The agreement among European Union leaders meeting in Brussels sent the American stock market into the stratosphere on Thursday. The terms of the agreement require that the region’s banks would be recapitalized; that the borrowing capacity of the European Financial Stability Facility (EFSF) would be increased to 1 trillion euros in addition to a commitment by banks and other private bondholders to accept a 50% write-down on Greek debt. Despite Thursday’s stock market mania (which was intensified by a Commerce Department report that third quarter GDP reached an annualized rate of 2.5%) there were warnings from numerous commentators, who advised against getting swept-up by the hype.
Stephen Gandel, who writes The Curious Capitalist blog for Time, noted that “worry is still in strong supply”:
Still, for a number of economists today’s news wasn’t enough to wipe away their general pessimism about the economy. Paul Ashworth, chief U.S. economist at Capital Economics, said the growth was temporary and would soon fade. Nigal Gault at IHS Global Insight said the most likely outlook for the U.S. is continued weak growth. Josh Bivens of the think tank the Economic Policy Institute said that “the strongest growth in a year was still not strong enough.” NBER economist Justin Wolfers said the recovery has been delayed another quarter.
At The New York Times, Landon Thomas characterized the rally over the euro deal as “relief mixed with wariness”:
For one thing, while the agreement by banks to write down 50 percent of Greek debt was welcomed, the deal’s success is conditioned on investors’ “agreeing” to take such a large loss. If a large number of investors refuse to accept such a loss, then the plan loses its voluntary status and would thus become a default – creating more unease and panic in the markets.
Moreover, private investors are not obliged to take the write-down, and two big holders of Greek debt, the International Monetary Fund and the European Central Bank, are not granting debt relief. So it is not clear how much of Greece’s overall sovereign debt of 340 billion euros ($480 billion) is going to be forgiven.
And it remains to be seen whether the debt relief for Greece will prompt other countries – Spain, Italy, Portugal or Ireland – to seek similar treatment.
The most dire warning for investors came from Comstock Partners:
The economic sectors that have shown some recent improvement are generally coincident or lagging indicators while leading indicators appear to be showing some weakness. The ECRI Weekly Leading Indicator is at levels indicating a recession ahead. This indicator has a good record of predicting past recessions and has never forecast one that didn’t occur. If this prediction is accurate, we will be going into a recession in such a fragile economic environment that we would expect any recession to be severe. Some of the statistics are; 9.1% unemployment, 22% of homeowners underwater, about 5 million homes in inventory or shadow inventory, home prices continuing to decline, and debt (all sectors) at historically high levels.
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In sum, we believe that the current rally will not last much longer and that the lows of 2009 will eventually be retested. We did not expect the S&P 500 to rise above the significant resistance of 1250, but it did rise above it this week. We shouldn’t be surprised to see another “bear market trap” after the housing and stock market bubble (and the 100% move up from the oversold condition in March of 2009), all within the secular bear market that started in early 2000. It seems that investors in U.S. equities will never learn from past experience, but we would now really be surprised if the market exceeded the early May peak of 1370 on the S&P 500.
The Dow Jones Industrial Average surged by an enormous 339 points on Thursday, to close at 12,208 for a gain of 2.86 percent. The S&P 500 advanced by 3.43 percent to finish at 1,284. The NASDAQ Composite jumped by 3.32 percent to end the day at 2,738.
Miami-based corporations had a great day on Thursday. Ryder System (R) led the group with a fat gain of 5.13% to close at 51.41. Lennar (LEN) was next, advancing by 4.31% to finish at 17.19. Carnival Cruise Lines (CCL) rose by 2.60% to close at 36.73. Royal Caribbean (RCL) advanced by 1.94% to end the day at 29.47.
The following companies will be playing “beat the number” on Friday, with the release of their quarterly earnings reports: Amcol International (ACO), American Axle (AXL), Amerigroup (AGP), Aon Corp (AON), Arch Coal (ACI), Barnes Group (B), BorgWarner (BWA), Cablevision Systems (CVC), Calpine (CPN), Chevron (CVX), Cigna (CI), Interpublic Group (IPG), ITT Corp (ITT), Lear Corp (LEA), Merck (MRK), Newell Rubbermaid (NWL), OneBeacon Insurance Group (OB), Oppenheimer Holdings (OPY), Rockwell Collins (COL), Standard Register (SR), Superior Industries International (SUP), TenneCo (TEN), Goodyear (GT), West Coast Bancorp (WCBO), Weyerhaeuser (WY) and Whirlpool (WHR). Good luck!