Archive for July, 2012

European Crisis Meeting Reality

Since the beginning of the crisis in the Euro Zone, the market has viewed the situation very optimistically. Good news, even slightly good news, has been met with market rallies. Bad news has been tempered to such a degree that even if the market trades down on the news, it rallies late and the market ends up only down slightly. Except for Friday’s (June 29th )+267 move (which can also be partly explained by quarter-end window dressing and some short covering in front of the weekend), the market has been selling off slowly but surely. It has been bringing stock valuations down to what many so called experts call “low multiples” and a buying opportunity. However, these multiples are based on current assumptions which could and should be coming down…..potentially dramatically! Indications are that the Euro Zone is heading toward a major, deep recession.

Just today, France dramatically lowered its growth forecast (http://finance.yahoo.com/news/france-lower-gdp-forecasts-2012-181211313.html) and France is considered one of the two powerhouse economies in Europe (the other is Germany). This could be signaling a major problem going forward since France needs to offer “bail outs.” That will be tough to do if France is not growing and doesn’t have extra cash lying around to support others. If France is cutting its growth rate well below 2% then the overall growth rate of the region is probably below that level also!

The corresponding slow-down of economic activity should hurt sales of US companies thus raising the multiples of the US markets. I think that the sell-off we have been seeing is the market’s response to this fact.

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