Friday, May 21, 2010

U.S Stock sell off part of exaggerated macro concerns: Not fully warranted

I will dedicate a post shortly on how to read macro data and link it to IDD Magazine's M&A data...but for now...

As I said earlier the PMI data, consumer index and jobs data trend (not last week's blip) should have given equity markets hope and not made them react knee-jerk fashion as they did this week in the sell-off

...Greece seems to have brought out the fears of a 'Coupling Contagion' in the U.S. An overdue correction has occured, which is partly understandable.

I feel that the stock sell off in the U.S. is not based based on a sound basis, and has become an  exaggerated reaction to Europe, some of them are

1. Euro fall leading to U.S companies earnings getting hit (U.S is more dependent on exports esp. technology and capital goods) - partly true, but the dependence is not that great either

2. The ECB version of TARP is not helping as it is leading to fears of more hidden losses (local guys know best, if they are yanking out...hmmm it is better to take a cue) 

My View: ECB is not helping, but to premise the US sell-off on this would be exaggerating its impact considerably and also ignores promising U.S Macro indicators trend

3. Fears of a general slowdown and indeed deflation (Oil Futures got whacked big time) 

My View: Again , Europe's mess is bad, but to base global demand and indeed economic prospects on it would be to miss the forest for the trees. The attention should be on Asia, Brazil, US and other

Whether we may like it or not, Europe's role will continue to decline. The Frame of  Reference needs to change

4. In the short term, the bad jobs data also contributed to negative sentiment in a market that was overdue for a correction 

My View: Again, the jobs data was a blip. The trend has been indicating a recovery...please see my post on May 22 or May 23....

The above video is an interview by renowned expert Ed Yardeni of Yardeni Associates. he touches upon a number of these topics...

ECB Stimulus: Doing a Drachma on the Euro and losing credibility

It is better not to use sweeping terms, but the fact remains that the 1 trillion US$ ECB bail out could have been used better in cleaning up the mess after permitting the Greeks to default. Now, what is happening is the Euro is being put through the 'Drachma effect' of depreciating. The ECB has lost credibility and the financial crisis is much larger now. In addition, the damage to the ECB in buying these 'sub-investment' grade securities is going to hurt it even more....

This is good in a way as it will stimulate exports. But it is bad for the rest of the world because foreign operations of firms in Europe will be impacted negatively. It is going to take a long time as the Euro is here to stay. Any attempt to re-introduce old currencies will be disastrous as the liabilites denominated in Euro will result in immediate default and collapse owing to currency depreciation.

The ECB is going to lurch out slowly and stagger out of this problem unwanted mess...we could have cleaned up much better had the Greeks defaulted...

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