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Maybe This Picture Is Worth A Thousand Words....

Mar. 06, 2013 4:52 PM ET
KDavitt profile picture
KDavitt's Blog
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(or a few thousand dollars?)

My tendency is to write a thousand words.......and I still may, but in short.....

General belief is (particularly post March 2009 S&P bottom) Europe matter and Europe is still a mess.

As everybody knows, US Equities highs were made in October of 2007 (until recently when the DJIA and RUT broke old highs).

The Euro continued to strengthen into early/mid 2008 (March 2008 was Dollar Index low when Bear Stearns went under). Commodities and the Euro continued to hang in there until July of 2008.

I won't go through every tick, but from July 2008 to Nov 2008 the Euro dropped 35 handles or -22%. Over the same time frame the S&Ps dropped 500 points or -38%.

From Nov 2008 to Dec 2008 we got a bounce on both markets. The Euro rallied 22 handles or +17.6% and the S&Ps rallied 130 points or +16%.

From Jan 2009 to March 2009 the Euro fell 22 handles or 15.3%. Over the same time frame, the S&Ps dropped 250 points or 27.5%.

Some Key dates

  • May 2010 - the original "Greece is broke" risk flare. Euro trades 118 and the S&Ps are 1050.
  • October 2010 - the Fed starts QEII (after signaling it on August 25, 2010 at Jackson Hole)
  • May 2011 - ECB RAISES rates on Trichet's last meeting. Commodities panic and Europe goes into tailspin.
  • Dec 2011/Jan 2012 - Draghi institutes LTRO (essentially "protecting short term - 3 year and in - borrow rates for the periphery).
  • July 2012 (7/26) - "Whatever it takes".

"Within our mandate, the ECB is ready to do whatever it takes to preserve the euro," Mr Draghi said, pausing for effect. "And believe me, it will be enough."
http://www.ft.com/intl/cms/s/0/8fca75b8-4535-11e2-838f-00144feabdc0.html#axzz2MmoIPzNJ
This pattern continues with some lead/lag as you can see in the chart until recently. February 1st the two markets have had a notable divergence.

This harkens back to May 2011 when the Euro topped (just like a month ago)...Commodities topped (sound familiar?)...Equities had a shallow pullback until July 2011 when they caught down.......FAST.

In my opinion, Europe still matters. It's a huge market and they are NOT DOING WELL. Since 2/1 the Euro has fallen 5% (and the Dollar has been very strong). Since 2/1 the S&Ps are up 3%. That's a considerable divergence.

I do NOT BELIEVE IN DECOUPLING in an era of global trade/Currency wars.

If that's the case then either the Euro is too low or the S&Ps are too high.

Or maybe I'm wrong. Time will tell.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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