A big market move might be ahead

Founder and Publisher of the Switzer Report
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While Europe and its debt predicament will remain the main focus for financial markets right into 2012, this week investors will be tuned in to the decisions of the US Congress’s ‘super committee’ as the 23 November deadline to slash debt looms. That’s Wednesday – one day before Thanksgiving — so let’s hope the Yanks have something to be thankful for.

The super committee is made up of six democrats and six republicans and their job is to find US$1.2 trillion worth of budget cuts to be introduced over the next ten years. Early indications suggest the group won’t reach an agreement, but if the expert Congress watchers are wrong, the market could spike higher.

But a failure to agree might not be so bad for stocks because automatic budget cuts are earmarked to start in 2013 if the super committee proves to be less than super.

Of course, the last time the Congress goofed up on deficits and debt, S&P downgraded the US credit rating and the stock market dived.

In a nutshell, the Republicans don’t want the tax increases that the Democrats want and the Democrats don’t want to can their more generous health care and social security programs, which the Republicans don’t support.

By the way, in case you are counting, the US government’s debt is now at US$15 trillion!

And what about Europe?

Well, the word is the European Central Bank (ECB) is buying bonds and yields are falling as a result, but will they be successful in keeping yields down?

Lower yields will keep borrowing costs down, which can be a make or break for governments over their heads in debt.

So it’s these bond yields that market expert players will be watching closely and Mohamed El-Erian, the CEO of PIMCO – the biggest bond trading business in the world – is doing exactly that. He told CNBC there are signs the market can swing big time either way.

He is worried the European debt issue is leading to lots of deleveraging by financial institutions, while others in good financial positions are reducing their willingness to play the usual game of banking. This is not good for business and ultimately stock prices. El-Erian told CNBC that regulatory developments and traditional end-of-year behaviour is influencing the actions of financial institutions right now.

This shows up as liquidity problems as fewer players play, putting pressure on the ECB to increase the eurozone’s money supply to keep funds pumping through the economy. However, some think the ECB won’t deliver its potential shock and awe actions until they are sure the troubled governments of the eurozone have committed to fiscal reform.

Spain is going to an election on Sunday, Europe time, where the current government looks like ‘dead meat’ and this could mean the ECB will have to wait and see what a new government proposes for its reform agenda.

But it’s not all bad news with Dick Bove, a US banking expert from Rochdale Securities, telling CNBC that it is time to buy US banks – despite European concerns!

US banks as a group are down 28% for the year, while financials in the S&P 500 are down 22% for the year.

Bove has gone from being all cash around mid-year to 50% in stocks now and he argues banks are over-beaten up.

I certainly believe Europe is still a loose cannon but a hell of a lot of onetime negatives are turning positive. Only the political nincompoops in Europe and the US stand in the way of some solid improvement for stocks.

Go the ECB!

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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