Monday, December 12, 2011

The Shanghai Index has now closed down for the seventh time in the past nine days, and it appears short-term oversold.

Miller Tabak's Peter Boockvar chimes in on Fitch's comments:

After Moody's did earlier today, Fitch is giving its thoughts on Friday's EU summit. "It seems that a 'comprehensive solution' to the current crisis is not on offer." They acknowledged the initiation of an "institutional and policy framework for a more viable eurozone and ultimately greater fiscal union, but taking the gradualist approach imposes additional economic and financial costs compared with an immediate comprehensive solution. It means the crisis will continue at varying levels of intensity throughout 2012 and probably beyond, until the region is able to sustain broad economic recovery." Fitch didn't define what a 'comprehensive solution' would look like however. On the ECB Fitch believes they are "the only truly credible firewall against liquidity and even solvency crisis in Europe." "Hopes that the ECB would step up its actions in support of its sovereign shareholders as a quid pro quo for institutional and legal changes that gave the ECB greater confidence in the long run commitment of eurozone governments to fiscal discipline appear to have been misplaced."

The euro versus the U.S. dollar is now at the lowest level since early October.

I expect interest rates to slowly march higher in 2012, and reinvestment rates for life insurers should improve for the industry.

Trading at low multiples and at discounts to book value.....

Intel cut its forecast - it's a component shortage issue, not a demand issue.

"In times like these, it is helpful to remember that there have always been times like these."

-- Paul Harvey

The Eurozone's Solution (All Hat, No Cattle?)

The European leaders did the minimum amount necessary to stem the debt contagion. We got timid and tame instead of shock and awe. Though the market rejoiced on Friday, the reluctance to mimic the U.S.'s quantitative-easing approach renders the European sovereign debt and bank recapitalization program unresolved and will likely constrain stock market valuations and the prices of other risk assets. The initial plan argues for a deeper recession in 2012-2013 amid the heavy lifting of austerity punctuated (at best) by uncertainty of outcome and (at worst) by the dissolution of the euro. (John Mauldin does a good job in presenting the situation in this week's "Thoughts from the Frontline: A Player to Be Named Later.")

As a result, it is my expectation that, as soon as this week, a hangover will immediately follow the EU's announcement on Friday, with a high probability that sovereign debt yields (in Spain and Italy) begin to climb again. And so will an imminent downgrade of France follow the new but toothless EU fiscal framework that fails to counter the debt crisis with a more aggressive printing strategy.

Furthermore, with the economic outlook for the eurozone weakening (posthaste), investors will likely remain skeptical that the proposed enforcement actions against deficit-ramping sovereigns will be effective. The concept of an EU repo man, frankly, is almost comical. The EU will basically ask fiscally crippled sovereigns that fail to meet their new "stress tests" to escrow monies that they don't have or can't afford. Another question is whether a meaningful escrow will even be demanded.

The new rules seem squishy to me and without substance or much strength to alleviate a deep-rooted contagion and debt crisis.

My guess is that the crisis continues, the initial framework unravels and more aggressive steps are taken, in the fullness of time.