Financials will be a huge indicator of market direction. Unfortunately, as of now, upside will be limited.
5 reasons the crisis isnât over By Brett Arends | MarketWatch â 16 hours ago BOSTON (MarketWatch) â Boom! Stock markets around the world soared yesterday. The Dow jumped more than 300 points. News out of Europe says theyâre working on a fix to resolve the crisis there. Reports here say the holiday season may be off to a strong start. Sales on âBlack Fridayâ may have hit a record. So, is that it? Is the crisis over? Is it time to ramp up your equity exposure, take on more risk? Heavens. Anything can happen. And, OK, there are stocks out there that look pretty decent value. But here are ten reasons to be skeptical. This so looks like a dead cat bounce. 1. The market was due a rally. The Standard & Poorâs 500 index (SNP:^GSPC - News) had fallen seven days in a row. But equity markets never fall in a straight line. After a long run of down days, people whoâve been betting against stocks by selling short get tempted to lock in some of their profits by buying stocks back. Others who want to buy stocks see sharp falls and get tempted to âbargain hunt.â This inevitably produces quick, sharp rallies. This one may last a day, a week, a month or more. That doesnât mean a thing about long-term trends. 2. The report from Italy, one of the items sparking bullish sentiment, has already proven a crock. A news report there over the weekend said the International Monetary Fund was working on plans to step into the European debt crisis with a gigantic $600 billion bailout. The report has been dismissed, on the record, by an IMF spokesman. 3. The reports from northern Europe are absurd. Markets are excited by reports that Germany, France and Brussels are working on a new âbailoutâ plan. But look at the details! Under the proposals, the European Union will help insure the debts of countries in crisis, but in return it will be given veto powers over the budgets of the countries in question. This idea canât survive 10 seconds of serious thought. The Greeks are rioting over budget cuts proposed by their own governments. What possible chance is there that they â or the Italians, or the Spanish â would accept austerity measures imposed by Brussels? 4. Are the Germans suddenly reflationists? The only politically feasible way out of the European crisis is to turn on the printing presses. That either means letting the European Central Bank print more euros, or letting countries like Greece drop out of the euro, so they can print their own currencies. But so far neither is on the agenda. Germany wonât let the ECB print. And countries arenât ready to drop out of the single currency. Until one of these happens, there will be no resolution to the crisis. 5. Italy is still in trouble. Gross government debts are 120% of gross domestic product, and even net of intra-government liabilities they are 100%. Ken Rogoff and Carmen Reinhart, in their sweeping history of financial crises, This Time Is Different, found that 100% was the âtipping pointâ for serious trouble. No wonder investors are demanding 7.5% annual interest to lend money to Italy for five years â compared to just 1.3% for Germany. And theyâre demanding more than 6% to lend to Spain.
S&P's Scott Bugie says the ECB's â¬489B liquidity infusion Wednesday was just that - liquidity, not solvency, and by itself will not prevent threatened ratings downgrades of the EU's banks. "It's kicking the can a long way down the road rather than just a little bit, but in the end it is still kicking the big old can down the road." Did I say 2011? I think I meant 2012, or maybe it was 2013? I forget.
Fed reducing swap lines and ECB doing 3 yr LTRO is basically supported the market. If they had not done that the EURIBOR would have collapsed even further and basically froze credit and a bank run would have began and the system would have crashed. But the Fed and ECB again saved the day with liquidity measures to prevent a run on soverign banks that was very iminent. If you look at 3 month swaps they hit a low of -142 and during the first fall of 2008 we hit -135 then went to -180 and -200 as credit was frozen. So by comparaing Aug 2011 to Fall of 2008, we were in a very serious situation and if the Fed and ECB didn't step in with liquidity the markets would have toppled and the spreads would have blown out wider than the Rio de la Plata river. (Widest river in the world) Which just shows that the bond market is artifical as well as the stock market. Its insane how much intervention is continually done so that the markets don't end up in free fall. You get rid of central banks and have no liquidity it will be may 6th 2010 very quickly.