Caution continues to dictates the next move…
The overall market was indecisive last week as market activity seemed more bullish than bearish, but I am continuing to be extremely cautious. The situation in Spain has deteriorated to the point where they absolutely had to look to the Eurozone for a bailout to the tune of 100 Billion Euros to shore up its financial system. Spain’s borrowing costs are still very high, indicating investor restraint about lending to Spain is rampant and that the initial gains to be seen from the bailout perhaps will not be long term. The EU capital markets punted and the Eurozone has no other choice but to catch the ball and prepare to move forward. This is a significant step toward a resolution to the crisis but it does not solve the situation whatsoever.
German and EU officials seemed to be moving closer to creating some mechanism for issuing debt. These solutions may help Spain, Italy, and other troubled countries raise capital in the debt markets at more equitable rates; however that may just ultimately just be a bandage that would kick the can down the road yet again. Yes that is skepticism you are reading from me, massive skepticism. While European officials are, ahem, “working” on solving their problems, China cut its interest rates to try and boost its economy after its growth indicated signs of being actually slower than previously expected. The overall market reacted positively to this news as a slower than expected Chinese growth had already been priced in.
Here in the states, The Federal Reserve’s program to reduce long term interest rates, Operation Twist, is set to expire at the end of the month. Our recent employment numbers continue to indicate a slower pace of job growth; the Fed is coming under more pressure to launch another program to support the economy. However, Ben Bernanke did not mention any plans in Congressional testimony last week. With interest rates already at historic lows it will be harder for the Fed to come up with a program that could have an evocative impact. Nonetheless, the markets demand actions since previous Fed moves have been catalysts for rallies. Expect the typical noise makers (or know and do nothings as they actually are) to fill the airwaves with regurgitated cow patties, pointing fingers to prove their incompetence and dereliction of duty. A pox on their houses I say (with many apologies to Shakespeare) as both political entities will again prove to be effectively useless. The US faces a tempestuous second half of 2012 with the Presidential election and continued Congressional absurdity. It is unclear how the market will react to the campaign season, the eventual winner and the fools in Congress.
Finally, my ever present optimism makes an appearance. With all of the adverse sentiment over the past couple of months, the market is positioning for positive surprises in the second quarter’s earnings season, which begins in early July. First quarter’s earnings season marked the end of the rally and since then it’s only been negative news. US corporations are in good financial shape (with 2 Trillion sitting on the side lines, why wouldn’t they be?) and if they beat expectations, which more than likely will be reduced by July, the market could have another reason to rally going into Third Quarter. I remain optimistic.