Rate Cut Friday
Research for Online Investors

by John Dalt

10/07/11

After setting a new 52-week low, the market has been on a good run this week.  It is no surprise the market is giving some of it back this morning.  Traders are always anxious to take profits off the table on Fridays.  Who knows what can happen over the weekend?

Not long after the market started faltering, Fitch announced downgrades to Italian and Spanish debt.  Concerning the downgrade of Spain, Fitch wrote:

“The downgrade primarily reflect two factors: the intensification of the euro area crisis and secondly, risks to the fiscal consolidation effort arising from the budgetary performance of some regions and downward revision by Fitch of Spain’s medium-term growth prospects…a credible and comprehensive solution to the crisis is politically and technically complex and will take time to put in place and to earn the trust of investors.

Gross external debt (169% of GDP in 2010) is not high by euro area comparison; the net external debt of the economy (91% of GDP in 2010) is one of the highest in the world.”

French President Nicolas Sarkozy and German Chancellor Angela Merkel are going to hold talks on Sunday concerning recapitalizing eurozone banks.  France wants to use European Financial Stability Facility (EFSF) funds to recapitalize banks.  Germany wants each country to recapitalize their own banks, with the EFSF acting as a funding source only when no national funds are available.  Eurozone leaders will meet in Brussels on October 17 and 18.  Sarkozy and Merkel will try to work out their differences so they can set the agenda.

French banks have the largest exposure to ‘dodgy’ debt from troubled countries.  The French are worried they may endanger their sovereign debt rating of AAA if the government has to pump too much money into the country’s banks.  Germany contributes the largest share of funds to the EFSF, and doesn’t want to fund the bailout of banks across the eurozone.

France has the highest debt-to-GDP ratio of any of the six AAA rated countries in the eurozone at 86.2%  Sarkozy is facing elections next year and is currently trailing the Socialists in opinion polls.

What happens to the Eurozone when France gets downgraded?

Yesterday the Bank of England (BOE) announced their version of QE2. The British Central Bank sanctioned another $116 billion injection of cash into the economy. Bank Chief Mervyn King said “This is the most serious financial crisis at least since the 1930’s, if not ever.  We’re creating money because there’s not enough money in the economy.”  Britain’s GDP grew by 0.1% in the second quarter.

The Bank of England will use the new money to buy government debt from England’s banks between now and the end of the year.  The BOE pumped $310 billion into the monetary system between March 2009 and January 2010 in their first round of quantitative easing.

The Labor Department released the Non Farm payroll report for September this morning. Nonfarm payrolls (jobs) increased by 103,000. Today's chart compares nonfarm payrolls following the end of the latest economic recession (i.e. the Great Recession -- solid red line) to that of the prior recession (i.e. 2001 recession -- dashed gold line) to that of the average post-recession from 1954-2000 (dashed blue line). The current jobs recovery is much weaker than the average jobs recovery that follows the end of a recession. Today's chart also illustrates that the current jobs recovery has been slightly stronger than what occurred following the recession of 2001 (census workers). However, the upward trend has slowed significantly over the past five months.

Chart courtesy of www.chartoftheday.com

Quote:
You can’t understand the U.S. market at all unless you understand Europe.-- Alan Greenspan on CNBC 10/07/11

The mailbag:
When I was putting my husband through college at Ohio State in the 70's, we didn't wear designer clothing, and we didn't have time to demonstrate.--Long-Term & Buy, Sell, Hold subscriber G.C.

John's reply:  I was too busy working part time jobs (around studying) to pay for it.  Every Christmas break I would stop in Wichita on my way home and pick up a laborer's job to work full time during the break.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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