Latest Euroland Gimmick

The S&P500 inched up 0.88% last week on lower volume. Volatility also dipped as traders lightened up on downside protection. Once again, headlines from Europe drove almost all of the big moves in risk asset markets, especially equities. Diverging (bearishly) from stocks, the euro dropped slightly for the week. And US Treasuries are still stuck at near record low rates. Both of these factors suggest that stock market investors, in general, are more optimistic than investors in other key markets.

On the economic front, the US data continues to hang in there, despite signs of rapid slowdowns in Europe, Asia (China and Japan), and Latin America.  US factory orders disappointed, by falling more than expected.  ISM Services badly missed; remember that services are the dominant segment of the US economy.  Initial jobless claims dropped back below 400,000, but as usual (with a virtual 100% track record), the prior week’s figure was revised higher (worse). International trade, while still in a massive deficit, was slightly worse than expected. Consumer confidence was slightly better than forecast, but still at abysmally low levels given that the economy is supposed to be in a “recovery”.

Technically, the S&P is still in a bounce formation, but it’s sitting at a major testing level—the 200 day moving average, which is now sloping downward (not a healthy sign).  The hope among bulls is that the almost “taken for granted” Santa Claus rally will push the S&P above the 200 day, allowing the stock market to finish strongly. Interestingly, as of Friday’s close, the S&P is still DOWN slightly for the year, despite the hugely volatile swings, both up and down, over the last four months.

Last week, stocks ended with a strong final day, spurred on by the latest—of seemingly dozens—of eurozone “fixes” that are in fact nothing but thinly disguised gimmicks design to fool the markets into believing that all is well.

Two years ago, such gimmicks lasted about six months, before markets saw through the lies and started selling—-stocks, corporate debt, and sovereign debt.  Then earlier this year, the gimmicks lasted a month or two, before the selling began. Lately, it seems as though the gimmicks “work” for a few days or at most a few weeks, before the ugly truth sinks in.

So this time, it might be useful to get a sampling of opinions from leading media outlets and their most respected journalists and thinkers.

From the Financial Times:

“Near-Term Risk to Peripheral States Remains”

“Amid all the heated speculation about the European Union summit’s impact on Europe’s economic future and Britain’s role in it, traders are asking a more mundane question: “Has it done enough to get us through to Christmas?” Their answer: probably not.”

From the New York Times:

“Europe’s Latest Try”

“We’re losing count of how many European Union summit meetings have ended with “historic” agreements to contain the euro-zone debt crisis only to see them fall apart as markets judged they were inadequate or irrelevant to the problem of making good on old debts and generating enough growth to pay off future obligations.

We are not optimistic that Friday morning’s agreement on a “new fiscal compact” for the euro-zone will now break that cycle.”

From Paul Krugman, on his NY Times blog, in describing the most recent “fiscal union”:

“The Orwellian Currency Area”

“… the relentless wrong-headedness of the Europeans, their insistence on seeing their crisis as something it isn’t, and responding with actions that deepen the real crisis, has been a wonder to behold. In the 1930s policy makers had the excuse of ignorance; there was nobody to explain what was happening. Now, their actions amount to a willful disregard of Econ 101.”

From The Telegraph:

“The Eurozone Banking System on the Edge of Collapse”

“Senior analysts and traders warned of impending bank failures as a summit intended to solve the European crisis failed to deliver a solution that eased concerns over bank funding.

The European Central Bank admitted it had held meetings about providing emergency funding to the region’s struggling banks, however City figures said a “collateral crunch” was looming.

“If anyone thinks things are getting better then they simply don’t understand how severe the problems are. I think a major bank could fail within weeks,” said one London-based executive at a major global bank.”

So here we go again:  not only is the latest “plan” announced on Friday not a true solution (as usual), but it’s also at risk of masking a ticking time bomb, a potential collapse that threatens the entire banking system of the eurozone, and perhaps, the entire world.

What a disaster.

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