vaughnwoods

In the last week of November, two days before the announcement of a coordinated effort amongst six central banks (ECB, Federal Reserve, Switzerland, Canada, U.K., Japan) to stem the European debt crisis, Credit Suisse analysts stated that the probability of a U.S. recession is 11%. This was bold talk juxtaposed with new hints that French banks were in deep trouble. Moreover, one day later, American Airlines filed for bankruptcy and S&P Research downgraded the credit rating of twelve large US banks. In the last week of November, it seemed like contagion was no longer a theory. It had arrived.

 Analysts knew they had already discounted the possibility of a collapse of the Euro into pricing models because a Lehman Brothers meltdown was not out of the question. Some European banks stopped making overnight loans to other banks. Then, in a burst of contrarianism, famed analyst Lazlo Birinyi reminded people that in his opinion, the U.S. stock market is only halfway through a five year bull market. According to Birinyi, the best is yet to come. Birinyi went on to recommend five stocks for 2012, much the way he did years earlier when he recommended a $7 stock on Luis Rukeyser’s Wall Street Week TV show. The name of the $7 stock? Apple.

Everyone loves a strong non-consensus call. This makes sense since historically some of the best investment opportunities arise when siding against the prevailing market view. The key of course is to have a strong fundamental foundation for your bullish context rather than being contrarian just for the sake of it. To that end, bullish discernment was stiffly set upon the recognition that policy makers had to act. The dour picture emerging from Europe was that chaos would be the end result of a not so unified European Union. As France was increasingly at the center of the market’s attention, the euro crisis moved from the periphery to the core. Even Germany would not have been spared if the European crisis was not managed. Yet, to remain confident and trusting that policy makers will be constructive is difficult. In that regard, it is with humble thanks that I continue to recognize your confidence in our daily activities to engage in actions which are prudent, constructive and productive.

Focusing on France, the French government has been active and reactive during this crisis in pledging to reduce its fiscal deficit to more sustainable levels in due time, and consistently announcing corrective measures in light of downward revision to GDP forecasts (Credit Suisse). Credit Suisse analysts view the recently announced French fiscal measures as positive. France is a diversified economy with no extreme weaknesses. France’s position still remains solid even after discounting further economic weakness and losses. However, if the euro area continues to deteriorate, France may lose its AAA credit rating. Before this occurs, however, France would be put on what rating agencies call a negative outlook. Remember that the UK was put on negative outlook for some time only to have this negative outlook lifted after the new government showed renewed efforts to stabilize the fiscal outlook.

 Nevertheless, more action needs to be taken by the European Central Bank and soon. The coordinated effort by the world’s central banks sends a strong message that more help is on the way – perhaps this time by a united European Central Bank.

Meanwhile, for U.S. markets and the world’s economy, moderate US GDP growth is expected next year even in the wake of major problems in the Euro zone. In fact, a continuation of earnings growth in the US may soften the recession in Europe. Because equity valuations in the US have already discounted a collapse of the Euro, if anything less transpires, multiple expansion may be part of a market rally leading into 2012. It doesn’t take much of an increase in earnings to move the market higher if multiples are expanding at the same time.

Given the momentous events unfolding in Europe and in our markets, I hope to provide you further updates on these issues in the months ahead. It may be that historians will refer to December 2011 as the month when policy makers began a coordinated worldwide effort to stabilize the financial markets. If they are successful than perhaps Birinyi will be right and the best is yet to come.

Best Regards,

Vaughn L. Woods, CFP®, M.B.A.

*Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter may not reflect the views off Delta Equity Services Corp. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0145

**Marketedge.com, Pershing NetExchange Pro, Bloomberg, Credit Suisse, Briefing.com

- Marketedge.com, Pershing NetExchange Pro, Bloomberg, Credit Suisse, Briefing.com, Standard & Poors, WSJ.com

- Credit Suisse - First Edition U.S. Alert – 11-28-11