Friday, June 17, 2011

Reasons for Positive Market

On Friday, U.S. stocks posted their first weekly gain since April, but just barely. At one point, with about 30 minutes left to go until the market closed, it was uncertain whether the S&P 500 and/or Dow Jones would be able to pull through and post this weekly gain.

Now, there were a few factors that helped push these two indexes over the top today. However, all of the reasons were misnomers and misleading thereby giving no substantial reason to believe that stocks will stay up by next week.

Let's go by every factor that helped facilitate these gains and I will explain why they were fallacious to be acted upon:

Reason #1: Before the market had opened on Friday, French President Nicolas Sarkozy and German Chancellor Angela Merkel said in a joint press conference that they were confident and hopeful that the Greek crisis will be resolved quickly and that they were committed to preserving the euro's stability.

Why Fallacious: Both Sarkozy and Merkel would have been well aware of the economic effects any type of negative, therefore truthful, remarks on the state of the eurozone crisis would have had, especially in the foreign exchange market concerning the euro. Of course, it is in the best interest of Sarkozy and Merkel to prop up the euro in the face of impending catastrophe. It's the same reason why Bernanke refuses to admit that the dollar's devaluation has been a result of quantitative easing. The truth is that there is no solving the Greek crisis in a way that both the long and short term would be positively affected, especially not in the suggested ways that European leaders have urged. Even if by some ingenious way the Greek issue is settled with both bureaucratic and popular support, crises in Ireland and Portugal would not be far behind. And behind those two are Spain and Italy, respectively. So, any belief that the eurozone crisis is anywhere near solved is erroneous. Sarkozy and Merkel should be charged with a Pump N' Dump scheme.

Reason #2: Also before the markets had opened on Friday, there was seemingly good news that the Greek government had reshuffled its cabinet highlighted by the appointment of a new finance minister, Evangelos Venizelos. These were considered positive steps in ensuring that Greece avoids a debt default.

Why Fallacious: As stated before, the chances the Greek government gets their house in order in a way that would subdue the majority of popular protests are slim. Ironically, the markets responded positively to Reason #2 although former Fed Chairman Alan Greenspan had said in a Friday interview with Charlie Rose that a Greek default was "almost certain" and that it would almost certainly cause a double dip recession in the United States.

Reason #3: Out of the two economic data pieces released today, one was the Conference Board's leading indicators that showed a surprising strong growth of .8% for the month of May. This positive data led to a positive response in the markets and led one economist to say that this figure should "squash double-dip fears."

Why Fallacious: As mentioned the leading indicators was only half of the economic data released. Note that its increases took place in the month of May. However, the other economic data released was by the University of Michigan and Thompson Reuters showed that, in June, consumer sentiment has fallen to 71.8, a worse than expected figure. Notice how the bulls, and aforementioned economist, were able to focus solely on the positive data and neglect the more recent, and equally as vital, negative data. I'm not completely sure how a worse than expected drop in consumer sentiment should "squash double dip fears."

Reason #4: Moody's waited until late in the day to announce that it was considering downgrading Italy's credit rating due to structural weaknesses and a likely rise in interest rates.

Why Fallacious: Watching the markets late in the day, it was obvious that this late announcement played a role in the uncertainty as to whether or not the S&P and DJIA would post weekly gains. In the end, the bulls prevailed. However, this ties into Reasons #1 and #2 where I explained that the eurozone crisis is far from resolved and that even a Greek solution would not forestall impending crises in other countries, including possibly Italy. While I do not believe Italy will be in a situation anywhere near comparable to Greece or Portugal, the fact that there are internal uncertainties in yet another European country should have signaled to the markets that the European leaders cannot be trusted to be objective in their sentiments and speeches.

It seems the prevailing wisdom was not so prevailing today. It could have possibly been for confidence reasons that allowed the markets to post a weekly gain for the first time in 6 weeks. Even Wall Street wants some reason to be happy. However, I do not believe these sentiments will last through next week. However if they do, it could simply be attributed to more selective economic readings by the bulls that will crowd out the warnings from the bears.

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