10/4/2012 7:32 PM ET|
3 ticking time bombs of 2012
A rally into 2013 seems likely, but keep an eye on the eurozone crisis, China's slowdown and the approaching U.S. fiscal cliff.
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.
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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VIDEO ON MSN MONEY
The magic words for spending tax money like a 1st grader is call , national security. We really need to take the bull by the horns and stop this insane bahavior. Our defense budget will make this country bankrupt.
Lets introduce legislation that LIMITS the defense budget to 2 1/2 percent of Gross.Take the savings and invest all in technology and science. Osama is laughing in hell, the defense contractors are smiling at him.
I really can not understand how someone can run for President and not be required to produce atleast 10 years of Tax Returns for the public to look at. Its unfathomable to consider what a crooked President of the worlds most powerful Nation could do to the Nation and the entire planet.The **** is going to hit the fan real soon and Romney will eliminate 47% of it through his POLICIES.
I am not an analyst, but I can tell you that the stock market is way over-valued in comparison to REALITY (gee what a concept - ya think) The global and US economies are WAY WORSE than in 2000, yet people have this unwarranted exuberence that things are 'great' and 'getting better'....
Go ahead and waste your money on exhuberence.... at our own risk, It would probably be better if you pulled your head out of your 'shell of denial' and looked around.
The reason Spain isn't asking for a bailout is not just short-term politics. There is plenty of "book-cooking" going on there, and when they finally have to ask for a bailout and get a real audit, the reality will get out to the bond market. So that will shortly erase the initial "good feeling" about any bailout, because everyone will know what kind of black hole needs to be filled in there.
I expect Spain to go right down the road Greece has taken, can-kicking all the way. To be followed not too long after by Italy. Portugal is already toast. Since Spain and Italy are immense compared to Greece or Portugal, this will be much worse than Greece or a a "Grexit". France is also sliding down the same road. Expect 2013 to be the real crisis, or they might kick the can down the road to 2014 or 2015, making it worse in the process.
Why is it we in the US can't see the writing on the wall here? We're only a few years behind them in this process, if we keep up the deficits we're running.
I always enjoy your ponderings. But still I think you missed a few time bombs.
The nutjob in Iran.
But, Obummer is done. That's one less time bomb.
If Nobama gets back in, it's game over man....
Spiking taxes on the rich= massive unemployment/tanking revenue
Federal MANDATE on purchasing healthcare=discretionary spending goes away
Yea, that's really gonna stop the doom clock from ticking...
GO ROMNEY 2012!!!
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[BRIEFING.COM] The stock market finished an upbeat week on a mixed note. The S&P 500 shed less than a point, ending the week higher by 1.3%, while the Dow Jones Industrial Average (+0.1%) cemented a 1.7% advance for the week. High-beta names underperformed, which weighed on the Nasdaq Composite (-0.3%) and the Russell 2000 (-1.3%).
Equity indices displayed strength in the early going with the S&P 500 tagging the 2,019 level during the opening 30 minutes of the action. However, ... More
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