FYI | Jun 11 2014
By Peter Switzer, Switzer Super Report
We lived through big events last week and I will remember it as D-week. Economically two big D’s delivered, like the Allied Forces did in 1944. One was a Decision and the other a Data release — and possibly significantly, they happened in the week when we commemorated the 70th year since D-Day.
I don’t want to get this out of perspective – the Normandy Landings on D-Day involved over 130,000 Allied forces on a mission to rescue Europe from the Nazis and some 4,400 of the Allied troops, 2,000 French citizens and 5,000 German forces died.
But it was a decisive event that turned around a trend and that’s the link that’s relevant to us, as last week’s developments could be decisive for the course of stocks.
You see, a lot of negativity has been building with doubts about the US recovery, concerns over Europe and the European Central Bank’s response to a threat of deflation, and there are also those out there telling us that China will grow at a 5-6% pace rather than the 7.5% rate projected by the Chinese leadership.
If all of these things came true, then stock valuations would be recalculated and that overdue correction would result and the drop could be closer to 20% than 10%.
Saved by the dip buyers
Right now, markets have defied correction forecasts by doomsday merchants and respected market commentators alike that a crash or significant correction is coming. That’s because any decent sell-off is countered by dip-buyers who believe in the overall comeback story for China, the USA and Europe.
And last week reinforced their optimism.
The Yanks’ job report was a ripper with 217,000 positions created, beating expectations. Now the country has passed the peak of job creation recorded in January 2008 of 134.8 million. The UK newspaper FT called it “a significant moment in the US’s recovery from the Great Recession.”
Sure they need to create even more jobs, as there have been millions more join the workforce, but these very headlines such as FT’s “US jobs market tops pre-crisis peak” all help to add to the positive momentum that is building for the world’s biggest economy.
Meanwhile in Europe, the ECB’s leader, Mario Draghi was sounding Churchillian, if an Italian can ever sound so, when he concluded his work of last Thursday, telling all: “We are not finished here”, which bordered on Schwarzenegger’s “I’ll be back!”
It was a historic meeting of the ECB, with the official interest rate cut from 0.25% to 0.15%, but it also introduced the first ever move to a negative rate of interest for any bank that deposits money with the ECB. Effectively, banks will be punished for doing so and Draghi wants small business to start seeing European banks lending to the sector again. That’s why he launched a 400 billion euros plan called a ‘TLTRO’ or ‘targeted long-term refinancing operations’.
Banks will get this cheap money as long as it goes to small enterprises and it comes at a time when surveys show there is actually a rising demand for loans from business. That’s a nice omen in a good week for omens.
So this is another shot in the dark by the ECB to hopefully restart the recovery and to try to beat the threat of deflation. Draghi became famous for his “whatever it takes” promise and he still has another shot in the locker called Quantitative Easing or QE, which has certainly helped the USA recover but it does take time and this is why I am confident about stocks going forward.
After the ECB decision, Spain’s 10-year government bond yield dropped to a record low of 2.65% and given that this was a once PIIGS basket case economy, which was paying double digit rates for money at the height of the GFC, it says the spook factor in bond markets is low. And that makes me think we stock optimists, or bulls, have time on our side.
Changed minds
Adding to the positivity was a good trade number for China over the weekend, though the GDP increase was down slightly to 7.4% after a 7.7% read in previous quarter. China remains a wait-and-see proposition but manufacturing has been rising. My China experts say “don’t worry” about a slowing China as it is a bigger economy and lower growth rates are to be expected.
Throw in the changed attitudes of the likes of PIMCO’s Bill Gross, GMO’s Jeremy Grantham and Appaloosa Management’s David Tepper, it keeps me certain that being long stocks is the right strategy. I know I have expected a small sell-off, and I still do, but with all of this good news around and the ECB taking significant steps to keep the economic show on the road, it all augurs well for stock price rises.
In fact, I expect them to “grind higher”, which implies less big rises but a longer time where we can be optimistic about economic growth, profits and then share prices. I know the link between growth and share prices is not straightforward but I prefer growth over slowdowns and recessions any day, when I am in a stock-positive frame of mind.
I’d like to finish with something Churchillian to castigate the negative nervous Nellies out there, such as “we will beat them in the economies, in the corridors of policy power and in the stock markets…” but that would be going too far, even for me!
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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