Tuesday’s late reversal had investors worried that a Hope Rally was fading quickly. But we should note that stock price moves always have a lot to do with expectations and anticipation.
As we’ve discussed, the stock market traded sharply lower last week as it anticipated the dual threats of Greek default and global recession. Greek default has been on the table for months. And the EU plan that would account for Greek default and help banks survive the event is the most realistic plan they’ve come up with yet. Reports are that it will allow a 50% default by Greece
Clearly, investors are pleased that the EU is, at the least, being realistic when it comes to Greece’s debt. Allowing a partial default keeps Greece in the EU and should ease the anxiety that the EU will collapse.
Now, this plan has yet to be completed. And we’ve sent that EU members have no problem changing their minds at any time. Plus, Germany will have to vote on the expansion of the EFSF fund that is to be used to backstop the Euro-banks.
So there’s still plenty of potential for the current plan to be scrapped. And I suspect that will keep a lid on stock prices, at least until there’s some other catalyst that can take precedence, like the issue of global recession…
I hope that Daily Profit readers are aware of the extent to which the financial media influences the bullish/bearish discussion. When the stock market sells off sharply, you can bet that CNBC and online channels like Yahoo! Finance and even Bloomberg will have plenty of bears represented.
In just the past week, we’ve heard Nouriel Roubini’s message that the world is at the brink of widespread recession. And we heard PIMCO’s Mohamed El-Erian say that the world is at the brink of the next financial crisis.
Yeah, sounds pretty bad. Throwing around words like "global recession" and "next financial crisis" confirms a lot of investors’ worst fears and is bound to get you in the headlines. But it is up to the individual investor to assimilate the available information and come to a conclusion. This is your money we’re talking about here. And while the Wall Street–401K crowd likes to make it sound like you’ll be safe if you invest with their firm, the fact is, they will say just about anything to get your business.
Anyway, back to the discussion…
Roubini, El-Arian can state that recession and financial crisis are coming, but it doesn’t make it so. And yesterday’s durable goods report serves as a good counterpoint to the bears.
Durable goods orders in August came in basically in line. Economists expected now growth from July’s 4.1% increase, and the actual number was -0.1%. Sounds worse than expected, but there is actually good news buried in the report.
Capital goods, which Bloomberg says is things like computers and communications gear, was up 1.1%. That’s the biggest jump since May, and it means that corporations are still spending money. And that doesn’t fit with the recession scenario. (In fact, one might even suggest that companies are increasing their spending ahead of the holiday shopping season, even at the risk of being labeled a heretic.)
Corporations are pretty good at seeing drops in demand coming. And they adjust workforce and spending quickly to compensate. Yesterday’s capital goods number suggests that current demand in the economy hasn’t changed despite the issue in the EU.
It seems to me that current low demand in the economy is a direct reflection of the unemployment rate. And so I believe that there is upside for demand and economic growth. The big question is when.
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