It is with great pride and excitement that we introduce our new quarterly newsletter that we’re calling Insights. In these informative pieces you’ll hear from us, and others, regarding the current market environment as well as a variety of investment and financial topics. Please enjoy.
Washington failed to produce an alternative budget plan so today marks the first day of sequestration—automatic spending cuts of $85 billion over the next seven months (the government’s fiscal year ends September 30th).
Contrary to some opinions, today’s market selloff has little to do with the outcome of yesterday’s elections and much to do with European Central Bank head Mario Draghi’s comment that he anticipated seeing weakness in the European economy for the foreseeable future.
Over this past weekend the Spanish government secured $125 billion in bailout funds (Prime Minister Mariano Rajoy prefers to call it a line of credit) to secure the Spanish banks.
Much has happened this quarter and we’re barely past the midpoint. France elected a Socialist; Greece can’t elect anyone; JPMorgan, the most vocal opponent of the Volcker Rule, had a massive trading error; and, Facebook, the social media giant, came to market with a $16 billion initial public offering that left a bad taste in the mouth’s of individual investors as it appears (ironically, since we are talking about a social media company) that certain information wasn’t shared with them (mostly Facebook users) that was shared with some institutional investors.
It’s done! It’s done? It’s done. We aren’t quite sure how to best characterize the completion of the Greek debt restructuring, but we’re relieved that it is at least temporarily over. In present value terms existing holders of Greek debt took approximately 75% losses on their bonds.
The combination of better-than-expected domestic economic news and the coordinated efforts of six central banks to ease the liquidity needs of European banks ignited a massive global equity market rally yesterday. The S&P 500’s return of 4.33% was its 4th largest last day of the month rally in 1000 observations dating back to 1928.
Even with yesterday’s late afternoon selloff, the market has had quite a run over the past six weeks—the S&P 500 is up nearly 13% over that stretch. That move has gotten it back to essentially unchanged year-to-date.
EU-phoria, that’s what the market is feeling today. The European Union announced a three-pronged solution to the sovereign debt crisis that had been threatening the global economy: 1) they convinced European banks and insurance companies to take a 50% loss on their Greek bonds, 2) they are mandating that European banks increase their reserves to 9% by June 2012, and 3) they committed to leverage the size of the European Financial Stability Facility (EFSF)—the blocs rescue fund, from approximately $600 billion to $1.4 trillion.
The domestic stock market has been on quite a run over the past month—the S&P 500 is up 8.6% since the last week of August. We’re struggling to understand what all the euphoria is about. There is no question that the market was way oversold in the weeks that followed the debt ceiling debacle and the downgrading of the US credit rating from AAA to AA+; but, those conditions warranted a little bounce. What we’ve witnessed is a rally in the absence of any good news.
