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Euro-drama again, but follow the money

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by Peter Switzer

It could have been the start of another “here we go again” crash of the market, just as we saw last August and September, but fortunately the good old optimistic Yanks put on an afternoon rally to chop the early big losses in half.

That said, European leaders again have put global stock markets into a precarious position and they appear to be doing precious little to avoid a break up of the eurozone.

The trigger again is Spain, and the spiking of the yields on its sovereign bonds to record highs seems to be screaming that not only will their banks and the region of Valencia need a bailout, but so might Spain itself.

If this happens, it then becomes contagion time where the next question goes to Italy and that’s when the European Union’s rescue funds will be found short. That’s when a breakup of the eurozone would become likely, creating economic dislocation, market uncertainty or even panic and we would be looking at a worldwide recession and GFC Mk II!

That’s why I shake my head at what the European leaders are doing — or not doing!

Wall Street lower

Anyway, the Yanks did their bit to support the bulls who can’t believe we can’t muddle through this. The Dow was down 101.11 or 0.79 per cent to 12,721.46 and the S&P 500 index was off 12.14 or 0.89 per cent to 1350.52.

This was a great result given the fact that the German DAX was down 210 points or 3.18 per cent.

Last week I did a Boomtown Rats piece saying I hate Mondays. The reason for this lament was added to in New York with the eighth down Monday in a row. CNBC says the last time this happened was in 2002, which was in the Dotcom Crash. But the size of the sell-off was a positive considering all of the news out of Europe was terrible with the Spanish economy contracting in the June quarter and more regional governments putting up their hand for help. And the Spanish and Italians evened it out with short-selling bans!

Then there were reports that the International Monetary Fund (IMF) would pull funds from Greece and the country’s Prime Minister was talking about a depression. This didn’t help its stock market, which slumped 7.1 per cent!

The good news

The one piece of good news apart from Wall Street’s comeback late in the day was the fact that JP Morgan’s CEO, Jamie Dimon, bought 500,000 shares in his own company.

Now, of course he has been in the poo for the big $4.4 billion loss because of the so-called London Whale, but I would like to think Dimon has vision on the big picture (even if he missed the small $4.4 billion picture), and his investment in his bank is a proxy for what he thinks will eventually happen for the world economy, the US economy and his bank.

Of course, many US traders remain confident or less Euro-scared because they know the Federal Reserve and QE3 are out there waiting to happen if the Europeans stuff up.

I hope following the money, which is a great strategy on the market and at the track, will pay dividends for us cautious optimists.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Tuesday, July 24, 2012

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