Mario Draghi's introduction of the OMT (Outright Monetary Transactions) yesterday came off about as expected - largely because the details of the plan had pretty much been leaked on Wednesday. To the bulls, the plan was a breath of fresh air because it meant that the ECB was at least trying to do something to stop the rate contagion in Europe. And at first blush, it looks like the plan might have a shot at doing just that. But from the other side of the market aisle, the bears could be heard scoffing, saying that the idea of buying bonds of troubled countries isn't going to solve the problem.
To the point our friends in fur are making, I have what I feel is one very important distinction to offer. You see, while it IS true that even unlimited bond purchases by the ECB aren't going to solve Europe's debt and/or growth problems, the key is that Super Mario's new plan just might solve the problem for many stock markets of the world.
Before you start booing, hissing, and throwing things at your screen, allow me to explain. For the better part of the past three years, stocks have swung wildly in reaction to the ongoing crisis in Europe. The market has plunged on three separate occasions when it appeared that there was no end in sight to skyrocketing rates in those oh-so popular vacation spots of southern Europe. Traders quickly learned that a collapse in Greece meant big problems for the global banking system. As such, Greek problems (as well as problems in Portugal, Spain, Italy, etc) have largely become equated with stock market problems ever since the summer of 2010.
However, the key here is that Greek problems really don't mean a hill of beans to Apple (AAPL), Service Corp (SCI), Fiserv (FISV), Concur Technologies (CNQR), Alliance Data (ADS), Biogen IDEC (BIIB), Align Technology (ALGN), Eli Lilly (LLY), Brown Forman (BF.B), United Natural Foods (UNFI), or DR Horton (DHI) - all of which we own, and all of which hit new highs yesterday (well, all except for AAPL that is). And the really big point is that the Greek problems weren't necessarily stock market problems but rather global banking industry problems.
Put another way, if spiking rates in places like Portugal, Italy and Span can be stopped - say by something like the ECB committing to buying as many bonds as it takes to keep rates at reasonable levels - then there is no threat to the banking system. And as a result, there is no reason for the stock market to panic. Thus, Super Mario's plan may have indeed solved Europe's problems - at least as far as the stock market is concerned.
Remember, the stock market can deal with lots of things, including a recession in Europe and/or a slowdown in places like China and India. It can deal with high unemployment and perhaps even a little commodity inflation. But what the market simply cannot deal with is the potential for the collapse of the banking system and it was this fear that was responsible for the final flush in 2009 and then the severe corrections in 2010 and 2011.
So, if you are bearish on the U.S. because Europe's economy is struggling, I'm going to suggest that this is yesterday's news and that you just might be fighting the last war. Remember, the U.S. stock market looks forward, not back. And if one objectively looks ahead, they are likely to see that the U.S. is not in nor is it likely to sink back into a recession, they will see that the Bernanke Cavalry looks to be itching to ride in and combat unemployment, that corporate earnings aren't half bad, and that valuations are no worse than neutral. And in short, this is NOT the recipe for an imminent stock market disaster.
This is not to say that the European debt crisis won't flare up again. And to be sure, if rates in Spain and Italy resume an upward trend, stocks may see red for an extended period of time. But, from where I sit, it looks like Mario Draghi may have solved the stock market's problems - well, for a while anyway.
Publishing Note: I won't bore you with my travel schedule, but it will suffice to say that my morning reports will continue to be sporadic through next week.
Turning to this morning... European and Asian markets followed Wall Street's lead and put up big green numbers. In addition to the positive sentiment surrounding the ECB's bond buying plan, stocks in China surged on the announcement of 1 trillion yuan in infrastructure spending, which led many to believe that more stimulus will be forthcoming in China. However, in the last few minutes, Intel cut its guidance for the quarter which has caused U.S. futures to pull back a bit from their morning highs.
Thought for the day... The difference between the impossible and the possible lies in a man's determination. -Tommy Lasorda
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Wishing you green screens and all the best for a great day,
David D. Moenning
Chief Investment Strategist
Positions in stocks mentioned: none
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