The stock market has given us over the past six weeks all the thrills of a summertime Six Flag amusement park ride. This serrated performance of risk on/risk off greed and fear rests upon the painful to watch unraveling of the European Monetary Union (EMU
Now headlining the limited engagement of sovereign surrender of the old country to Germany is Spain.
Wednesday night, Moody's Investors Service cut its rating on Spanish government debt by three notches on Wednesday from A-3 to Baa-3. Moody's rating puts it one notch above junk status. Standard & Poor's rates Spain two notches higher at BBB-plus with a negative outlook.
Egan-Jones also cut Spain's sovereign rating to "CCC+" from "B," pushing the country's debt deep into speculative territory. The rating cut, Egan-Jones's fifth for Spain this year, carries a "negative" outlook.
Fitch Ratings cut Spain's rating by three notches on June 7 to BBB, one notch above Moody's, and put a negative outlook on the credit
The current bearish market metronome to Europe’s impotent and incompetence, Spain’s insolvency and other countries soon to follow, is neither surprising, or, heretofore, improbable. Yet, angst-filled investors remain invested.
Still, a summertime rally will climb this particular wall-of-worry, albeit in a saw tooth pattern, if only because so few people believe that it can or should. Only a fortnight ago, we stared into the abyss having received freshly humbling economic reports on real estate and non-farm payroll. This doom and gloom was sandwiched in-between periods of misplaced optimism about the outcome of Europe’s banking crisis and future global growth.
Treasury rates made their final approach and landed into the history books, June 1, reaching 1.45% on the 10-year and 2.51% on the 30-year, exceeding all-time lows reached in the fourth quarter of 2008.
Gold and silver has finally awaken from their $1,500 range-bound sleep with explosive upside moves, also June 1, coinciding with revisions of two previous months’ worth of punk GDP growth and a terrible realization that a new Fed punchbowl is nearby while the Presidential hopeful, former Massachusetts governor Mitt Romney chances for capturing the White house in November are brighter than ever.
Only in these perverted times will bad news make the stock market happy. Although in testimony before congress, Fed Chairman Ben Bernanke downplayed any urgency in enacting Quantitative Easing III (QE III), and was instructed by a member of congress to take the punchbowl away; you can be sure that it will remain. Since, without QE III, many politicians and many portfolio managers alike fear for their careers; and the economy, too.
The remaining June milestones to watch include the Greece’s Parliamentary (Snap) election to elect parties that the (EMU) will approve of and vice versa; keeping the dream of higher asset prices and no bank loses alive. It’s being reported that $1 billion dollars daily is being withdrawn from Greek banks prior to Sunday, June 17th election.
France’s Legislative Second Round election will to determine if the Socialists will take control of their government. Both countries’ elections occur on the same day.
On June 19th, the Federal Open Market Committee (FOMC) two-day meeting begins. Opinion is split as to whether or not an announcement regarding QE III will be made. The usual monthly data sets throughout the rest of June should experience an elevated sensitivity because the current atmosphere of presidential politics supercharges all things economic.
So, why will there be a summer stock market rally? Patience; we’re getting there.
Over the past two years, knowledgeable talking heads informed us that Greek and Portugal fiscal catastrophes are manageable, however, if the banking crisis infects Spain, then, its economy is just too large to save and the ballgame for developed nations and emerging markets is over. Well, that time has come. Spain officially asked for a €100 billion bailout.
I’m sure you have heard that the rescue structure is the Ireland model. The double quote below, the first from Gluskin Sheff of David Rosenberg, and the second from the blog site Zerohedge commenting on Rosenberg’s comment succinctly summarizes the folly of rescue:
Rosenberg - When you realize that of the potential $100 billion to spend, 22% of that has to be provided by Italy and their lending to Spain is at 3% but Italy has to borrow at 6%. They have to lend to Spain $22bn at 3% - it is just madness. Everybody is getting worried again. The solution that they seem to have come up with seems to be worse than the problem in the first place.
- As we have pointed out vociferously over the past few days, even though the assistance is being earmarked for the banks, the Spanish government assumes the responsibility and so this once 'low national debt' sovereign is following in Ireland's footsteps as its debt/GDP takes a 10pt jump to 89% (based on the government's data) and much higher in reality (when guarantees and contingencies are accounted for).
If the too big to contain (TBTC) outstanding bad debt equation about the EMU was true two years ago, it’s no less true, today.
Taken all together, this is a continuation of the crisis and fallout from 2008. Greece is in a depression. Europe will soon enter a depression. Eventually, the entire world will sink into an economic depression; another economic depression in a long line of collapses throughout history. But, somehow, we will survive. We always do. There will be new winners and new losers in the 21st century.
Back to this summers’ rally. The S&P 500 Index
52 week range is 1,074.77 - 1,422.38. The close on June 13th was 1,314.88. Its 6-month high was 1419.04 and low was 1205.535, a ten handle move on the index before Labor Day is not unreasonable. The stock market is as much a psychological and emotional occurrence as any endeavor imaginable.
On a technical basis, the market is near the middle of its 180-day trading range. The market is nearer to an oversold condition than an overbought one. The market can ignore reality (bad news) for weeks, sometimes months, at a time. This summer’s rally may take out the year’s highs but will be the last opportunity for money managers to enhance long returns in 2012.
When the stars and stripes are waived this summer in London at the Games of the XXX Olympiad, beginning July, 27th, lasting thru August 12th, and gold, silver, and bronze medals for individual effort and achievement are collected by young men and women on behalf of our republic, we will lay down our various political blood sports, for a brief moment, and swell with national pride.
Is a summer rally guaranteed because the nations of the world are watching their fellow countrymen represent and excel in their sport of passion, as a payoff for years of dedication through their blood, sweat, and tears, while also inspiring the next generation to compete and succeed? No.
But, show me anything that makes sense in a de-levering world of microscopic interest rates, austerity programs that allegedly spurs economic growth, notional derivative contract values several times over of total global wealth today, an insolvent global banking system that extends and pretends the day of reckoning, or a financial world that believes somehow, someway, helicopter Ben will save the day.
We all need to believe in something.