Time bomb © RubberBall, Alamy

Frankly, I don't want to write another one of these.

I'd much prefer a normal market where what matters are fundamentals such as earnings and balance sheets. And where picking the right stocks is more important than making an educated guess on the speed of Chinese economic stimulus or when Spain will finally ask for the European Central Bank's help in driving down interest rates by buying Spanish bonds.

But a normal market -- that quaint sort in which stocks go up when a company is well run and well positioned and go down when a CEO makes boneheaded moves or a trend that was supposed to zig left instead zags right will remain a fading memory for another quarter at least -- and for much of 2013, I fear.

Since the financial crisis that began in 2007, stock prices across most of the world's markets have danced to the tune of big macro events. When it looked as if economies were headed for hard landings or entire national banking sectors were about to freeze up, a pattern of trades called "risk off" dominated. Stocks in general, but especially emerging-market and European stocks, fell. When it looked as if growth might be picking up and effective plans to support banks or deeply indebted governments were moving into place, a pattern called "risk on" dominated. Stocks rallied, with shares in the world's emerging markets leading the way.

If it sometimes seemed more important to catch the shift from risk-on to risk-off (or the other way around) than to pick the best oil, technology or banking stock, well, it seemed that way because it was.

I think the coming quarter is also going to be dominated by macro events. Stock or sector selection won't be irrelevant, but returns will be dominated by the way those big macro trends play out. So, like it or not, I think you've got to spend at least a little time at the beginning of the fourth quarter creating a timeline of macro events for the next few months and sketching out the odds that these trends will break one way or the other.

image: Jim Jubak

Jim Jubak

Let's get down to it, shall we?

3 potential time bombs

The big three macro trends haven't changed: There's still the eurozone debt crisis, the slowing of China's economy, and the twin problems of slow growth and big deficits in the United States.

Oddly enough, I'm optimistic on each of those trends. Oh, not because the underlying problems in each case will get solved this quarter, but because I think the odds are good that we'll kick the can down the road one more time for each. If that raises your hackles and increases your worries about 2013, it should. But global financial markets are likely to react positively to the illusion of a solution in each case just as they have for most of 2012.

In other words, I think the odds favor a rising stock market for the fourth quarter as a whole. Caveats on that statement later.

The euro mess, Part 1: Greece

The European debt crisis will move from full boil back to simmer in the quarter. Greece will get its next payment from the bailout fund sometime in November and be able to keep the lights on for a few more months, and the Spanish government will make a formal request for a program of bond buying by the European Central Bank in November.

A deal that gets the money flowing in Greece again won't -- let's be clear -- move that country away from another bond default/restructuring. (To me, the March haircut that lowered the value of some bonds was a default, and the next exercise in forcing bondholders to take less than the maturity value of their bonds will be a default, too. But I'm sure it will be called a "restructuring.")

In fact, such a deal will move Greece closer to the moment when the International Monetary Fund and the European Central Bank will conclude that the trend line on Greek debt -- projected to grow to 179% of the gross domestic product in 2013 -- requires another bond write-down, and this time one that includes the ECB's portfolio of Greek bonds. But that restructuring won't take place until the IMF has convinced the ECB that there's no other way. I look for a second restructuring in 2013, sometime before the anniversary of the first restructuring in March 2012.

A November cash payment and a March 2013 bond restructuring, though, will be the last shots at keeping a Greek government with the votes in parliament to keep that country in the euro. At the moment, the Greek government is clinging to office -- facing opposition from, for example, the shipyard workers storming the defense ministry demanding that they be paid for the past six months' work (The Greek government is keeping the lights on by not paying contractors for work performed for the government. The bill right now is 8 billion euros.)

When it's clear that the Greek economy is headed for another year of recession in 2014 and that the eurozone will have to throw yet more money at Greece even after a bond restructuring, I think the discussion will move to a Greek exit from the euro.

I think that's the logic for 2013. For the last quarter of 2012, though, I think the financial markets will be able to convince themselves that they see progress.

The euro mess, Part 2: Spain

Spain will look much the same to the markets in the final quarter of 2012. The bond markets continue to price in bond-buying by the European Central Bank. On Thursday, Spain sold almost 4 billion euros ($5.17 billion) in debt at yields of 4.77% for the five-year note (down from 6.46% at the last auction) and 3.28% for the two-year note (down from 5.2% in the last auction). Those big drops in yield aren't a vote of confidence in the economic policies of the government of Prime Minister Mariano Rajoy, but in the backstop plan proposed by the European Central Bank.

At some point, that plan needs to go from proposed to real. That will require a formal request for intervention by the European Stability Mechanism, the eurozone's bailout fund, and the ECB. Those institutions will impose conditions for economic reform and budget restraint on Spain in exchange for their bond buying. (Without conditions, the package will never win the required support from other eurozone governments.) The financial markets believe that a request by Rajoy is inevitable, and with that belief have been willing to give the Spanish prime minister enough slack to put off the request until after regional elections in October and November. But that's about all the time Rajoy has to maneuver.

Spain has to raise 207 billion euros (about $270 billion) in the financial markets in 2013. That's not possible without a European Central Bank backstop. I think we'll see a formal request from Spain for that bond-market support in November or December. And until the market sees that the request isn't forthcoming, it will be willing to buy Spanish debt at less than crisis interest rates.

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