Predicting the Europe Outcome: What it Means for US Stocks
Let's start with my nomination for the quote of the day, the words of Jack Bouroudjian: A blinding glimpse of the obvious.
Here is the context. Bouroudjian, a CNBC regular, when asked about his reaction to the late-day Fitch warning about a possible rating downgrade for US banks responded as follows:
…What i call scared cash on the sidelines that seems to run for that ten-year bond every time Fitch or somebody else gives us what i call a blinding glimpse of the obvious.
The overall market perspective is very good and worth a careful listen.
Regular readers know that I advise against too much interpretation of daily market swings. Today there was a rather obvious cause, so we have something specific to think about. There was a sharp market selloff immediately after a Fitch press release on a possible downgrade of credit ratings for US banks. Mark Gongloff had a nice take in real time in his post, Here We Go Again. He noted the mild nature of the Fitch comments and the extreme nature of the selling.
Today was a light-volume day during expiration week. Veteran market observers know that it takes little to get extreme moves in these circumstances. Whatever the reasons the prices are recorded and technical analysts will impute meaning to the selling.
A Contrary Take on Europe
I continue to hold a contrary constructive view on Europe. My reason is pretty simple:
It is in the financial interest of the entire world to reach a solution.
Do you remember the various steps in this story? A few weeks ago we were worried about a vote in Malta and the power of a splinter party in Slovakia. The market sold off on every rumor about leadership in each European country. The small players eventually came around.
What now? It is obvious that some European banks are unloading sovereign debt and there is also an attack on the Italian bond via futures selling. It is the most convenient way to "short Europe." There are many who would profit from a collapse of the Euro, European banks, and world-wide markets, and they are out in force.
Various pundits have predicted the fall of Europe by comparing debts to German assets, for example, as if Germany is the only resource.
This is silly!
Today's mild Fitch comment — a mere suggestion that US bank ratings were at risk, resulted in a market cap loss in US stocks of about $300 billion — in about thirty minutes!
The overall effect on US stocks is greater than the "bailout need" for Europe.
You can do a similar calculation on the Chinese economy. Allowing Europe to fail is a disaster for them — and also for the Saudi's. It is in the national self-interest of many countries to help. You can expect them to join in at the appropriate time. Meanwhile, they are all exhorting European leaders to do more and do it more quickly.
When it is in the self-interest of so many countries to solve a problem, you can expect it to happen. The process is not as fast and efficient as traders and pundits would like, but then they have never had this kind of responsibility, so their opinions lack the wisdom of genuine experience.
The Contrarian Edge
The individual investors I meet are usually very intelligent and well-informed. They think that they have an advantage when they understand everything that they read in the daily financial news. This is wrong — exactly wrong.
They have an advantage only when they see the error of those writing or quoted in the daily news. The financial stocks were unduly punished today, so that is the best shopping ground. Regular readers know that I like JPM. Stocks in many unrelated sectors were also punished for no reason. How about Oracle (ORCL)? Or Target (TGT) with great earnings and a nice response before the so-called "big news" from Fitch.
The most difficult thing to learn is disrespect for this kind of news, especially when most are embracing it.