On the Edge of Glory
With all due respect to our readers, we are not going to give you much insight on yesterday's market action. Trust us. If we did, your head would be spinning and you'd be left with a sense of not knowing what you just read. The only information that is pertinent is that the Dow gained 0.3%, the Nasdaq dropped 0.2%, and the S&P 500 increased 0.5%.
How we got there is irrelevant, but let's just say there was a lot of headline nonsense about the impending EU Summit that played a major role.
The only thing that can be said for certain about that summit is that there are a number of known unknowns.
We know that private holders of Greek debt are going to be asked to take a bigger writedown. Nobody knows for certain what the size of that writedown will be.
We know that there will be a bank recapitalization plan for European banks. Nobody knows for certain what the size of that plan will be.
We know that the European Financial Stability Facility will be used to help mitigate a run on European sovereign bond markets. Nobody knows for certain how much leverage the EFSF will have to do that.
All of the speculation on these main points, and other items, like the discord between Merkel and Sarkozy over whether streusel or eclairs will be served for dessert at the summit dinner, has become a fool's stomping ground. Fittingly, one can easily lose their mind watching the flood of conflicting headlines on this all-important summit.
In the end, the facts will come out from the leaders themselves (reportedly no later than Wednesday) and not from a gaggle of unnamed sources and so-called senior officials. Until then, it is simply gambling trying to allocate capital on an expected outcome that has more looks than Lady Gaga.
Having said all that, the cash market looks poised for a solid start. The S&P futures are trading 1.1% above fair value on this options expiration day. Yes, this bullish bias reportedly has a lot to do with optimism over the expected outcome from the summit, as new headlines now suggest Merkel and Sarkozy are "on the same page" ahead of the European summit.
It is probably worth noting that a quarterback and a receiver can break the huddle on the same page of the playbook, only to realize they weren't really on the same page they each thought they were when the quarterback throws a down-and-out while the receiver runs a down-and-in.
It's now game-time, though, and perfect execution is key for these leaders. Unfortunately, perfect execution has not been a trait of the European players, but this is a moment where they could be on "the edge of glory" (A Lady Gaga song... sorry).
On an unrelated note, corporations continue to execute very well, even perfect in some cases, as evidenced by the third quarter earnings reports. Microsoft (MSFT), General Electric (GE), Verizon (VZ), and McDonald's (MCD) all did what they had to do, which is not disappoint with their earnings results.
While headlines about Europe continue to dominate the action, it is fair to say that the earnings news continues to provide an important measure of support for the broader market. If European leaders can manage not to mess things up, the earnings results should ultimately be seen as a solid foundation for an upside breakout for the equity market.
--Patrick J. O'Hare, Briefing.com
Patrick J. O'Hare is Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial, please email researchsales@briefing.com.
Take time to look around, even on a down day!
