By Scott Freeze
The last few weeks have brought to fruition the sell-off that we expected to slowly occur during the second half of the year, as per our write-up “The Great European Headfake of 2011” on May 31st. Our concerns were the “irrational exuberance” that was displayed in the market thinking that the EU problems were solved. As we saw, the kick the can approach to the EU issues is not effective and they still have larger concerns, but not as bad as currently being displayed.
While the PIIGS have continued issues and the contagion has infected some European banks (which was already priced into the market), the most recent collapse has occurred and accelerated greatly based on fears that Italy is the next to fail. We find it hard to believe that Italy will run into the PIIGS issues. They have a 2013 plan for a balanced budget, will raise their capital gains taxes and ease their strict laws to allow for greater revenue streams and lower their debt to GDP ratios. The fear that Italy will fall or bring down many banks with their issues is, in our opinion, unfounded and more evidence of the fear mongering that occurs in these situations. In addition to these “problems” being oversold in the marketplace, the proposed French and Italian ban on short selling would put an artificial floor on the market and backstop many futures markets.
While we see the U.S. unemployment rate staying stagnant and more rating issues for municipalities, there still isn’t anywhere else people want to put their money. Remember Japanese AA ratings were cheaper than U.S. AAA ratings. In a vacuum the downgrade hurts, but with the Fed setting a date of mid 2013 for keeping rates at zero and no better options for global money, the rating is really not as important as it was before the world financial markets imploded.
Companies will continue to “beat estimates,” albeit lowered estimates, oil continues to trade at levels that do not stress production and (to say it as scientifically as possible) there is a TON of institutional money on the sidelines. While we may not go back up 20% for the rest of the year, it would seem to me that we have reached or neared the bottom and it looks like March 2009 all over again. Fear will continue to be in the market and we could see some dramatic short term pullbacks, but this is the time to get back in to the market. While we suggest ETFs as opposed to individual stocks (to mitigate risk) and still are worried about financials, this seems like the time to jump back in.
We are seeing support for the S&P near the 1100-1120 area and a move through 1175 on the upside, should clear the way for a move to 1275.