Tuesday, May 15, 2012

New Realities: Not Solely Domestic

1 - Last call: our New Realities: Investing seminar is tomorrow at 5:30pm. If you haven't registered yet, we would love to see you there. I promise to make it entertaining, and I even have a little surprise announcement in store. Following the one-hour program, we will enjoy passed hors d'oeuvres by Pat Strother along with casual conversation. This event is open to the public; please attend -- and invite a friend. You can register either online or by calling Michele at 859-7001 (ext. 2). 

2 - Don't look now, but the European crisis is back following recent elections in France and Greece. French voters elected Socialist François Hollande as president. He has promised to revisit the Eurozone accord led by German Chancellor Angela Merkel.  Greek national elections resulted in a deeply divided parliament -- and no clear leader. Hold on to your hat; things could get ugly again. See the story below for more info on this unsettling topic.

3 - Many investors put faith in special individuals who can see what the rest of us can't, who know just the right stock to buy at just the right time and price. Those special individuals are known as gurus, and there's always a market for them. There's just one problem: they don't really exist. Check out this week's video for a brief explanation. 

4 - Mother's Day was yesterday, of course. For some of us who no longer have our mothers, the day brings treasured memories of wisdom, discipline, guidance -- and, most of all, unconditional love. A mother is unique among the universe; if you still have yours, treasure her. 

Have a terrific week!


Changes in Europe Bring Fresh Anxiety to Wall Street
Will stocks face further headwinds, or sail strongly ahead?

Eurozone debt issues aren't going away -- in fact, it may be several years before the crisis ebbs. Here in May, we have a new development: leaders in Greece and France have been voted out of office, with the risk of jeopardizing the agreed-upon Greek bailout, the close alliance between Eurozone economic powerhouses France and Germany, and in the worst-case scenario, possibly even the European Union itself.
 U.S. stocks retreated from May 7-11, perhaps in part because of the news from the Eurozone. The concern may be whether we are going to have a replay of 2011 -- a new round of EU squabbling that will increase Wall Street volatility.

Some analysts think U.S. stocks can ride through these anxieties without much damage. Others wonder how "decoupled" we are from the crisis.  

What's going on in Greece? On May 6, Greece held a national election from which no majority party emerged. From May 7-11, three attempts were made to form a unity government; they all failed. Hopefully, by the time you read this, current Greek president Karolos Papoulias will have negotiated his way to a coalition. Or, the nation's next president could turn out to be Alexis Tsipras, leader of the radical-left Syriza party that gained ground with voters on its pledge to fight the austerity cuts that the Greek government agreed to as part of the latest EU/IMF bailout. If no coalition emerges in the Greek parliament, there could be another national election in June.1,2

Greece made a deal with its bondholders months ago: they accepted write-downs on the bonds they held with the promise that those bonds would be swapped for new ones. If Greece backs out of this deal, no one knows what will happen. Some analysts think the hit would be primarily taken by Italy, Portgual and Spain -- investors would probably require higher interest rates on government bonds from these nations, which would push them further into debt. If investors pull their money out of the Spanish and Italian bond markets, Spain and Italy might end up needing bailouts.3

In the most severe scenario, Greece rejects the agreed-upon bailout deal and the euro along with it. That could lead to huge problems. A single rejection of the euro from an EU member might reveal a deeply flawed currency. A perception of a failing euro would hurt the currency and the value of European equities and bank debt; euro-denominated bonds would find fewer investors. So the global currency swap market could be damaged, with a multi-continent recession a possible consequence. Hopefully, things won't go this far.3

What's going on in France? President Nicolas Sarkozy lost a national election to Francois Hollande, a socialist who is widely considered a moderate. Hollande wants to see an economic stimulus for France even with the austerity measures coming, and he has indicated that he will propose the same thing for Germany when he meets with German chancellor Angela Merkel.3

You may recall that Merkel and Sarkozy formed a united front these last couple of years -- affirming their faith in the euro and helping to broker the Greek bailouts. Hollande and Merkel would seem to have immediate philosophical differences about fixing the EU economy, and any difference of philosophy between the leaders of the EU's two most powerful economies doesn't bode well for unity.

Defending the euro may be their most important task. It would be unimaginable to have one of the globe's reserve currencies fall apart. If currency traders see a departing euro, then conditions would be right for another global credit crunch.

What does this mean for Wall Street? If the data stream from our recovering economy can drag Wall Street's attention away from Europe -- and if the EU and IMF leaders successfully hurdle this latest obstacle -- then the impact on U.S. equities might be short-term.

Economists have warned of a fragmented Eurozone before, yet it has held together despite remarkable stress. Common ground was painful to reach, yet a feasible Greek bailout plan emerged from it. Now that common ground must be regained.

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