The economic news from Italy to Indianapolis has depressed both “Occupiers” and hedge fund managers for some time, but this week’s developments brought some needed cheer.  After the worst Thanksgiving week for the stock market since 1932, consumers stormed the malls, giving retailers record "Black Friday" sales. And this Wednesday, the U.S. Federal Reserve, along with central banks across Europe and Japan, announced a credit agreement to keep money flowing in the Eurozone.  And China, which has been tightening credit for over a year to slow their booming economy and curb inflation, announced a reversal toward easier money.  This will likely shift Chinese demand for housing, vehicles, and consumer goods back into high gear, revving up a whole host of industries.  Here at home, employment is up, and the jobless rate has dropped nationally to 8.6%, according to the Bureau of Labor Statistics.  It still feels shaky, yet the global economy limps along.  Greece has exited from the stage for now, but Italy has placed a seductive toe into the limelight.  Renegotiation of Italy’s debt, along with Spain’s and Portugal’s, will likely occupy business headlines for years to come.

Coordinated action by the U.S., Canadian, European Union, Swiss, and Japanese Central Banks will hopefully keep European banks from swirling down the tubes, for now.   As you may know, the European Union nations of Greece, Italy, Spain, and Portugal are essentially bankrupt.  Ireland has resigned itself to a painful reorganization, the luck of the Irish. The financial contagion that began in the U.S. four years ago has spread to the entire world and landed Europe in the emergency room.  The central banks delivered strong medicine, and the patient may need it for some time to come.

Yet this week’s action clearly shows that central banks are determined to avert a global melt down and catastrophe will be avoided at all cost.  In other words, the world is a safer place to invest.  Daddy’s got your back.

To use another analogy, the global economy will play out like a game of strip poker in a college fraternity basement.  One European nation after another will fold its hand and sit at the table naked.  But amidst the complaints and howls of derision, the beer will keep flowing and the cards will still be dealt.  And at the end of the night, everybody will pick up their clothes and go back to their rooms, business as usual.  Global capitalism is a wonderful thing, indeed.   

Remember Iceland, the first overly leveraged western nation to default on its debt as a result of the 2008 financial crisis?  In a vote of the people this past August, 93% of Icelanders voted to renounce their debt guarantees rather than pay for their bank bailout through higher taxes.  These strong-willed Nordic folks have told their fat cat bankers and the rest of the world to take a hike, chips fall where they may.  And so far, there has been little press coverage here in the U.S., and no significant repercussions globally.  Iceland is a small country with a population of just over three hundred thousand that leveraged its banking system to the hilt with mortgage backed securities.  Such trusting folks!  Frugal and rational Brits and Danes invested in high-yield Icelandic money funds.  You see where this is going?  Financial contagion manifests in strange ways.  Fortunately most of the victims here are Brits.  These mild-mannered people, unable to access their funds for months on end, ultimately getting back half or so of their quid, are unlikely to go postal.

http://www.truth-out.org/why-iceland-should-be-news-not/1322327303

http://www.thisismoney.co.uk/money/news/article-2028276/Iceland-set-pay-British-debt-months-following-massive-sale-retail-stakes.html

The Occupy Movement, however, is starting to lose its cool, following unnecessary violence by police forces on campuses and in cities across this great nation. In Santa Cruz, a spin-off group has taken over a vacant former bank building on River Street.  The local cops have been admirably restrained so far, but the owners of the building want the trespassers out. This spin-off group needs a good grant-writer, and fast, in order to fulfill their dream of turning this building into a community center.  Let’s hope this plays out peacefully. 

They Got Bailed Out, We Got Sold Out.  New York Times business report Andrew Ross Sorkin’s book  Too Big To Fail brings readers inside the homes, offices, and minds of the biggest players of the 2008 financial crisis.  The book humanizes some of the Occupy movement’s enemies while documenting the near melt-down of the global financial system.  Makes a good Christmas gift, or doorstop, if you don't really like to read about this stuff.

Reason and compromise? The Congressional SuperCommittee failed to reach agreement on a deficit-reduction plan, and so Congress has one year to make a new deal or else deep cuts to military and social programs will take effect automatically.  Is it too much to say that the stability of our society and financial markets hang in the balance, thereby begging for reason and compromise? Bah, humbug!  One man and his multi-million dollar non-profit organization, Americans for Tax Reform, controls the votes of 279 Congressmen & Senators on tax issues. To view or read the CBS interview with Grover Norquist, follow this link:

http://www.cbsnews.com/8301-18560_162-57327816/the-pledge-grover-norquists-hold-on-the-gop/?tag=contentMain;contentBody

Self-made billionaire Leon Cooperman, however, has issued a public letter to President Obama encouraging a calmer tone and following up on his 9-point plan to fix the budget and stimulate the economy.  It’s not perfect, but it’s a nice middle ground starting point for negotiators seeking to solve the financial problems facing our nation.  You can view his proposal here:

http://www.institutionalinvestor.com/Article/2884101/Leon-Coopermans-Nine-Point-Presidential-Plan.html?ArticleId=2884101

Amidst this swirl of financial and political wrangling, the stock market has been justifiably volatile, both up and down.  I noted in Blast #29 on October 12 that the stock market reversed to the upside on October 4, but that “rallies above Dow 12,000 appear unsustainable at present”.  Since then, the Dow Jones Industrial Average has closed and failed to hold above 12,000 three times.  Today, once again, it fluttered, but did not fall below 12,000.

So, I am revising my prediction for the Dow Jones Industrial Average.  There will be no collapse, there will be no crash. Markets will gyrate with an upward bias, fluctuating above and below Dow 12,000.  There will be plenty of chills and thrills, but we won’t go off the tracks any time soon.  Many stocks are cheap, and the future is not really so dark.  If it is appropriate to your risk tolerance and investment objectives, consider buying the dips.

If I can be of assistance, do not hesitate to call.

Yours truly,

Paul Drescher, CFP®
Foothill Securities, Inc.
Direct (831) 462-3200