How Much Can US Stocks Decouple? - Real Time Insight
June 18 2012 - 8:16AM
Zacks
After Greece's somewhat positive election
outcomes, the reality remains that the great eurozone monetary
experiment is still in deep trouble. Spanish bond yields soaring to
new euro-era highs above 7.25% is proof of that.
Regardless of Greece staying within the fold for
another few months are bigger issues of politics, solvency, growth
and integration that will determine the fate--indeed the
survival--of the single currency regime.
And it should also be clear now to all that the
troika is not rushing to the rescue with any grand plans that will
make any difference in the next few weeks, or even months. Yes,
they are drafting specific blueprints for greater eurozone
integration that will likely be unveiled around the time of the
next EU Summit June 28-29, including banking and fiscal union that
will shield against future crises.
But many of those structural reforms depend on EU
treaty and other legal amendments that will take time. German
Chancellor Merkel and Finance Minister Schaueble have been
telegraphing as much for weeks. They see the path of full
integration taking two to five years on the low
end.
And this works fine for Germany because they can
get a lot of things sorted out during that time; things like who
stays and who leaves, and who can get their fiscal house in
order and who can't. In this way, they ensure fiscal discipline
before they dare step down the slippery slope of "debt sharing"
(i.e., eurobonds, quantitative easing, and all other forms of
monetizing debt and money printing).
Last fall, I was convinced that Europe would get
the Fed's religion of QE if only because they saw how bad the US
credit crisis hit our economy and markets in 2008 and 2009. But as
I learned more and more about their philosophical and economic
views and witnessed their stubborn resolve, I realized that they
will let member countries go to the brink of disaster before they
give in on the ECB becoming the lender of last
resort.
Given this, can you imagine that US markets
once again slowly adjust to the snail's pace of eurozone "action"
as participants realize this crisis is going to be with us for
another few years?
And how likely is it that the S&P lows of
1,266 hold in the face of the euro-mess, China deceleration, and
our approaching "fiscal cliff?"
These are various ways of asking "can we
decouple?"
Obviously, to answer this line of questioning,
you will probably also consider things like the extent of Europe's
debt and banking crisis and its impact on their
recession.
In this morning's "Profit from the Pros" letter,
Reity put together a decent scenario matrix with some probabilities
and outcomes that get you thinking. He doesn't believe US
stocks are pricing-in all the odds of something going wrong in the
near-term.
For those who haven't seen it, I share
it below because framing our investing and trading questions
this way gives you a good framework for making decisions that suit
you, ahead of time. In other words, before you are caught
off-guard and thinking emotionally. You don't have to get the
probabilities right, you just have to know what you will do
under different outcomes.
"So even though I think the European debt
situation will be contained in time, there is still a 10-15% chance
that their politicians botch it up leading to a Lehman type
implosion.
"Even with no implosion, there is about another 20% chance that the
European economy slips into such a steep recession that they export
their troubles to other economies around the world.
Adding it all up there is a 65-70% chance of things being fine with
US stocks free to make normal annual gains. And then there is a
30-35% chance of stocks being decimated over the next
year."
And you see how I got through this whole thing so far without
even discussing new Federal Reserve QE? It will be interesting
to see if we can talk about these problems and
disregard the "nearly out of meaningful bullets" Fed. Unless
of course you think markets are waiting for a short-term stimulus
driven rally soon.
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PWRSH-DB US$ BU (UUP): ETF Research Reports
(VIX): ETF Research Reports
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