ECB's cheap loans have stopped a 'serious' credit contraction, says president Mario Draghi - Telegraph
The ECB is succeeding in buying time for political officials to get a “fiscal compact” approved. However, expectations for a “mild recession” may be too rosy and remains a big risk that may critically rock the boat.
I think it’s interesting to note that we are seeing an expansionary monetary policy in the face of a contracting fiscal policy in Europe. This experiment may provide valuable clues as to whether a QE3 in the U.S. would help our economy and financial markets in the face of a recession, should one occur.
UPDATE: Now down 15+%
UPDATE 2 (12:00 am Chicago): Japanese Stock Exchange Shut down.
Merkel Felt the Heat (Click here)
I posted this a few days ago. It seems that Merkel’s political life is in danger and she’s in a terrible bind.
If Germany doesn’t approve the long-term EU bailout mechanism expected by the financial markets, you’ll be hearing more Eurozone sovereign-debt problems in the near-term (a few months).
Gut Feeling
I dunno why, but I feel like we are about to experience a big move in the markets (in 3 weeks max). My hunch is that the dollar is in a retesting phase and that this will be another medium (perhaps major) bottom.
There are way too many risks out there and complacency is just ridiculous.
“$100 oil won’t be enough to derail the recovery” is the main sentiment of investors…
The VIX plunged 10% today despite Saudi Arabia’s stock market free-falling as the Day of Rage comes up. Furthermore, just look at the VIX level now (considering a MAJOR oil producer is in danger of riots and oil delivery disruptions) versus the level it achieved when Greece was going down….this comparison bring the obvious conclusion that investors are not paying attention to the worsening situation in the Middle East.
Something to Keep An Eye On (Market Breadth)
These two charts are very interesting in that they may be showing a weakening bull market. The first chart is the Russell 2000 Advance/Decline Line. It shows that while equities have rallied to new highs, breadth has not matched the strength of the price action. The second chart is the %age of Stocks Above the 200 Day Moving Average. Same story here, recent market highs have not seen the same number of stocks showing bullish price action. These are signs of declining breadth and it’s worth watching closely to see if it corrects, or if something more nefarious is amiss.
I believe that equity markets will begin to rollover at some point this year. There are numerous headwinds and dangers that lurk in the investment waters ahead. Emerging Market inflation is beginning to become a big problem, particularly in China (another potential headwind I analyzed almost 1 year ago). The Eurozone also has its problems and they seem to be progressively getting worse. It seems that recent discussions among politicians over there haven’t ameliorated the increasingly edgy bond markets. Throw in there reduced spending from the US government (another topic I covered here), a double-dipping housing market (which is in my thesis as well), and increasing commodity prices as investors continue to poor money into raw materials due to fears of the Federal Reserve destroying the value of the dollar (think summer 2008); and you have an environment fraught with risks that are not being correctly priced into the equity market. Complacency is rampant and most analysts are expecting continued recovery and rising stock markets. What was that what Warren Buffet said?
“Be fearful when others are greedy and greedy when others are fearful.”
Charts Courtesy of freestockcharts.com
Bull/Bear Quickie
Bull:
Manufacturing ISM numbers come in strong (Chicago PMI too)…manufacturing continues to carry the US economy on the back of a weaker dollar and increasing global growth. This is translating to expanding hiring plans.
In December, consumers did their part in helping the recovery as their spending and income numbers posted healthy increases. Contrary to bears making the claim that consumers will remain cautious, they continue to surprise.
ADP and ISM employment sub-index shows that job growth is improving. Challenger Job-Cut survey shows that all in all, the firings are completed. Companies are running lean.
Bear
Geopolitics continues to be a headwind as uncertainty on how Egypt will play out (contagion effects?) has oil steadily rising. If oil and other commodities continue climbing, company profits may get squeezed as they find it more difficult to pass rising costs to consumers, or consumers buy less (in the US).
Retail sales numbers are starting to signal weakness in growth. While winter storms are cited as the reason, the real one is because we still have a weak job market and uncertainty on whether job growth will come back. Growth up to this point in the job market has remained quite weak.
Housing remains in a funk.
Perfect Example of a "Moral Hazard Bubble"
(Click on the article above)
Congratulations officials…you’ve succeeded in setting up the most dangerous investment climate ever….BRAVO!!!
This confirms my worse fears that this whole recovery in the markets is based on hope and moral hazard (ie the government will always come to the rescue). Sure the economy has been recovering, but the recovery has been extremely lackluster and is VERY vulnerable to ANY negative shock.
At this point, any time you have some government pondering the idea of withdrawing support, you’ll get this. It’s happening in the Eurozone and it’s happening here.
But guess what…it may continue…because every day the market goes up, more air is being blown into the bubble and the more painful the crash will be. Officials will do everything in their power to keep it going until there’s some sort of political event that pops the whole damn thing.
Who knows when the whole house of cards comes crashing down, but be assured that it will be riduckoulus. It may be worse than 2008.
More Reason for Caution
The Fed is signaling that QE isn’t going to be the panacea that everyone expects. They are urging more fiscal stimulus as the state of the economy can only be described as —growing, but at a pace that is far to weak to bring down unemployment and vulnerable to an exogenous shock.
While economic indicators show improvement, this article confirms my bearishness on the strength and sustainability of the recovery.
Addendum to Irish Bailout Announcement
After about an hour for the Euro to absorb the Irish bailout news, it still remains undecisive which way it wants to go (there could be a bullish inverted head and shoulders forming).
Market action this week will be very interesting as it may signal whether the bailout plan was successful in establishing confidence that the Eurozone has seen the last of its debt problems.
Contagion Alert: Eurozone
Even after the bailout, financial markets are not convinced that the whole system is sound and are applying pressure on Portugal and Spain to confirm if Eurozone officials will cover those countries as well. Merkel is standing her ground though, no more bailouts. This issue bears very close watching.
