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The right way to approach macro investment themes depends upon your time frame. For traders, you need to find the rhythm of the current market. What do the active participants expect? When do they expect it? The problem for investors is much different. The investor should hope for wild gyrations and mispricing of asset classes. That is the source of opportunity.

As we prepare to turn the page on the calendar, everyone will focus on what is important for 2012. Everyone will write about Europe, since nothing else has mattered for several months. With that in mind, I want to do a more comprehensive analysis. I have frequently written about the European debt crisis, but more often stating my current posture and conclusions. Since my chosen airline does not have internet access, I have the joy of isolation during flying time. This sensory deprivation is valuable and can also be achieved by turning everything off.

The key conclusion I reached is that for many weeks, documented in my WTWA series, nothing much matters except Europe. Why is this?

  • It is the message of the market. US economic news has been irrelevant. The US economy is showing solid progress. Corporate earnings have slowed, but still show significant growth.
  • The volatility. Wild market swings distort perceptions. When the Dow has 300 point swings in a day, why play for an expected annual gain of 8% or so?
  • Counter-party risk contagion. This is the disaster scenario for US investors. What is the exposure for US banks?
  • Recession contagion. Will a European recession drag down the rest of the world?
  • Earnings outlook. The gloomy forecasts have already had an effect. Why would any company give an upbeat outlook? Why not keep the bar low by citing uncertainty?

These factors all combine to create a negative outlook for US equities.

What to Expect

A mainstream article from William J. Watts of MarketWatch captures the current sentiment.

Think 2012 will be the year when investors learn once and for all whether Europe’s leaders can come up with a plan to once and for all address the euro-zone debt crisis?

Think again.

The volatility and market turmoil that accompanied the 2011 realization that the euro could conceivably come apart is unlikely to be fully dispelled. Instead, top politicians and policy makers appear likely to continue relying on the potential for imminent disaster to push through otherwise politically unpalatable changes, economists said.

Does this make sense?

Regular readers know that my conclusion is that the impact on US equities is overstated. As I prepared for this article (thanks, United Airlines for the sensory deprivation) I saw the issues more clearly. It is my plan to expand on each of these themes, but I invite comments on which is most important.

  • Timing. This will not play out quickly. I have described a process of incremental compromise and adjustment. Eventually, everyone will agree with me. Watts is among the first.
  • Economists are not the best sources. I am one of the chief defenders of economists on many fronts, as regular readers know. Forecasting political events is not their forte. Why rely on them to predict what Europe will do?
  • Doomsayers. Old idea, new situation. So many economists and bloggers who claim credit for "calling the housing crisis" are going for a repeat performance. These credentials should be carefully examined.

The Blog Agenda

There are many facets to this problem, and each deserves careful consideration. The problem of sources is paramount. Most people writing on this topic have no special expertise. We tend to look to journalists, who have the skill of taking technical problems and explaining them. For this translation to work, the journalist must have an adequate grasp of the technical problem.

In the case of Europe, there is a very poor grasp of the problem faced by the various leaders. To summarize -- and to do so far too briefly -- the many critics suggest that the leadership is stupid, ill-informed, and made up of people who "just don't get it."

My perspective is quite different. Any blogger who thinks that he or she knows more than Merkel or Sarkozy or Braghi (or Bernanke) is posturing for an audience. World leaders are intelligent, well-informed, and aware of the market implications. Market pundits are wrong to underestimate their abilities.

As one who has moved freely in both the government leadership and trading groups, I want to sharpen the focus.

Ask not what some pundit thinks should happen. Ask instead what is most likely to happen.

Taking this approach will lead to a significant investment advantage over the doctrinaire and often political viewpoints of the popular market pundits.

Current Investment Implications

There are many stocks that fit the current theme for investors, but here are two favorites.

Oracle (NYSE:ORCL) has been trading lower for no particular reason in front of earnings. This is one of many stocks that has been slammed on Europe news. Cheap on earnings (next week), channel checks solid.

JP Morgan Chase (NYSE:JPM) is the strongest US financial stock. It is not necessary to make a big statement on Europe to buy this stock. You only need to understand that the exposure is limited.

For participants in my enhanced yield program, I write calls against both positions.