Let's see here; thanks to the boys and their computer toys, the stock market is currently tied (inversely) to the dollar, which, is tied (again inversely) to the Euro. And the Euro, of course, appears to be tied to the outlook for the European debt mess. So, like it not; we're all currency traders at the present time - well, except for the 50-1 leverage generally associated with Forex, that is.
The point I'm attempting to convey on this fine Tuesday morning is that "the trade" the hedgies and the big banks are currently running is making a lot of traditional stock market analysis almost useless. Breadth doesn't really matter these days. Volume isn't critical at the moment. Even economic inputs aren't vital. And while earnings always matter, the next parade of quarterly reports doesn't begin for about five weeks. So, with the market stuck in a trading range and driven by the Euro/dollar/stock correlation trade, perhaps the best thing to do is focus our attention on the Euro.
The key question at hand in the Eurozone is whether or not one (or more) of the PIGI'S will default. Logic would seem to dictate that since countries like Greece, Portugal, and Ireland can't raise money in the bond markets without paying the "junk" rates lenders are demanding, they can either default on the current debt (via restructuring, reprofiling, or rescheduling) or hope that they can continue to "kick the can down the road" with additional bailout loans.
The problem with the first option is the fear that the world's financial markets would see a replay of the 2008/09 debacle. A default (technical or otherwise) would create a mess in the financial markets due to the fact that no one is exactly sure what the total impact of the event would be. Remember, the credit markets aren't simple anymore and given the alphabet soup of derivatives out there, nobody really wants to see which banks, brokers, countries, or funds, might "go down" should a country or three start defaulting on their debt.
Most of the world believes that the latter option is the better way to go at the present time. The plan involves borrowing now from the EU/IMF/ECB and then hoping (the key word) that the economies in question will improve enough so that the countries can eventually wean themselves off of the bailout loan programs and return to the debt markets. The key problem here is economics isn't an exact science.
Everybody knows what Greece et al needs to do. There are just two little problems. First, the people who live in these countries and who have grown accustomed to their socialistic lifestyles aren't wild about the demands the EU/IMF/ECB are putting on them. And second, the folks who live in the "good" economies of Europe aren't terribly excited about continuing to spend their money to bail out those that were irresponsible with their checkbooks.
Given the uncertainty relating to the situation, it is easy to see how a downward spiral could develop. Just this weekend we learned that Greece is going to need another bailout loan to make next months' loan payments and that Ireland is going to need more cash. So, if the folks in Germany or Finland really start to balk about continuing to pony up the money for the little PIGI'S, problems could develop. This, of course, would send the Euro down, the dollar higher, and our stock market down (assuming Wall Street's love affair with the current correlation trade continues).
And yet at the same time, it is easy to see that it is in the EU's best interest to not let this thing get out of hand. Assuming that the EU/IMF/ECB and keep things cool and nothing bad happens this week, it is easy to see that the Euro could rise, the dollar could fall, and stocks could go up.
So, there you have it. If you think everything is going to be fine across the pond in the near-term, you can buy stocks. If not, well, maybe buying some dollars and gold might make sense. And with the Big Kahuna (the U.S. Jobs report) scheduled for Friday, it may prove to be an interesting week.
Source: Top Stock Portfolios
