Tuesday, September 13, 2011
With nothing major on the U.S. economic calendar, stocks will likely again be reflecting the developments, or lack thereof, from across the pond in Europe. The debt problems in Europe remain a major source of headline risk for the market. The extreme market volatility on Monday was a function of Europe and we will likely get more of the same today.
I find it difficult to buy into some of the extreme calls about Europe, such as that Greece will default or that it will be kicked out of the European Union. It is probably marginally cheaper for Germany and France to re-capitalize their banks than to keep bailing out country after country. But it is hard to envision the monetary/currency union surviving if you let Greece default or be removed from the Union, the unraveling of which is a far more costly and destabilizing alternative for Germany than the current situation.
What this means is that the core of the EU common currency group, which is basically Germany and France, will not let it unravel. Then why do we have all this tough talk from German officials every now and then?
They do this to keep pressure on the Greeks and the other countries so that they can work towards fixing their budget problems. The Greeks and the others are unlikely to implement the tough austerity measures unless they are pressured to do so. And that’s exactly what has been happening lately. The problem is that this constant back and forth is very unsettling for the markets. But we’d better get used to it.
Europe aside, we have a few important corporate headlines this morning. Best Buy (BBY) came out short of EPS and revenue expectations this morning. Cracker Barrel (CBRL) beat on earnings, missed on revenue, but raised its quarterly dividend by 14%. We got weak guidance from Steel Dynamics (STLD) after the close on Monday.
Sheraz Mian
Director of Research
Zacks Investment Research
