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U.S. stock index futures are bouncing back in a big way on Monday.
Much as things started out on Friday, everything that has been down
of late is bouncing back. Friday's rally died. We don't expect the
same thing on Monday, but it's not altogether out of the picture
either in this crazy market.
News For Thought
Europe hits the printing presses. According to The Wall
Street Journl: "The European Union agreed on an audacious €750 billion
($955 billion) bailout plan in an effort to stanch a burgeoning sovereign
debt crisis that began in Greece but now threatens the stability of financial
markets world-wide. The money would be available to rescue euro-zone
economies that get into financial troubles. The plan would consist of
€440 billion of loans from euro-zone governments, €60 billion from an
EU emergency fund and €250 billion from the International Monetary Fund."
Iraq violence on the rise. According to The Washington Post: "Two
car explosions and a suicide bomber have killed at least 40 people outside a
textile factory, taking the day's death toll to 75, Iraq's bloodiest day of the
year so far."
Transocean (NYSE: RIG) has had more problems than just Gulf oil spill,
and they may have been ongoing for some time. According to The Wall Street
Journal: "The sinking of the Deepwater Horizon drilling rig, which triggered
the spill spewing oil into the Gulf of Mexico, caught the energy world by surprise.
The operator, Transocean Ltd., is a giant in the brave new world of drilling
for oil in deep waters far offshore. It had been honored by regulators for its
safety record. The very day of the blast on the rig, executives were aboard celebrating
its seven straight years free of serious accidents. But a Wall Street Journal
examination of Transocean's record paints a more equivocal picture. Nearly three
of every four incidents that triggered federal investigations into safety and
other problems on deepwater drilling rigs in the Gulf of Mexico since 2008 have
been on rigs operated by Transocean, according to an analysis of federal data.
Transocean defended its safety record but didn't dispute the Journal's analysis."
In fact, The Journal reported: "In addition, an industry survey of oil companies
that hired Transocean perceived a drop in its quality and performance, including
safety by some measures, compared with its peers, though it still scored tops
in one safety category." |
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Investors are in for a wild ride on Monday as the European
Commission, the Eurozone, and the International Monetary Fund (IMF) have
cobbled together a $1 trillion rescue package for the continent and stocks
rallied massively overnight.
If you were a short seller, and you went big on Friday, you're going to get hurt
today. If you've been short for a few weeks and you cover this morning, you'll
probably still have some gains, but not as many as you went out with on Friday.
That's the nature of the beast in a volatile market. If you get greedy, you get
hurt.
So, as usual, we'll try to parse through details and figure out where this thing
is going after the initial noise and hype disappears.
Europe did the only thing that they could do, agree to monetize their problems,
otherwise known as printing money. Central banks will be buying bonds from the
market, providing liquidity, and short covering and some buying will boost the
stock market, adding a note of validity, or a tangible sign or two to the proceedings.
The EU gets a win. But there will be consequences. As this thing progresses,
those who are footing the bill, the Germans, will start to make changes in their
political structure. Already this weekend, Angela Merkel's FDP party took a hit
in some regional elections as opposition to the Greek bailout, and Merkel's pace
of deciding on how to go about deciding what to do about it backfired on the
German Chancellor.
In the U.S. the Tea Party brought about its own set of political changes, both
on a regional scale, and perhaps on a national scale as Utah Republican Robert
Bennett was denied a chance for a fourth term in the Senate as a result of his
voting record. Especially working against Mr. Bennett was his vote for the U.S.
bailout after the U.S. subprime mortgage meltdown on Wall Street.
So what's really happened? Mostly, the EU is going to print money and the potential
for some kind of sustained stock rally has to be entertained. Whether the money
leads to some kind of economic recovery in Europe or not, though, is the big
question. If the U.S. is a guide, then conditions in Europe will improve, at
least some, although it could take some time to see that improvement. Then, we'll
have to parse the details of the improvement, or the recovery.
What kind of job creation came of all this money? Where did the money go? What
will the long lasting effects of this money be? And so on. Again, if the U.S.
is any guide, it's a tough call. The U.S. job market has been trying to recover,
but job growth is difficult to measure at this early stage. The Household Survey,
the part of the employment report that few people talk about has been showing
lots of new jobs.
So what is the household survey? It's that part of the employment report that
is based on questions from 60,000 U.S. households, not the employers. So the
household survey is telling us that people are perceiving themselves as being
employed. That means that if the logic holds, those people in the household survey
are not yet counted in the employer section of the jobs report, and that the
numbers in the employer section, what Wall Street pays attention to, will swell
in coming months.
What's our point? It takes a long time to figure out what's going on in the economy.
The markets are rallying big this morning on expectations of something good coming
from this huge package of money that will be deployed in Europe. But there is
no way of knowing what this package will actually do.
Chart Courtesy of StockCharts.com
Last week, on Thursday and Friday, the stock market got washed out, and were
primed for a bounce of some sort this week. The S & P 500 (SPX) fell to levels
not seen since December 2009, on the way down, and March 2010 on the way back
up from the deep February lows. In fact, the S & P 500 bounced off of its
200-day moving average on Thursday and Friday of last week, and survived, albeit
in a controversial bit of trading on Thursday when the infamous 1000 point drop
on the Dow Jones Industrial average made the headlines.
Chart Courtesy of StockCharts.com
Again, we look to the NYSE advance decline line (NYAD) as a symbol of the market's
strength last week. Stocks clearly broke down, and looked headed for more trouble.
Chart Courtesy of StockCharts.com
And the situation was worse on the Nasdaq, as the Nasdaq advance decline line
(NAAD) also showed a broken market.
Conclusion
So what do we have? We have a huge cranking up of the printing presses in Europe,
essentially joining the huge cranking up of the printing presses in the U.S.
That means easy money. And that's the kind of drug that the stock market likes.
But have we really fixed anything? Not likely, at least not in the long term.
Deficits are still on the rise, and will rise more based on the new bailout.
And the global economy will improve, but may not include as many people as during
the last up cycle.
In other words, with each successive crash, and each successive bailout/recovery,
fewer people participate. The fewer the number of people participating, the more
the difference is between the haves and the have nots. And governments are only
likely to increase the safety net, financed by the haves.
In this scenario, no one wins in the long run. In the short term, it may be time
to buy back some stocks. But it seems prudent to give Monday a chance to progress
before going too crazy on the buy side.
Know when to sell and how to make money when the market falls. Get
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