Thursday, October 27, 2011

The European So-Called "Solution"

Having been wary of equity market performance and a host of troubling contextual factors for most of this month, I would, in light of this morning's US GDP and spending data, and the investor reaction to the suspect 'solution' to the European debt crisis, return to a fully-invested long position in my portfolios.

It's not that any of the concerns which roiled the equity markets in early October have disappeared. But there is a sense of unfulfilled, self-fulfilling market behavior. Instead of moving down to a level of 1050 or so, the S&P has fitfully moved higher, then, after news overnight of some sort of initial Greek debt accord in Europe, S&P futures were already at around 1260 this morning. The 8:30AM release of third quarter GDP and spending further boosted investor optimism.

Thus, with market levels well away from those which would signal being out or short, I'd return to full investment levels at this time.

I don't think anyone actually believes the European situation has been resolved in any real sense. The description of the process for handling bond losses provided by a CNBC correspondent this morning was positively laughable. Banks are supposed to take earnings hits to cover writedowns. Then, if necessary, raise capital in public markets. If that doesn't fulfill their needs, then a combination of national treasuries and the EFSF are supposed to provide the necessary capital.

This sounds exactly like what Kyle Bass and others have warned against. It's mostly hope, smoke and mirrors. Spain, Portugal and Italy weren't even mentioned, yet everyone knows they are far larger and share Greece's sovereign debt problems.

Meanwhile, in the US, with unemployment remaining high and real median income down for the past decade, it's tough to see from where the rise in Q3 spending is coming. But when equity markets move decisively in a direction, it's usually foolish to completely ignore that.

In this case, since there are some developments of a non-negative nature in key contextual variables influencing my outlook on equities, their change can lead to a change in my decisions.

No comments: