Well, that's what I'm doing w/this morning's market rally…fading it. I'm not jumping into this buying frenzy, for several reasons…..
1) True we avoided a meltdown of potentially cataclysmic proportions in Europe thanks to the key aspects of the deal struck overnight: the lack of subordination of existing debtholders, the agreement to set up a Europe-wide bank supervisor, and the aid to bring Spanish and Italian rates down immediately (which has already worked). BUT…..the longer term structural problems do not appear to have been touched in any meaningful way. Also, the bank supervisory body won't be in place for some time to come. So, in sum, reason to applaud, but no standing ovation.
2) US earnings parade will start in a couple of weeks. Did you see what happened to Nike (NYSE:NKE) last night on disappointing earnings, largely fueled by a slowdown in Europe, the very place where they were supposed to excel due their new sneaker technology, heavy marketing campaign, European soccer championships and upcoming Olympics? Or did you see Ford's comments this morning re overseas losses tripling from last quarter? I suspect other companies will suffer the same fate and therefore the risk weighting associated w/a disappointing overall earnings season should go up…..btw…that's on top of the already slowing momentum of earnings growth that has been witnessed in recent quarters.
3) US 'fiscal cliff'….say no more! Ok, say more….what happens if we don't address the requisite budget targets….sequestration? What impact would that have on the economy? Also, what are the rating agencies (who appear to be trigger happy these days) likely do with a US credit rating that is supposed to reflect our country's ability to pay its debts when the dysfunction in Washington continues, no agreement of prudent spending cuts and tax increases can be reached, and the only option remains sequestration where the depth and breadth of the cuts might cause our economy to reverse course and possibly head towards recession?
There's more, including the slowdown in China that may prove to be less 'soft' than hoped for, or geopolitical risks associated with the usual suspects in the Middle East, etc., but suffice to say, while the immediate impact of last night's agreement in Europe is certainly worthy of some uptick in equity asset valuations (throw in the pop in the Euro which, if sustained, means that for US companies, the fx conversion of overseas earnings back into USD will help on reported earnings), the headwinds fighting sustained upward movement in broad sectors of the global equity markets remain quite strong.
(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
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Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NKE over the next 72 hours.
Additional disclosure: Positions may change at any time without notice.