February, Tuesday 21, 2012

DOW +15 = 12965

SPX +0.98 = 1362
NAS – 3 = 2948
10 YR YLD +.04 = 2.05%

OIL +2.64 = 105.88
GOLD + 26.20 = 1761.30
SILV + .74 = 34.45
PLAT + 44.00 = 1694.00

The European Union has approved a $170 billion-dollar bailout package for Greece. No surprise; they had to come up with a deal, they were running out of time. The Euro-crisis is now officially under control; at least for a couple of days. There is still the little problem of making sure the ring-fences hold. The Euro-Union has set up massive pools of money to make emergency loans. The ECB has loaned more than $600 billion to Euro-banks. It still remains to be seen if the loans do anything more than allow the Euro-banks to kick the can down the road. Meanwhile, the Euro-zone is in a recession and the prescribed medicine is austerity. The cure may be worse than the affliction.

And when all is said and done, the cure may not actually cure anything. Part of the plan is to bring down Greek debt to 120% of GDP within the next 8 years, but if Greece misses a few economic assumptions, they might end up with debt to GDP at 160%. And the truth is that whether it is 120% or 160%, the debt is going to bury Greece, and the bailout won't stop it.

Countries like Germany might demand even tougher conditions on loans. Politics and democracy might destabilize the markets. Part of the deal was an attempt to push back elections in Greece. There is a good chance that the current political powers will be swept out in an election; polls indicate that far left parties are going to be swept in. These parties want nothing to do with simply taking on more debt to satisfy old debt holders.

The bailout model is not a sustainable model. Nobody thinks it's a good idea to make Greece a template. The Greek Prime Minister spoke of a choice between “austerity” and “disorder”. He got both. There is still a concern that private sector investors might dump European government bonds if they fear more debt write downs; and that might set off another round of financial woes.

So, there was a Greek bailout but the Euro-crisis is only under control for a couple of days; it is not resolved; it is not over.

So, now that we've relegated Europe to back burner status for a couple of days, what else can we worry about?

Well, the US economy is copacetic. Just don't stop at the gas station. There is a station in L.A. Charging $5 a gallon for premium. Iran apparently didn't get the memo that they were supposed to drop to their knees, trembling at the thought of sanctions. Instead, Iran just sent two warships through the Suez Canal. Brent crude just hit $121 per barrel. West Texas Intermediate hit $105. Iran is cutting off oil deliveries to the UK and France, but that wasn't much to begin with. Sudan has halted oil exports, Syria's uprising has cut oil production by 400,000 barrels a day. Saudi Arabia has not been able to compensate by ramping up production. India continues to buy from Iran. China is is the process of working out a deal to buy Iranian oil. Turkey wants to work out a deal. So, really, except for the saber rattling, the sanctions against Iran haven't had much effect. But the oil market is full of jittery traders, or at least traders who are willing to act jittery if it will drive prices higher. And the same people that complain that the US response to Iran hasn't been strong enough are also complaining about the higher prices at the pump.

Over the past couple of weeks, US demand for gasoline has dried up. Normally we start to see a season increase in driving but not this year; maybe this is an indicator of future consumer behavior; maybe consumers are tightening their collective belts once again. We'll have to wait and see. Consumers’ assessment of the labor market was also less positive. Those saying jobs are “plentiful” decreased to 6.1 percent from 6.6 percent, while those claiming jobs are “hard to get” increased to 43.5 percent from 41.6 percent.

So, except for the high price of energy, everything is copacetic. The Dow Industrials made a run at the 13,000 level. The last time was May 2008. We  hit 13,005 and the market drifted lower. That 13,000 level is nothing special; it's just a number, a round number. The Dow has generally been rising since the beginning of 2012, and is up by more than 6 percent. The S&P is up more than 8 percent in the year to date.

So, let's see if we can find any elephants that left footprints in the sand; in other words, where is the big money? Many hedge funds think the European Central Bank’s long-term refinancing operations (LTRO), which flooded markets with $644 billion of cheap cash in December and provide more this month, are a turning point in propping up the region’s battered banks. They are also betting that China, which is facing a fifth successive quarter of slowing economic growth, will experience a so-called ‘soft landing’, while the U.S., which saw its fastest growth in one-and-a-half years in the fourth quarter, is firmly on the recovery path.

The blended earnings growth rate for the S&P 500 for Q4 2011 currently stands at 5.5%. If this is the final earnings growth rate for the quarter, it will mark the end of the streak of consecutive quarters of double-digit earnings growth at eight. However, the streak of consecutive quarters of overall earnings growth will extend to nine. Looking ahead to the current quarter, what is the projected earnings growth rate for Q1 2012? Are analysts expecting the streak of consecutive quarters of earnings growth for the S&P 500 to continue? Based on the current estimates, the answer is no. As of today, the estimated earnings growth rate for the S&P 500 dropped to 0.0%. The growth rate has steadily dropped from 8.0% on September 30 to 3.0% on December 30 to 0.0% today. I know that doesn't sound great, but the markets aren't acting scared. Everything is copacetic, at least for now.