1. Our modified Dow Theory discipline more important than ever; we posted this analysis by Stratfor on October 3, 2011, with warning, when SPX was 1074. "All told, STRATFOR estimates that a bailout fund that can manage the fallout from a Greek ejection would need to manage roughly 2 trillion euros". Has the EU crisis gotten better ... or worse? What does Dow Theory say? What's the trend since October 27?
2. Barron's: "2nd half of 2012 should give rise to 12% gains",
3. Tobias Levkovich, in next 12 to 18 months we could see a major bull market rally of 30% or more:
a. A decade of zero price gains, two burst bubbles, and a wave of successive credit crises may have set the stage for a huge bull rally, says Citi's Tobias Levkovich. A housing recovery, progress towards energy independence, and a number of other forces will align to spark the start of a bull market at some point during the next 12-18 months. Levkovich adds, “While we do not expect the markets to react to these drivers in the near term, their coalescence could generate a much more impressive rally over the next few years.”
4. Fitch Ratings says "EU has neither political structure ability or economic to solve financial and solvency crisis"... S&P readies wholesale downgrades:
Fitch affirms France's AAA rating, but revises the outlook to negative. "The affirmation ... is underpinned by its wealthy and diversified economy. ... its financing flexibility reflecting its status as a large benchmark euro area sovereign issuer." The negative outlook is all about "contingent liabilities," i.e. if French bank liabilities become French state liabilities. In addition to France, Fitch also places Belgium, Spain, Slovenia, Italy, Ireland, and Cyrus on negative watch. "Fitch has concluded a 'comprehensive solution' to the euro crisis is technically and politically beyond reach."
More from Fitch: "France is in Fitch's judgement the most exposed to a further intensification of the crisis." The negative outlook indicates just over a 50% chance of a ratings cut over the next 2 years.
In Friday's S&P downgrade of Spain's Canary Islands lies a hint the agency could soon move on the country itself. "(Concern) on the Canary Islands mirrors that (of) Spain ... (and) the potential impact on Spain of what we view as deepening political, financial, and monetary problems within the EMU ... We could lower the ratings on Spain by up to 2 notches."
5. El Erian's dire take "Deep Dive, Downward Spiral: http://www.foreignpolicy.com/articles/2011/12/15/downward_spiral?page=0,1
5a. ECRI: "recession on way, inevitable"; http://www.businesscycle.com/news_events/news_details/3105
6. Christine Lagarde sounds clarion call/warning of impending world wide doom this week.
a. Speaking at the State Department, IMF chief Lagarde hits the usual points, warning of a return to a variety of 1930s style "isms" (protectionism, isolationism, ...) if the agency doesn't get hundreds of billions in additional funding to parcel out to needy European countries. "No country or region" is immune to the dangers, she says.
7. Economists (including Elliott, Lachmann, Ely, Rosner, Sanders) from Brookings, American Enterprise, Cato Institute, Graham & Fisher, George mason UI.) in testimony on Thursday to US House Oversight Committee on Government Reform of Financial Institutions, Bailouts and TARP Study: (this is link to video of Hearing, which I watched live, took notes)
Transcripts of testimony:
a. EU is largely insolvent and unable to work its way out due to fixed exchange rate of Euro, socialism/political structures that prevent countries from being able to generate growth or attract capital to help create growth sufficient to generate GDP expansion, to overcome unsustainable sovereign debt and unsustainable "entitlement" commitments to largely unmotivated and unproductive populations;
b. US Banks have $1T in EU banks, mostly France and Germany, that places US money market accounts again at risk, a default by Italy (due to German and French bank holdings of Italian sovereign debt) likely leads to US money markets seizing up;
c. US Banks have loans and commitments exceeding of $5T to EU countries and banks: "U.S. banks, and their subsidiaries, have $2.7 trillion in loans and other commitments to eurozone governments, banks, and corporations, and roughly $2 trillion more of exposure to the UK. U.S. insurers, mutual funds, pension funds, and other entities also have a great deal committed to Europe. ...";
d. US Federal Reserve swap line making US$ available to EU countries is about $600B, temporarily alleviates liquidity issues for cannot avert or address insolvency of at least 6 EU countries, inevitable coming defaults and exposes US to $600B in potential losses;
e. an IMF bailout wold cost US taxpayers starting at around $200B, but that would not solve the issues in any way, this just based on current exposure;
f. US Fed bailout of US money markets could be requires, meanwhile short term credit availability seizes up, major disruption world wide to credit markets;
8. Elliot, Testifying before the House Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs, Douglas Elliott discusses the likelihood that the euro crisis will cause Europe to plunge into a deep recession and the United States into a mild recession. Elliott warns that the crisis is likely to get worse before it gets better:
"...There is a significant chance that the euro crisis could go badly enough wrong that Europe plunges into a deep recession that puts the U.S. into at least a mild recession. The eurozone has the resources to avoid such an outcome and I believe there is a three in four chance that they will do so, but the one in four chance of disaster could come to pass due to very complicated political constraints in Europe. The crisis is likely to get worse before it gets better, as it will probably take the imminent possibility of disaster to allow the politicians to break through those political constraints. At that point, it may be necessary for European leaders to produce a comprehensive package backed by as much as 2 trillion euros of available funds...."
9. What do you suppose bond markets and stock markets will do in event of likely scenario described above?
10. Wonder why US' $SPX can't hold 200sma or key Fibonnaci level of 1225, which represents 62% recovery from 2007 highs?
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