What I’m Watching This Week – 30 July 2012

Illness of Indecision….

Last week Mario Draghi, the European Central Bank President, announced that he would do everything possible to save the Euro.  Such words sent the market’s into an upward tizzy of remarkable proportions.  One thing that really took me by the ears was that nowhere in his comments or any other European leader, was that there was no discussion of European solvency, everything being discussed is revolving around Europe’s liquidity problem.  The real problem for Europe is the solvency of the southern countries, not liquidity.  The difference you ask?  Solvency is about going bankrupt because of losses that cannot be covered.  Liquidity is a problem where countries have a lack of cash to meet obligations.  Most of the Southern European countries are going broke because they have accumulated massive losses without adequate capital to cover the loss.  Their banks are broke as well as their national governments.  And no, they cannot just print money, like we do here in the U.S., inflation be damned.  The southern nations (Greece, Italy, Spain, and Portugal) have zero control over the Euro printing presses and the northern nations won’t allow any of that anyway, as that would simply bankrupt themselves if they keep advancing more money to the bankrupt southern countries without any opportunity to recoup those monies.  This is a solvency issue where each nation is positioning to protect its own financial survival.  Mr. Draghi never mentioned how he would make sure that the Euro wouldn’t fail.  One has to speculate that behind closed doors, there is a considerable amount of conversation about the ‘unthinkable’, several southern countries would need to be handed their walking papers and kicked out of the Euro Zone in order for its own solvency to remain intact.  The Illness of Indecision…doubtful there will be a comprehensive resolution before the end of this year and it can’t wait until 2013.  Rest assured this ‘Illness’ will continue to affect the U.S. markets.

U.S. equity indexes posted significant gains last week, ending with positive numbers across the board.  Global markets followed suit and there was nary a negative number to be seen by Friday. This week presents a rather interesting and difficult scenario.  The Fed and the ECB have announcements to make this week and the markets have repeatedly shown zero patience for anything other than instant gratification.

The 5 year Treasury note closed at 66 basis points, the 10 year at 1.55%, and the 30 year under 2.63%.   With the momentum being switched to equities and away from Treasuries, debt holders took note of the change in temperament and licked their wounds from the heightened expectation of further stimulus from both the Fed and the ECB.

Commodities ended the week heavily mixed with Wheat, Coffee, Oil and Natural Gas, all recoiling from their gains of previous sessions. Gold and Silver made upwards moves and I expect that to continue this week when the reality sets in that no solutions were provided last week and volatility didn’t take the hint and go on summer holiday .

The positives to take from last week included initial jobless claims declined 35, 000 to 353K, durable goods orders were up 1.6% and corporate earnings have continues to beat the lowered expectations, and revenue began to show that weakness really isn’t across the boards as initially speculated.  Home values are higher than this time last year as well.  GDP growth came in at 1.5% as expected, weak and sluggish yes, but considering the worldwide circumstances, it’s a net positive.  There remains a bullish attitude in most sectors, albeit a tepid one.  The Doom and Gloom noisemaker crowd are cheering for a recession even though the statistical evidence is refuting them.   I see little chance of a recession in the next six to nine months.   With more earning news coming out this week, employment numbers, personal income and more home info,  I certainly expect a good dose of volatility as the week progresses.  I’m continuing to remain optimistic.