It's been just over a week since the euphoria over Euro fix 19.0 came to light, but as we awake Spanish yields are back over 7% and Italian yields are over 6% – the same levels they were at before "the breakthrough" a week ago Thursday night. Since zombies have become so popular in our culture, one can parallel the European mess to these creatures of the night – it just cannot be killed. That said, the market recognizes each time push comes to shove, Germany relents – the main trick is figuring out which periods the market is calmed by this, and which periods the market forgets that. Of course each "solution" thus far has been little more than papering over the structural issues, but at some point the end game comes.
Meanwhile, the drama in Europe has distracted some from the fact global growth is slowing dramatically. China joined the central bank cutting party last Thursday, riding shotgun with the Bank of England and the ECB – signaling to some to expect some poor economic data out of the country this week. Overnight Chinese inflation was released at a paltry 2.2% (the lowest in about 2.5 years) – of course you can believe what you wish about the real number, [Sep 13, 2010: BW - What's China's Real Inflation Rate? (What's China's Real Anything?)] [Nov 12, 2010: Even China Accuses China of Fibbing About Inflation] but the weakness in commodities through much of 2012 signals China has slowed significantly. "Reported" inflation was 5.5% as recently as November 2011. Premier Wen Jiabao was reported as saying downward pressure on the economy is still “relatively large.” Chinese stocks continue to suffer.
Meanwhile the U.S. economic data continues to stagnate as the ECRI predictions of recessions in latter 2011 look much more probable. Of course the difference between a statistical recession and what it feels like to the common man can be two worlds. U.S. markets were hit Friday by a weak labor report but a late day "The Fed is coming!" story out of the WSJ helped lift indexes well off their lows. For those of bullish conviction this was an excuse to work off a short term overbought condition, and the S&P 500 dipped exactly to its gap up open post Euro summit announcement Friday, which also happened to be very near a 38.2% retracement of the move off the June 26th lows – funny how that works.
Long story short if you were not "in" the market Thursday night ahead of a binary outcome Friday (or no announcement at all out of Europe) there were no gains to be had by the end of day Friday. The extent of the advance that remained was only that gap up Friday morning. Go forward pulling back not much more than the 50% retracement (134.20 on SPY) or worse case the 61.8% retracement (133.40 on SPY) of this move off June 26th would be the base cases for bulls. The latter would fill the entire European summit gap.
After a very heavy few weeks of news, and European headlines the news flow should slow down. China releases GDP later this week along with other news, and the FOMC speculation should be quiet until next week when Bernanke speaks to Congress. FOMC minutes are released Wednesday so that could move markets. Most of the U.S. economic data this week is not market moving. That said, we now transition to earnings season. Despite all the hubbub across the globe the past few years, U.S. corporate profits have been able to rebound smartly off their dramatic lows of 2008/early 2009. But that story is now potentially getting long in the tooth, so the tailwind this provided in 2010 and 2011 might be coming to an end. More on this in a later post.
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog