is over (note from aw: yields are above 7% and approaching 8%)
5) The danger:high rates reinforce stability concerns, leading to higher rates
6) and deeper conviction of a self sustaining credit event and eventual default
7) We think decisions at eurozone summit is step forward but EFSF not adequate
8) Time has run out--policy reforms not sufficient to break neg mkt dynamics
9) Investors do not have the patience to wait for austerity, growth to work
The problem, put simply, is that Italy is both too big to fail and too big to save. It’s the eighth-largest economy in the world. At $2 trillion, it’s about seven times as large as Greece’s $300 billion economy. France and Germany’s banks alone have $600 billion in exposure to Italian debt. But Barclay’s says Italy is “now mathematically beyond the point of no return.” Silvio Berlusconi might be out, but changing governments does not change arithmetic. And so the question is simple, and stark: If there wasn’t the will to really save Greece, where would the will -- and the money -- come from to save Italy?
Here's the Barclays Bullet Points that Ezra Referenced: 1) At this point, it seems Italy is now mathematically beyond point of no return
2) While reforms are necessary, in and of itself not be enough to prevent crisis
3) Reason? Simple math--growth and austerity not enough to offset cost of debt
4) On our ests, yields above 5.5% is inflection point where game is over (note from aw: yields are above 7% and approaching 8%)
5) The danger:high rates reinforce stability concerns, leading to higher rates
6) and deeper conviction of a self sustaining credit event and eventual default
7) We think decisions at eurozone summit is step forward but EFSF not adequate
8) Time has run out--policy reforms not sufficient to break neg mkt dynamics
9) Investors do not have the patience to wait for austerity, growth to work
Tues 11.8.11
Just a short note from Kevin today. As everyone starts to really question if we could have contagion in the Euro, and some investors are pointing out that China could come to their rescue, since so much of China's GDP is from exports to Europe.
Although China is on track to become the largest economic power in the next 30-50 years, The one thing that I want to point out this morning is that they are still a very poor country, as noted by their GDP per capita. Their total GDP is higher, but when you consider how low their GDP per capita is compared to other countries, it really drives the point that China is not really at a point where they can bail out the Euro.
Although China is on track to become the largest economic power in the next 30-50 years, The one thing that I want to point out this morning is that they are still a very poor country, as noted by their GDP per capita. Their total GDP is higher, but when you consider how low their GDP per capita is compared to other countries, it really drives the point that China is not really at a point where they can bail out the Euro.
Mon 11.7.11
Sorry, the comment is a little late. Kevin once again focuses on the one economic statistic that everyone should focus on....in the US 2/3 or 66% of our economic activity is based on consumer spending. This is unlike any other country in the world. This slide illustrates that the US's GDP is based on consumer spending considerably more than on exports. Look at the next to last on the bottom left hand slide, you see Hong Kong / China which rely almost entirely on exports for their GDP. This is why China doesn't want to reset the yuan, yet, b/c although they are growing at a rapid pace, they still are a younger economic country that relies on a cheap currency to export goods. If the US would focus on strengthening the dollar, we would see a tangible decline in commodity prices, including food and oil/gas (even with China's appetite for these items). If the price of commodities decline, then consumers will have more $ in their pockets and presumably will go out and spend it on other items.....resulting in higher economic growth and ultimately jobs
Source: Wolfe Trahan
Source: Wolfe Trahan
Monday, October 31, 2011
Mon 10.31.11
Saw this from Oppenheimer that puts into perspective how much of a rally that October experienced. Even with today's sell-off, it would put this month as one of the best months ever.
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