Saturday, December 10. 12:30 a.m.
The current situation in Europe is a smaller version of the 2008-2009 financial crisis in the U.S.
During the 2008-2009 financial meltdown, in March, 2008 the U.S. government began what became a string of increasingly larger rescue efforts, with a package guaranteeing $29 billion of toxic mortgage-related assets in Bear Stearns battered portfolio. That made it possible for JP Morgan Chase to take over the collapsing firm. The stock market reacted by surging into a rally that lasted until May.
But a new crisis popped up every few weeks, and seven more ever larger bailouts were enacted in panic each time; of banks, home-owners, Fannie Mae and Freddie Mac, AIG, automakers, resulting in the TARP program, and the Emergency Economic Stabilization Act of 2008, along with ever larger economic stimulus programs.
None were enough to impress the market for very long that the crisis could be contained, and it plunged ever further in a major bear market.
The Bush Administration was voted out. Its stimulus and bailout efforts had totaled $1.6 trillion, and voters were unhappy that they had not worked. However, the Obama Administration also decided massive stimulus efforts were the best hope for eventual recovery, and added a $787 billion stimulus package, and a $275 billion home-owners package, both in February, 2009, and another bailout of banks in March, 2009.
Finally, the G-20 nations stepped in with a $1 trillion stimulus package for global economies in April, 2009.
The severe bear market in stocks ended in early March, 2009, and the current three-year long bull market began, in apparent anticipation that global economies had escaped Armageddon, at least temporarily. And the market was right. The Great Recession ended in June, 2009.
It was a two-year struggle of huge disagreements in Washington and around the country over whether rescue efforts should even be taken, especially involving the bailout of banks, and over the methods and size of each effort.
Europe has been undergoing the same type of struggle for two years now, since October, 2009 when the newly elected Prime Minister of Greece announced that his predecessor had hidden the size of the country’s ballooning deficit.
The struggle in Europe has followed a similar path to that in the U.S. in the previous crisis.
The European Union and International Monetary Fund initially provided a series of bailout packages for Greece in early 2010 totaling $163 billion. Critics said it was not enough, leaving the rescuers behind the curve, which would cost more down the road as the crisis would continue to worsen. Some objected to any help, saying let the losers default, they got themselves into their own mess.
And so it went. Greece was still not stabilized, and the crisis moved on to Ireland. After much debate and disagreement the EU and IMF approved a contingency rescue fund of $680 billion for the European Union countries overall, expecting that would convince markets that they were serious about containing the crisis, while believing the fund would never have to be tapped.
But as we know, the crisis was not contained and continued to spread. The leadership remained well behind the curve. A new crisis popped up every couple of months, with additional rescue efforts each time that markets panicked.
Continuing to follow the pattern of the 2008-2009 crisis in the U.S., it became a political issue, and governments have fallen in Ireland, Portugal, Greece, and Italy, on hopes that new leaders can resolve the situation.
That brings us to the current situation.
Markets around the world have been rallying strongly on each hope that the final solution was at hand, and plunging again when they didn’t get everything they hoped for when European leaders panicked with each market decline and held emergency meetings.
This week was particularly eventful.
European leaders panicked again when global markets plunged sharply the first three weeks of November on renewed concerns about the crisis and its potential effect on global economies and financial systems.
And just as the rescue efforts in the U.S. in 2008-2009 escalated in size with each new crisis, so efforts in Europe escalated dramatically again this week.
The European Central Bank cut its key interest rate to just 1.0%, its record low reached in 2009 during the 2008-2009 global meltdown, and made loans much easier for European banks to take advantage of.
And at the European Union’s important summit meeting, a surprising 26 countries out of the 27 member countries voted to quite dramatically restructure the eurozone fiscally, limiting annual deficits to a maximum of 0.5% of each nation’s annual GDP, imposing automatic sanctions on countries whose deficit exceeds 3% of GDP, agreed to rapidly deploy the eurozone’s bailout fund (the European Financial Stability Facility). And the new bailout fund, the European Stability Mechanism, will enter into force earlier than planned next year. They also voted to provide the IMF with an additional $267 billion to bolster the IMF’s resources, which would be separate from the existing $440 billion EFSF bailout fund, to “ensure that the IMF has adequate resources to deal with the crisis”. In a significant reversal even Germany’s central bank signed on to the plan.
The only holdout was the U.K., which will not be part of the new restructuring.
Markets in Europe and the U.S. responded positively yesterday to the early reports from the summit, but not boisterously.
And as usual, opinions and analysis varies between extremes of optimism (that it is a substantial package that will at the very least kick the crisis down the road into late next year), and pessimism that it fell short and leaves the EU still far behind the curve.
Meanwhile, the crisis in Europe will probably continue to follow the pattern of the previous crisis in the U.S.
Meaning it won’t be analysts and economists that let us know when the crisis has bottomed. It will be markets.
In March, 2009, when global stock markets shot up in the rally that marked the end of the 2007-2009 bear market, sentiment was extremely pessimistic, economists convinced that even with the latest stimulus efforts, nothing would work in time to prevent an historical disaster.
We expect it will also be the markets that will decide this time when enough efforts have been made to make a difference, and that the diverse opinions are mostly just entertainment.
And that market jury is still out.Good Economic News Continues in the U.S.
At least while investors remain justified in their nervousness about Europe, and the slowing economic growth in China, the economic reports in the U.S. continue to improve and indicate the U.S. economy is in recovery mode after the slowdown in the first half.
This week’s reports included that the U.S. trade deficit narrowed for the fourth straight month in October, to its lowest level in a year.
And while economists and investors may be worried, consumers seem to be increasingly optimistic. The University of Michigan reported its Consumer Confidence Index rose in December for the fourth straight month, rising from 64.1 in November to 67.7.
And the U.S. stock market so far continues to show a resilience that is not being seen in other global markets.
But, although fully recovered from its sharp three-week decline in November, it is still stalled in the vicinity of the potential resistance at its long-term 200-day m.a., just as it must decide what it thinks of the EU summit meeting results.
Non-subscribers: We recently updated the sample issue of our Street Smart Report newsletter to a more recent issue you might find interesting. To view it click on this link: http://streetsmartreport.com/tosample.html
To read my weekend newspaper column ‘It’s Small-Stock Sweet Spot Time!’ Click here.
Subscribers to Street Smart Report: In addition to the charts and updates in the ‘premium content’ area of this blog this morning, the new issue of the newsletter and a hotline are in the subscribers’ area of the Street Smart Report website from Wednesday evening. And we’ll have an update of our regular ‘Global Markets’ report, and an update of our regular ‘Gold, Bonds, Dollar, Inflation’ report early next week.Yesterday in the U.S. Market.
A quite positive day, pretty much recovering all of Thursday’s decline, leaving a positive market for the week in the U.S.
The Dow closed up 186 points, or 1.6%. The S&P 500 closed up . The NYSE Composite closed up 1.8%. The Nasdaq closed up 1.9%. The Nasdaq 100 closed up 1.6%. The Russell 2000 closed up 3.1%. The DJ Transportation Avg. closed up 1.9%. The DJ Utilities Avg closed up 1.3%.
Gold closed up $1 an ounce at $1,711 an ounce.
Oil closed up $1.49 a barrel at $99.83.
The U.S. dollar etf UUP closed down 0.3%.
The U.S. Treasury bond etf TLT plunged 2.1%.Yesterday in European Markets.
European markets closed up in reaction to the early news out of the EU summit. The London FTSE closed up 0.8%. The German DAX closed up 1.9%. And France’s CAC closed up 2.5%.Global markets for the week.
A 2nd straight positive week for the U.S. but not for the rest of the world, although global markets closed higher than they were three weeks ago.
For Street Smart Report subscribers only, used to provide additional info to that provided in the newsletter, mid-week reports, and hotlines.
To obtain access please click on the ‘Subscribe’ link. It will take you to an information page on subscribing to Street Smart Report, a subscription to which includes access to the premium content area of this Street Smart Post blog.
In the premium content area this morning: Our outlook and charts on the U.S. market short-term and intermediate-term.
Next week’s Economic Reports:
Next week will be a quite heavy week for potential market-moving economic reports, including Retail Sales, Consumer Price Index, Industrial production, and the Fed’s FOMC meeting. To see the full schedule of the week’s reports click here, and look at the left side of the page it takes you to.
To read my weekend newspaper column ‘It’s Small-Stock Sweet Spot Time!’ Click here.
Subscribers to Street Smart Report: There is an in-depth ‘Global Markets’ update from Tuesday, an in-depth U.S. Market update from Wednesday, a hotline from Wednesday evening, and an in-depth ‘Gold, Bonds, Dollar, Inflation’ update from Thursday in the subscriber area of the Street Smart Report website.
I’ll be back with the next regular blog post on Tuesday morning at 9:25 a.m. Have a great weekend!
Non-subscribers: How are you doing so far in 2011? We can help, and at very reasonable cost! Market, sector, stock, gold, bond, and dollar buy and sell signals, short-sales, long-side and ‘inverse’ etf’s, mutual funds, two portfolios of recommended holdings (one modified buy and hold, and one market-timing). Street Smart Report Online provides an 8-page newsletter every 3 weeks, an in-depth 6 page interim update every Wednesday on our intermediate-term signals and recommended holdings, an in-depth 4-page ‘Gold, Bonds, Dollar’ update every 2 weeks, and special reports and hotline updates as needed. Highly regarded and in our 24th year. As a bonus for a one-year subscription you will also receive my latest book Beat the Market the Easy Way- Proven Seasonal Strategies That Double the Market’s Performance. Click here for subscription information.
This blog appears every Tuesday, Thursday, and Saturday morning!
**** End of Today’s post*****