- - Thursday, December 8, 2011


Down, up and down again she goes. Where we stop, nobody knows.

While that sounds like something out of a nursery school rhyme, it is in reality the movement in the stock market over the past three weeks. A horrific Thanksgiving week, the worst since 1932. That was followed by a move in the market akin to the launch of a rocket ship as the S&P 500 jumped 9 percent over the days after better-than-expected Black Friday and Cyber Monday sales. That gap in the index also reflected the growing hope that the eurozone would come to terms with its debt and deficit and enact a viable solution.

Until recently, the stock market had been taking a favorable view of the outcome in Europe. As I wrote several weeks ago, I have had my doubts and it appears that point of view has gained ground with others this week. That sentiment shift began early this week when Standard & Poor’s placed the eurozone countries, including AAA-rated Germany and France, under credit watch for a possible rating review.

As background, AAA is the highest rating assigned by any agency and is considered to indicate top-notch creditworthiness. Reasons cited by Standard & Poor’s for keeping those sovereign ratings on watch included tightening credit conditions, disagreements among European policymakers, high levels of government and household indebtedness. Not too dissimilar from the reasons why Standard & Poor’s downgraded the U.S. credit rating in August.

The ante was upped on Wednesday when Standard & Poor’s warned of a possible downgrade of the European Union’s coveted AAA rating, as well as the ratings of some of the region’s largest lenders, including BNP Paribas and Deutsche Bank. I suspect there was little to no coincidence in the timing of that warning given the summit Thursday and Friday at which the European leaders are exploring solutions to the escalating eurozone debt crisis.

Yes, I said escalating, and I did so because the latest data from Markit showed private-sector activity across the eurozone continued to shrink in November. Two key revelations in the November data were that the eurozone’s four largest nations - Germany, France, Italy and Spain - contracted in November and overall activity in the eurozone contracted for a third consecutive month, putting the region on course for a 0.6 percent contraction in the fourth quarter. The ripple effect already is being felt as evidenced by the contraction in China’s manufacturing and services purchasing managers indexes in November compared with October.

Making matters worse, the European Central Bank, which has been viewed as a key force in the eventual eurozone solution, shared measures Thursday to help ease pressure on banks, but none to bail out its debt-laden governments. The central bank also stopped short of giving any commitment to increased purchases of government bonds, saying the bank’s program of government debt purchases is “neither infinite nor eternal.”

In short, the European Central Bank did not deliver the financial bazooka that many hoped it would and that has resulted in a sharp move downward for the major stock indexes.

All in all, it will be a tense Friday heading into a weekend that will require vigilance and analysis to understand the short- and long-term implications of any and all solutions that come out of the eurozone summit. If a credible solution of size fails to materialize, odds are that the recent gains we have seen in the market will come under even more pressure as investors and economists recalibrate their outlooks.

Chinese credit ratings firm Dagong Global Credit Rating Co. already has downgraded France’s sovereign debt, citing its poor economic prospects, while the Bank of France forecasts that the French economy will stall in the current quarter and deliver zero growth after expanding 0.4 percent in the previous quarter.

As always, the devil is in the details. More as it develops.

Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington, D.C., area. He can be reached at cversace@washingtontimes.com. Follow him on Twitter @ChrisJVersace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.



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