Done Deal. What’s Next?

31 October 2011

October 27th, 2011 (Bloomberg)

“European leaders cajoled bondholders into accepting 50 percent writedowns on Greek debt and boosted their rescue fund’s capacity to 1 trillion euro (US$1.4 trillion) in a crisis-fighting package intended to shield the euro area.

The 17-nation euro and stocks climbed while bond spreads narrowed after leaders emerged early today from a 10-hour summit in Brussels armed with a plan they said points the way out of the quagmire, albeit with some details still to be ironed out.”

Ah yes, love is in the air it would seem! The S&P 500 has surged to its largest monthly rally since 1974, the Euro has risen, oil is up to $92, and European bank stocks are up. If you bought into a position just before the summit, I’d say the day after was your lucky day!

In summary, the European deal has cut Greece’s debt by 100 billion euro in an agreement between the eurozone and banks to take a 50% on their holdings. But how many ‘lucky’ days can we expect in the short term? What can we expect from a region that French President Nicolas Sarkozy says was wrong to admit Greece in 2001? Strong words from a leader whose own country’s pristine AAA rating may be in jeopardy I’d say.

In terms of expectations, one easy answer could be peaks and troughs, right? Well, the chart above certainly speaks for itself…a clearly strong and positive relationship between the number of smiling European leaders and market index performance.

An even more salient realisation is the repetition of short-lived success in the market followed by downturns due to systemic issues (such as Greek’s mountainous debt portfolio). So between Sarkozy’s statement and the likelihood of history repeating itself, I’d go out on a limb to say that there may still be trouble brewing. Would this be in one month, six months, two years? Who knows?

The oil buffs are definitely bullish, with BP Chief Executive Bob Dudley saying that the industry is increasingly using the $90 – $100 range per barrel. While it would be difficult to imagine oil prices reaching this year’s high of $127.02, that price-band is still substantially higher than T&T’s assumptive price of $75 for this year’s budget. Higher oil prices may be desired in themselves, but carefully consider that if these oil companies’ assumptions of higher oil prices are realised, this will also be bad news for inflation at a time when central banks need to keep rates low to help the fragile global economy.

Just think about all that excess liquidity in the system potentially overheating the economy once there is an upswing in activity.

However, after so many headaches and heartaches since 2008, some might view this as a necessary cost in order to regain much-needed investor confidence.

The index above shows how risk-friendly or risk-averse investors are each month by looking at actual levels of risk taken by investors in their portfolios. With the TTSEC stating earlier this week that confidence is “at an all time low,” capitalise on the rally.

Don’t expect it to last however. Take profits while you can as there’s no way to predict the exact heights of the market. ‘Make hay while the sun shines’ seems quite pertinent in this situation, with more rainy days likely to come.

Gerard Stephens
Account Executive

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