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Mistimed honesty hurts stocks

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by Peter Switzer

The warm and fuzzy feelings investors had towards European officials (who have mishandled their management of market perceptions connected to Euro-debt) went appreciably colder overnight.

The blunt news, which really should not be a big surprise, was that the Dow was down 247.49 points, or 2.13 per cent, to 11,397 and you can blame a big mouth or continually procrastinating eurozone official!

Yep, I guess you can’t blame the German Finance Minister for being honest but the market didn’t like hearing that the eurozone summit on the weekend will not give us the actual blueprint of how Europe will fix its debt challenges.

As Homer Simpson would say, “Doh!”

The culprit is Wolfgang Schaeuble, who is the German Finance Minister, and he came clean telling us not to expect a solution from the 23 October meeting.

Rally not over

Expert traders make a few points that keep the door open on the prospect that this rally isn’t over yet.

First, the volume wasn’t great. When the news is really bad, a sell-off usually will have more volume. And second, with a 1000-point rally or so since the most recent low, a pullback has to be expected.

Wolgang’s admission was a timely trigger for the traders who prefer to bank profits when market-disappointing news shows up.

Positive vs. negative

In other news that will help the bulls’ case for sticking to stocks, Citigroup came out with better-than-expected earnings and Wells Fargo only missed its earnings target by the smallest miss possible but still got clobbered by the market which was anti-bank because of the European question marks.

On the disappointing front, the Empire State index which measures manufacturing in New York remained stuck around -8.5 but economists had hoped for a number around minus-four.

Against that, overall US industrial production was up 0.2 per cent, which was what was tipped.

This weekend

Over the weekend ahead, the people who drive global stock markets want to know from the EU summit what money the European Financial Stability Facility (EFSF) will have, how the banks will be recapitalised and what kinds of hit the banks will have to take to swap their unwanted or unsellable Greek bonds for what will effectively be EFSF bonds, which will improve the calibre of their balance sheets.

Once this happens, the black clouds hanging over European banks will start to disappear. However, if the EU plan lacks clarity and doesn’t generate confidence, those black clouds could rain on our rally and wash away the value we have pocketed in recent weeks.

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.

Watch more from Peter on SWITZER TV.

Published on: Tuesday, October 18, 2011

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