With the euro still in crisis and the US economy stalling, we're simply stuck. Deteriorating fundamentals make it hard to bet that stocks will move up, and money printing makes it tough to predict they'll fall.
June ended with a flurry of news and volatile market action driven by corporate earnings and fallout from the European summit. On the earnings front, in a harbinger of the upcoming earnings season, both Nike (NKE) and Ford Motor (F) reported disappointing results from a lack of strength in the world economy. Research In Motion (RIMM) also blew up, but that was more of a company-specific problem, though the sorry state of the world didn't help it any.
Once again, RIM demonstrated the danger of bottom-fishing for companies to short in what appear to be cheap tech stocks. There is a lot more to it than just looking at the financial statements.
As for the European summit that ended June 29, it would appear -- though once again the devil is in the details -- that banks are now going to be allowed to borrow directly from the European Stability Mechanism. That may not start until December, after bank supervision structures are put in place.
Despite the latest deal, the European Central Bank remains unwilling to pump out cash as readily as its counterparts elsewhere. And that's the only real way to save the euro.
Hopes were no doubt running high this week that somehow a solution to the euro crisis would be found at the European summit, which began Thursday. Unfortunately, however, that was always extremely unlikely, as I'm sure anyone who thought about it could see.
In fact, world markets rallied Friday on headlines about a deal that includes letting European banks borrow from the European Stability Mechanism, a rescue fund. Details were sketchy, as usual, but a deal in and of itself will not provide much relief.
We need to be clear about what separates the European Union from everyone else and, though I have discussed this ad nauseam, I think it is worth repeating: The problem the Europeans face is the fact that the individual countries, and the European Central Bank collectively, are unwilling to use the printing press with reckless abandon.
The only way is the wrong way
That does not mean they aren't printing already, because they are: Witness the balance sheet of the ECB, which is now more than $3 trillion. Rather, the stumbling block is that the ECB doesn't stand ready to print money in unlimited quantities as the "winners" of the monetary world are, i.e., the U.S., Japan, Switzerland, the U.K., etc.
This week's Fed circus tells us mainly that the Fed is wrong again. But Europe may have found a way to keep the euro solvent (for now).
This week, all eyes were on what the Federal Open Market Committee and Federal Reserve Chairman Ben Bernanke might come up with on Wednesday to make everybody happy.
But, in an interesting wrinkle, European debt markets that day saw their own variation of Operation Twist, in that Italian, Spanish, and Portuguese debt rallied, while Germany's was sold.
The reason seems to be that, behind the scenes, Germany has decided to let the European Financial Stability Facility lend directly to the PIIGS, those problem nations of Portugal, Ireland, Italy, Greece and Spain. I say "seems" because that is the current back story, though Germany is still officially denying it (at least through midweek -- more on that below).
Obviously, we will have to see what happens. But if Germany has, in fact, caved on the issue, the European Central Bank will still be required to provide a giant amount of stimulus to make the whole system run. If those two things occur, then Europe will have effectively created a Federal Reserve of its own, and it will probably be able to kick the can down the road a ways.
The European Monetary Union seems unable to get ahead of the region's problems, putting stress on markets worldwide even as the endgame approaches.
A lot of last week's market action, particularly in European markets, seemed to be largely maneuvering at the margins, as I imagine folks felt the need to jigger their positions in front of Sunday's election in Greece.
Not that any such maneuvering would have been constructive. But suffice to say, the endgame is rapidly approaching for all of the PIIGS, those troubled nations of Portugal, Italy, Ireland, Greece and Spain.
There were more signs of that on Wednesday and Thursday, as the collapse of European sovereign debt markets accelerated, with yields on Spanish debt rising more than 40 basis points to 6.85%. Likewise, Italy's rose about 25 basis points to as high as 6.25% (before both markets rallied a bit). In addition, France saw its rates rise 17 basis points to 2.70%, while Germany's rose 12 basis points to 1.40% (these last two are noteworthy only because of the resulting percentage declines in bond prices).
The pressure is building on central banks worldwide to do the one thing they think works: print money. Expect to see QE3 bond-buying from the Fed, and similar moves in Europe, very soon.
By now everyone reading this knows that this week's nonfarm payroll report was a huge bust, with just 69,000 jobs created, versus expectations of 150,000. In addition, the report's innards were all weak. That extended the string of weak data that we have been seeing, and there is more to come.
As I have been saying for some time now, the seasonal adjustments didn't adequately capture the warm weather this winter, and therefore made the data appear better than they actually were. (There's no point in going into a lot of detail here, as I went on an extended rant on this topic, and others closely related to it, about a month ago in "Investors, it's time to face the truth.")
The region's debt markets are caught in a game of chicken in which the central bankers can either speed up the presses or lose the euro. In the end, it will solve nothing.
After some time on the back burner, European angst has worked its way back into the headlines and market price tickers, led once again by a deterioration of confidence in Italian and Spanish debt. Both were roughed up midweek for roughly 20 basis points apiece.
That left Spain's 10-year bonds yielding 6.60% and Italy's 5.90%, high numbers signaling that no one wants to touch them.
Recently it looked as if gold was set to bottom and might turn around soon. The turn may be here already. Also: What caused Facebook's face plant?
I rarely revisit a topic so soon after I write about it, but given how much time I spend focused on precious metals, the trading in that sector over the past handful of sessions seems to be calling for me to make an exception.
In my May 18 column, "Gold's fortunes will turn around soon," I discussed the recent correction in gold and gold mining stocks, concluding, "At some point the stage will be set (if it isn't already) for an unbelievably explosive rally to the upside in metals. I think, given how stretched everything has become, that day is close, but that could mean a matter of weeks or it could be a few days."
The metal is near record levels of negative sentiment. We can't know exactly when things will turn around, but we can get ready.
I would like to devote this week's column to the metals and miners in an attempt to put the recent nasty correction in perspective, as best as I am able.
First of all, I don't really think that the decline in gold prices or the miners' stocks reflects those markets "discounting" any particular event or outcome. That is, I don't think the decline is telling us that those markets are expecting some negative development in the future. Rather, there has been an overall lack of interest (demand), and the decline has fed on itself.
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ABOUT BILL FLECKENSTEIN
This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.
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As the devil-may-care bravado of Wall Street marches on, history warns that -- in the end -- there will be the devil to pay.
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