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Stock Markets Set to Fall

While European officials have recently taken steps to restore confidence, those steps have not being enough to get anywhere. The plan to restore confidence to financial institutions, isn't restoring confidence. Early earnings reports have pointed to a slow down in European demand. In addition, Greece still needs to default, orderly or otherwise. Let's take a look closer look at the situation.    

The plan to restore confidence to financial institutions, insists that banks first attempt to raise capital in the private market. Estimates for recapitalization of financial institutions have been in the area of $200b. Financials seeking to raise $200b in the private market is going to weigh on the shares of financials and the broader market. A debt or equity offering will adversely impact the shares of financials, either through dilution of existing equity holders or increased gearing of already highly geared financial institutions. The impact to financials will spread to the broader market. Investors want to know what impact capital raising will have on the earning potential of those assets. 

Alcoa kicked off earnings season this week. Alcoa mentioned a slow down in demand, from Europe adversely impacting its profitability. This is only the beginning of a slow down in Europe. Growth estimates have only recently been cut and austerity measures have yet to be fully implemented, specifically in the larger nations, Italy and Spain. As European growth contracts, fixed-income investors will get jittery and yields will rise on the debt of the periphery and possibly the core. A growth-less Greece, mired in social unrest, still hasn't defaulted.

Greece, with a debt-to-gdp ratio approaching 170%, still needs to write-down the value of its national debt. The plan was for a 21% write-down, which has been revised to 50% and in my opinion should be closer to 75%. While it is likely that most banks will take the voluntary write-down, the issue of how much, who takes what write-down and when, still needs to be resolved.

The European nations have binged on debt and have taken drunken steps out of the bar, yet they remain no where near home. The markets are at a resistance level and are showing signs of losing momentum, expect to see the market lower next week, than today's closing prices.