Print Version The Big Picture

Going Nowhere (and Fast); Has Anything Really Changed?

December 2, 2011

by Curtis Bergquist

Let's recap the past few days. The recent decline ran for 9 days, pulled the indices down sharply (-8.3%) and put the market in an extremely oversold condition. We then got word on this past Sunday of a huge €600 billion IMF loan plan to aid Italy. That started things going on Monday. It soon turned out that those reports were unfounded.

We then quickly got word of plans for a "Stability Pact" which EU countries could agree to and which did not require another cumbersome voting process. That was followed by Italian and Spanish bond auctions at extremely high, if not record, interest rates. But the markets put that aside as word hit of coordinated central bank action and a reduction in China's reserve requirements ratio. These were deemed as very bullish and anyone who asked embarrassing questions (like why were such moves necessary?) was shoved into a closet.

And so, over 3 days, the markets came roaring back.

Now here's my point. We are operating in a market environment in which memories are nearly non-existent and in which the mood of investors and traders can change without warning. I believe it is fair to say that during the past two years, in which we have been dealing with the European Sovereign Debt and Banking Crisis, many plans and schemes and proposals and solutions have come and gone.

But there has been virtually no structural changes made. Greece, Italy, Spain and Portugal (and let's throw in Cyprus, Hungary and Belgium) are still in terrible shape and getting worse.

Our periodic rallies occur every time a new and improved answer to the problems is presented. The markets want to believe. With each new scheme the markets celebrate the hoped for end to the crisis and run higher, often very sharply. Unfortunately, not much time seems to pass before the latest plan is discovered to be lacking (or worse) and the markets are racked with renewed fears. This triggers a wave of selling that drives the indexes back down.

And then the process starts all over again.

Here's a sample of a few questions I’ve been mulling over today:

Didn't Italy pay 7.89% to sell 3-year paper just 3 days ago?
Has Italy gotten its budget and debt back in line?
Is Spain's economy booming again?
Didn't China's P.M.I fall below the 50 level to 47.7, a 32-month low?
Didn't the Eurozone P.M.I. numbers released this week also show a contraction?
Didn't the new Greek government recently announce that the "voluntary haircut" needed to be 75% (instead of 50%)?
Weren't China and Europe supposed to pull the U.S. out of its economic funk?

In closing, I do not believe anything has permanently changed in the past few days (especially on the topic of too much debt and not enough income). Therefore I think we are best served by trading opportunistically. Ride the rallies, sure. But keep an eye on the exit and a finger on the sell button. Market metric and research pieces I have seen lead me to believe that this recent ramp up may continue for a little longer, but it is not likely a change in what for now seems to be a major downtrend.

"Enjoy it while it lasts, 'cause it never does" - Lou Manheim

Have a great day!

Curtis Bergquist
Editor: Daily Decision-PRO

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