React, Don't Predict

 | Apr 30, 2012 | 4:30 PM EDT  | Comments
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It looks like it is going to shape up to be a busy week. Here at Chez Melvin, we have awards ceremonies for the various academic awards the daughter has piled up going into her graduation from Towson, and that will take me out of the office a few times. Also this week, the Orioles are traveling to New York and then Boston on the "Are They Really This Good?" road trip. The markets are even busier, and a lot of announcements and events this week could provide some noisy gyrations in stock prices.

I ignore most of the white noise we get on a daily basis, but this week could see some fireworks that create opportunities. As always, I will make no prediction about the market's movements but will be prepared to react to whatever happens during the next week.

Today we have the Chicago PMI numbers, personal income numbers and a wave of quarterly reports from community banks. On Tuesday and Wednesday, we get global PMI numbers, starting with the latest novella out of China tomorrow morning. As we move into the week, we also get the ADP report, the jobs number on Friday and the continuation of earnings season. Closely watched companies such as MasterCard (MA) and Visa (V) will release numbers this week, along with General Motors (GM). There will be a constant flow of news and reports that will keep the short-term folks hopping and sweating all week.

The weekend brings the most important events of the week. Two elections in Europe could set the tone for the rest of the year. The one getting all the press is the French election, where it appears that President Nicolas Sarkozy may lose his position and be supplanted by a socialist government led by Francois Hollande. The other potentially critical election is in Greece, where it looks like there is a real chance that neither party gains an advantage and we get more market turmoil out of Athens. Regional elections will also be held in Italy and will be viewed as a referendum on Mario Monti and his economic reform efforts.

The real question facing the markets is what these elections may tell us about the mood in Europe. In the past week we have heard discussions about moving away from the path of austerity and toward what is optimistically called growth. Growth in this case means abandoning austerity measures in favor of more government spending, fueled by borrowing, to create economic activity. There have been no specific suggestions, although Hollande has mentioned a financial transaction tax to pay for growth-related measures in the European Union. I am always amazed that governments that have debt problems believe that more spending will solve their problems, but that seems to be the growing mood in Europe. The citizens of the E.U. are not big fans of cutbacks, and we have seen rallies, demonstrations and riots in response to proposed austerity measures.

If the numbers here at home are weak, we will start to hear cries for further action from the Federal Reserve to stimulate the economy. It is no secret that the markets want some version of QE3, and a bad jobs number or other indication of further slowing may be a catalyst for the Fed to act. Chairman Ben Bernanke has already indicated that he is concerned about next year's automatic spending cuts and tax-cut expirations and the drag they could create on the economic recovery. He has also indicated that the Federal Reserve will act again if necessary to provide additional economic stimulus.

I have no idea how the next week or two will play out. Like any fan of the Austrian school of economics, I am concerned about the ultimate result from all the global stimulus, but the markets have reacted very positively since 2009 to the flood of liquidity that has resulted from fiscal stimulus. If that is the result this time, my positions in names such as Royal Bank of Scotland (RBS) and Aegon (AEG) could resume their upward march, and I would expect my Japanese banks to respond favorably as well. New actions by the Fed at home should be good news for my community-bank stocks.

If it all goes south as a result of the heavy news flow this week, or if the market takes a sudden Austrian turn, I will be prepared. I am putting together a list of stocks that trade near or below their estimated liquidation value and which would become serious buying opportunities if prices dive. As the week develops, I will talk about some of these potentially safe and cheap long-term opportunities. No matter what happens this week, I will react to what it does and avoid the temptation to predict what it might do.

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