As I detailed in my post from 10/21, the resolution to the European sovereign debt crisis has played out according to what I had anticipated. Merkel had sufficiently lowered expectations to allow for a plan the market would embrace. U.S. corporate earnings are benefiting from the same mechanism: beating lowered expectations. With bearishness so high, as expressed in cash not just sentiment, the market was spring coiled for a pretty strong move higher. I had raised the prospect of a knee jerk sell on the news, always need an “out,” but that was not my high probability case and I did say I would have added on that momentary decline. I dont’ expect same reaction in US markets as we had in Europe. Asia type pop is more likely today.
But that is just for today, we will go up by 10-15% from here. How do I get to my upside: market basically flat on the year despite S&P earnings up approximately 15% this year and forecast up 13% next year. So we’re behind by that 15%, at least.
So where are we now? Europe is in a recession and it will deepen. In order for the banks to get to 9% Tier 1 ratios, they will begin by pulling in credit lines, removing that portion of their liabilities. This will lead to a further stifling of credit. Austerity measures will further crimp spending.
But most importantly we face the overhang of the details. But at this point there is no reason not to believe that the EU will work out sufficient details to support the plan. Maybe Washington can take a lesson on getting a plan to the finish line from the 17 EU currency countries. Nonetheless the trend of the market is higher. I am still sticking with high quality defensive stocks for the most part: WLP, KO. After today, junk will still be junk and quality, still quality. NFLX still overvalued, RIMM, despite all its problems, still cheaper than NFLX. At least they are making money during an all out assault on their business model. Hold sold most of NIHD before release given high expectations and big run but will buy tight here, down 14%.