Markets returned to positive territory as Europe appeared to make some progress at its financial summit, sending the S&P up 1.05%, although nothing is set in stone yet regarding a solution.
In commodities, oil took a backseat after two big days, falling 2.47%. Furthermore, the dollar remained at $1.39/Euro. The VIX also dropped 7.32% to fall below 30. As market volatility wavers significantly, I’m still skeptical about an entry point for equity exposure until there’s a more affirmative European game plan.
A sign that the EFSF funding situation has gotten more desperate than seemingly indicated, Sarkozy is planning to ask the Chinese premier for financial aid despite previous statements from China that it wants no part in the debt crisis. The Europeans are still seeking outside assistance given expanded powers of the EFSF that now expand to buying sovereign bonds. And that’s not the only issue at hand.
While it appears that a bank recapitalization plan is in place and an EFSF expansion model is inching closer towards a resolution, the Greek debt write downs remain in limbo.
With bondholders seemingly unwilling to accept a 60 percent haircut, the possibility of Greek default is becoming more realistic. Hopefully, new ECB president Mario Draghi (effective Nov. 1) will be able to put his foot down and achieve some sort of compromise among competing parties.
Meanwhile, it looks like Berlusconi finally came to his senses that Italy’s debt load is out of control. Although not finalized, he authorized asset sales and an increase in the retirement age to reduce the country’s debt, which is currently in excess of $2 trillion.
In relation to the American economy, the increase in durable goods orders (minus transportation) in September as well as a 5.7% increase in new home sales shed some optimism. However, the home sales figures have a caveat as a significant portion of this increase was driven by discounts, revealing that housing has a long way to go towards recovery.
At the present time, I still don’t feel comfortable straying away from my majority position in bond ETFs and cash.
Nonetheless, with our Domestic Buy signal in effect (since 10/25/11), I will be looking for some equity ETF positions to ease into, which I will increase, if we climb high enough above the trend line deeper into bull territory. In the meantime, let’s keep a close eye on Europe.Contact Ulli