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Is a Groundhog Day crash coming?

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by Peter Switzer

The good news is that the Dow Jones only lost 104 points after it was down around 200 points earlier in the day. The bad news is that there’s no good news out of Europe.

So, it makes me ponder — is a Groundhog Day crash coming like August and September of last year?

Helping the US market overnight was a Wall Street Journal article which reported the Federal Reserve stands ready with QE3 if growth and jobs don’t pick up. The Yanks get GDP growth numbers on Friday and then jobs on the following Friday.

Europe watch

Undoubtedly Wall Street’s woes are Europe-generated and unless something convincing happens soon, the smarties will try a big sell-off just like last year. Then it’s Groundhog Day, with eurozone officials having summits, markets getting worse, some half-arsed rescue plan knocked up that lasts for a few months and then we get ready for the next round of incompetence out of Europe.

Meanwhile the Fed boss, Ben Bernanke, is in a quandary. Like last year — Groundhog Day again! — he has a Congress standoff to worry about in the shape of a fiscal cliff which means automatically tax cuts and spending will cease at year’s end. This will hurt the US economy and could create a recession so he would rather keep QE3 until then. In fact, he would prefer Europe to get a solution, the US election out of the way, a new fiscal plan passed by Congress and have no need to use QE3 because the economy is recovering under its own steam — that would NOT be Groundhog Day!

It looks like we’re in precarious waters and could be close to another dive like last year if something positive doesn’t turn up soon. The S&P 500 ended down 12.21 points or 0.9 per cent to 1,338.31 and the chartists are worried at the level around 1,334 to 1,337 — as I say, we’re close.

Right now both Spain (with too high 10-year bond yields meaning the country might need a bailout) and Greece (said to need a new debt deal) are making it hard to be positive on stocks. Meanwhile debt-ratings agency, Moody’s, did not help by putting Germany and the Netherlands on negative watch because they’re exposed by their links to their eurozone partners!

In a better economic world, emerging economies — Asia, South America and Russia, etc. and the USA would manage to grow better than expected but Europe’s lack of growth makes that harder to achieve.

Learn to grow

That said, I think the world needs to learn to grow with a battered eurozone, but that goal was not helped by the latest read on manufacturing with the Richmond Fed index for the mid-Atlantic region falling more than expected. That’s why Fed action with QE3 is needed now but as I have argued, Bernanke needs to keep his trump card up his sleeve.

If Europe keeps dragging the chain, another Groundhog Day market slump will happen.

The Europeans are like tightwads trying to get a rescue on the cheap but all they will do is make themselves poorer — unfortunately it hurts us too.

Finally, for those who need good news, house prices rose in the USA in April and are now up 3.7 per cent for the year! It’s good but it won’t change the Groundhog Day market collapse that is possible and looking more probable.

I hope I’m wrong.

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: Wednesday, July 25, 2012

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