Bernanke pulled out all the stops and confounded the naysayers with a major QE announcement that caught 65% of traders off guard.
Art Cashin said roughly 60% to 70% of traders were expecting Bernanke to announce something but it would be a disappointment. Those traders expected a likely continuation to Operation Twist and probably an extension of the low interest rate expectations from the current target of mid 2014 to mid 2015. Bernanke went nuclear and roasted all those traders expecting a sell on the news event. He announced QE3 where the Fed will buy $40 billion of mortgage backed securities a month until the economy becomes self sustaining. There is no cutoff date. When asked in the press conference what would prompt the Fed to end the program he kept it vague saying better employment and a rising economy.
He believes the shock to the system in 2013 from the fiscal cliff, continued government deficits and weakness in the global economy will keep the U.S. economy from recovering. There are some Fed members that believe we will fall back into recession by Q1.
Bernanke's admits that QE3 can't replace the government policies now in effect but he is trying to push the market ahead at a fast enough pace that the damage from the fiscal cliff and/or its eventual remedy will not be serious.
Yes, he said market. He admitted again that rising asset prices including equities and real estate had a positive impact on consumer sentiment and rising asset prices would prompt more consumer spending. By keeping mortgage rates at an all time low it will prompt a continued rebound in the housing sector and provide employment and rising sales in household items like appliances, electronics, furniture, landscaping, etc, and the services businesses that go along with building, upgrading, moving, etc.
Bernanke also extended Operation Twist through year end and that will add another $45 billion per month in bond buying. Twist is rolling out short dated treasuries into longer dated maturities plus reinvesting the proceeds from those that have matured. Since the Fed is almost out of inventory on short term securities the majority of Twist buying the rest of the year will be from proceeds of maturing treasuries. The combination of the two programs will see $85 billion in monthly buying through the end of December.
The Fed also extended their expected time horizon to maintain low interest rates from mid 2014 to mid-2015. Actually vice chairman Janet Yellin said several Fed members actually expect low rates to last through 2017.
The triple announcement plus the unlimited dates on QE3 caught traders off guard and the markets roared off to triple digit gains on the Dow and new multi-year highs. On Friday the Dow was only 4% below an historic high although it closed well off its highs and came within 10 points of negative territory.
There was no sell the news event since the news and press conference were both stronger than expected. In theory now that we have hit new highs across the board we should continue higher. Like Yogi Berra said, "Theory never works in practice." I think we need to be planning on higher highs but remain wary about the potential for the markets to come down off their sugar high. I believe the dips will be bought. We are approaching quarter end and window dressing is going to be huge this quarter. No fund manager wants to show a large cash position with the markets at multiyear highs.
Before I get too far into this commentary everyone needs to realize the Fed is "all in" with respect to stimulus. They could still cut the overnight interest on funds on deposit at the Fed, currently 0.25%, but that would cause a lot of grief at the banks. Currently there is $1.6 trillion in cash on deposit at the Fed because banks are not lending. Credit quality has declined after the defaults during the financial crisis and lending standards are vastly higher than they were before the crisis. That means banks have lots of cash they can't use. Even at a microscopic 0.25% interest it is still income rather than do nothing with it. Bottom line, the Fed is now out of bullets.
The downside to a nuclear Bernanke is the impact on the middle class, the falling dollar and what could be a sharp spike in inflation. Seniors trying to live on their retirement savings are now facing several more years of limited income.
The economy is expected to grow by about 1% in Q1-2013 and not improve much the rest of the year. If the economy does not pick up speed then the Fed is going to be increasing its $2.8 trillion balance sheet by about $480 billion a year. Even though they are printing new digital money to make these purchases there is a limit to how much they can spend. Is it $3 trillion, $4 trillion, $5 trillion? Global investors will not continue to buy our debt with the Fed's balance sheet much over $3 trillion. There is a limit to the amount of risk reasonable people will pay even if they are in China. I know the Fed's balance sheet and the government debt are two different things but they are still linked.
Bank of America analyst Priya Misra, wrote on Friday the Fed's balance sheet could grow to $5 trillion by the end of 2014. "We do not believe there will be a substantial improvement in the labor market over the next 18-24 months and we believe the Fed will buy additional treasuries after the end of Operation Twist." BofA thinks the Fed will own 33% of the entire mortgage market by the end of 2014. They believe the Fed will own 65% of the 6-year to 30-year treasury market at the end of 2014. If that BofA prediction comes true we could expect $3,000 gold and $200 oil thanks to the $2.5 trillion of NEW QE added to the system. How exactly would you unwind a position that big without crashing the system?
QE or printing new digital money lowers the value of the dollar. That makes the price of everything we buy more expensive. A gallon of gasoline that costs $4 today could cost $4.50 six months from now because of the cheaper dollar. It takes more dollars to buy the same item.
Bernanke said the Fed would continue the program until employment improved or inflation accelerated. He would not disclose any targets for either one but analysts are thinking 7% unemployment and 3% inflation would probably be the cutoff. The Fed's normal target rate for inflation is 2%. He was asked if the Fed would be more lenient on the inflation target if unemployment was still high. He dodged the answer with a little Fedspeak.
While it is entirely possible that inflation ends this grand experiment in QE sooner rather than later it is awfully hard to fuel inflation when unemployment is so high. People have to earn the money to pay inflated prices or prices will remain low due to competition for reduced consumer spending. If unemployment remains low then inflation should be contained but the entire premise of this exercise is to increase employment.
Also, inflation in things like food, oil and gas is hard to stop since the inputs into those items are commodities and cheaper dollars pushes commodity prices higher. While consumers will be faced with paying more for those things it won't actually count in the Fed's math since food and energy are removed from the CPI calculation due to "volatility."
Dollar Index Chart
Bernanke claims the economy, specifically employment, is being held back by the approaching fiscal cliff. His QE3 is an attempt to overcome the impact of that cliff. However, I believe the cliff will be dealt with by Congress before year end simply because it would be a dereliction of duty for Congress to actually allow the U.S. fall off that cliff. We may not like how they deal with it since it will be a lame duck session that handles the problem but it will be handled. The solution may be worse than the problem but I am betting they kick the can farther down the road to force the new lawmakers to fix it. If the cliff goes away then the economy improves and QE3 should go away by the end of 2013. If the cliff just gets postponed then QE3 could last longer than expected.
As an example the House of Representatives reconvened this week after several weeks of vacation. Actually they were campaigning but it was officially a vacation. They quietly passed a continuing resolution that would keep the government operating for six more months without a budget. The Senate has been unable to approve a budget from the president for three years now. The last vote on the president's budget was 99-0 against and the democrats have the majority in the Senate. They could have passed anything they wanted but in an election year they preferred to punt the ball rather than run with it. The two houses have been passing monthly "continuing resolutions" to keep the government running. That they passed a six month resolution this time just shows how hostile they expect the new crop of lawmakers to be in January. After passing the resolution in the house they are going to adjourn until after the election, still 55 days away. With the divided House and Senate and the president in election mode they realized nothing was going to get done so why bother. This is just another example of why the fiscal cliff can is going to be kicked down the road as well.
Lastly, the Fed has never been able to extract stimulus from the market without crashing it. Since this post crisis stimulus is the largest in human history the odds are zero of them being able to extract themselves from this project in a timely manner with a minimum of pain. About the only thing they might try would be to quit buying and then hold those mortgages until they mature. That is not going to happen simply because of the term on the mortgages. They can probably get out of the Operation Twist securities of 5-7 year duration by letting them mature and maybe dumping a few off from time to time but the more the Fed adds to its balance sheet the worse the hangover will be. Actually it will be more like a drug addict going through withdrawal. A hangover will be minimal compared to the potential for volatility when the Fed decides to exit.
One analyst mentioned another reason for an unlimited QE program was to support the Federal deficit. The government has a lot of debt rolling over in 2013 plus they will need to borrow another $1.2 trillion or so for the 2013 deficit. They need interest rates as low as possible to keep the interest on the debt as low as possible. I have discussed this several times in the past. The only thing keeping the U.S. from being Greece is a 1% interest rate. If the interest on our $16 trillion in debt suddenly ballooned to 5% or 6% we would implode. We would be unable to sell enough new debt to pay the interest on the old debt and fund future deficits.
To emphasize this problem Egan Jones cut the debt rating on the USA from AA to AA- on Friday saying the Fed's latest QE program will likely hurt the economy more than help it. "The plan will weaken the dollar and push up the prices on commodities leaving less for consumers to spend on other things." They also warned the government's borrowing costs would probably rise anyway once the global economy begins to recover. Egan Jones cut the rating from AAA to AA back in July 2011 just before S&P cut their U.S. rating from AAA. Moody's has already warned they will likely cut the rating from AAa if budget negotiations fail. Fitch Ratings also issued a warning of a potential downgrade.
I just have one question. Actually I have a lot but I only have space for one. QE is supposed to drive down interest rates. If that is the case then why did the yield on the ten-year Note spike to close at a four-month high? Is that a lack of faith in the master plan or deteriorating credit quality? Inquiring minds want to know. I personally believe it was because current bond holders fled fixed income in order to move to equities and commodities. In a QE environment, cash is trash, and that goes for fixed income as well. I believe investors were racing to get out of bonds and into hard assets like equities. That selling pushed rates higher.
Ten-Year Yield Chart
Is QE really a good thing for the economy? Since QE2 was announced in Nov-2010 the stock market has risen by $3.2 trillion in value according to S&P and the Dow is 4% from a new high. Five stocks accounted for 19% of that gain. Those were Apple, IBM, GE, Exxon and Chevron. The wealth effect is working for somebody. However, those at the poverty level are the highest in 70 years. The pace of small business creation is at a 40-year low. Twenty five million people are unemployed and 47.6 million people are on food stamps. Why will QE3 be any different?
To emphasize the point on QE causing inflation the Consumer Price Index for August was released on Friday. The headline number rose by +0.6% and the biggest move in more than three years. The biggest factor in the spike was a sharp rise in food and gasoline prices. However, the core rate the Fed watches, without food and energy, rose only +0.1%. Clearly there is no inflation if you don't eat or drive. Gasoline rose +9% in August. Food prices rose slightly but we still have not seen the impact from the worst drought in 60 years. That will come later this year. The Dept of Agriculture is now saying the damage is not as severe as expected. Half the corn crop has reached maturity and that is more than some analysts expected at this point in the growing season.
Retail Sales for August rose +0.9% after a strong +0.6% in July. That more than reversed three consecutive months of declines totaling -1.3%. However, energy prices skewed those numbers. If you subtract the rise in gasoline prices the headline number falls to only +0.1% for the month. Gasoline station sales rose +5.5% and the biggest increase since 2009. Sure glad there is no inflation (grin). Electronics and appliances saw sales decline -1.4%. That was probably due to the drop in iPhone sales ahead of the September announcement. Analysts said sales have been very weak for the last two months ever since Jefferies revealed the September 12th announcement date. Year over year sales growth rose to +4.7% but that was mostly autos and fuel. Several groups reported sales lower than last August. Those included electronics, appliances, warehouse clubs and superstores. Drug and department stores were flat.
Industrial production for August fell by -1.2% with broad weakness across all categories. Manufacturing production declined -0.7% as a result of a -4% decline in auto manufacturing. This was the worst month for industrial production since the recovery began. With lackluster demand and rising inventories the outlook is not good for September. Order growth is slowing and suggests there will be minimal hiring this month.
Industrial Production Chart
Business inventories rose +0.8% in July and well over the consensus estimate for a +0.3% rise. This compares to a +0.1% rise in May. The inventory build is a result of the slowdown in retail sales and a decline in production will follow. This rise in inventories will also be a drag on Q3 GDP as it was in the prior two quarters.
Given all the economic headlines recently the Consumer Sentiment for September surprised everyone with a jump of +4.9 points to 79.2. The present conditions component actually declined from 88.7 to 88.3 but the expectations component jumped from 65.1 to 73.4. Given the rising price of gasoline and falling job gains it was a shock to see sentiment jump. Analysts attributed it to the political conventions and the speeches promising a job for everyone and a return to prosperity. Unfortunately speeches by political candidates rarely come true so this convention bounce in sentiment may fade once the next round of credit card bills comes in the mail and gas prices move over $4 thanks to QE3.
Consumer Sentiment Chart
The economic calendar for next week has a couple of housing reports that will be critical in keeping the housing sector rally alive. The biggest report for the week is the Philly Fed Manufacturing Survey. There was a slight improvement last month from -12.9 to -7.1 but that was the fourth consecutive month in contraction territory. If it dips again it could put a cloud over the market but QE3 will probably burn right through it and the Philly Fed will become one more brick in the wall of worry. If by chance the report turns positive it will add further fuel for the quarter end window dressing.
The EU meetings this weekend have already seen headlines shrinking the elephant in the room. That elephant is Greece and their coming default. The headlines claim the EU leaders are developing a "growing consensus" over giving Greece more time to meet its economic targets. If the Greek deficit turns out to be worse than expected they are going to give Greece more time but NOT more money. I think we can count on a deeper deficit. Something will emerge from the meeting about giving Greece more time because they have no choice. You can't change a spade into a club just because you want it to happen otherwise poker would be no fun. Greece will default and the EU can make it appear less damaging by bending the rules, again.
All the big economic events are now behind us and the market will have to return its focus to stock fundamentals. Oops! I must have had a senior moment there. If stocks were being priced today according to their fundamentals we would be significantly lower next week.
Q3 earnings are now expected to show a decline of about -3%. Remember, Intel and FedEx have already warned and we will probably see some new warnings next week. We are only three weeks from Q3 earnings season so time is running out for companies to confess.
The Dow managers are going to make a change on Sept-24th. Kraft (KFT), which is splitting itself into two companies, will be leaving the index and United Health (UNH) is taking their place. The Dow closed over 13,500 on Friday, a four-year high. The change will not impact the price of the average on the day it is made. They have a calculation to make sure nothing changes and it is modified every time a substitution is made. Twice the Dow has gone for 17 years with no changes. The managers said UNH was picked because of the growing impact of health care on the U.S. economy. UNH shares jumped +1.38 on the news but ended the day with only a fractional gain.
Quite a few people have been pushing for the inclusion of Apple into the index. David Blitzer, chairman of the index committee said they looked at several tech stocks but felt techs were already well represented. He said they felt names like Apple and Google were not appropriate because of their share price. The Dow is a price weighted index and the committee felt a $700, high volatility stock, would distort the index and increase its volatility.
United Health Chart
Apple (AAPL) shares spiked to $697 intraday and finished with an $8 gain on news the iPhone 5 had sold out online in only an hour. The initial online preorder inventory was sold out and the website is now quoting three-week delivery times. The iPhone was scheduled to start shipping next Friday to the first customers. Verizon, AT&T and Sprint websites are all showing a delay of four-weeks. Apple would not say how many phones were allocated for the initial orders and it does not hurt sales by saying demand was so strong we are sold out. That makes the phone seem more desirable.
The initial iPhone 4s sold over one-million units the first 24 hours beating the iPhone 4 sales of 600,000 on the first day. Apple may be having trouble getting phones. Sharp Corp, Apple's largest contract manufacturer has been having quality issues with the screens and they have fallen behind on production according to reports in late August.
WTI crude prices traded over $100 intraday but it was not specifically related to the QE although the falling dollar certainly helped. Pushing prices higher was the violence overseas directed at our embassies. Embassies in Tunisia, Nigeria, Pakistan, Afghanistan and Sudan saw violence and a KFC and a Hardee's restaurant were set on fire in Lebanon. 18 police were injured in Lebanon. Demonstrations in Egypt, Yemen and Libya were continuing. In all more than 25 countries saw demonstrations against the USA. Five demonstrators were killed by police and military. In Egypt international peacekeepers were attacked in the Sinai. In Jerusalem a crowd of about 400 Palestinians marching towards the U.S. embassy were stopped and fighting broke out.
The U.S. was rapidly increasing security and evacuating personnel. President Obama was asked in an interview if Egypt was an ally. He said the U.S. would not consider Egypt an ally but we don't consider them an enemy either. After the comments sparked headlines around the world the White House tried to walk it back saying, "Egypt was a close partner. Ally is a legal term of war," according to Tommy Victor, spokesman for the NSC, "We don't have a mutual defense treaty with Egypt like we do with our NATO allies."
The White House said later that Egyptian President Morsi had promised to "honor its obligation to ensure the safety of American personnel."
This links to Google maps and it is a map of all the protests around the Middle East with information on each. It is VERY interesting and worth viewing. Protest Map
YouTube has halted viewing of the movie trailer in various Muslim countries in an effort to calm the situation. The White House asked them to take it down but Google/YouTube said it was allowed under posting guidelines.
In Sudan a radical sheik on state radio urged protestors to march on the German embassy to protest graffiti on mosques in Berlin and then go to the U.S. embassy to protest the film. He said, "America has long been an enemy to Islam and to Sudan." Several thousand stormed the German embassy, migrated over to the British embassy and then on to the U.S. embassy where they burned cars, tried to climb the walls and clashed with police. Several demonstrators were shot by police.
My personal opinion is that the YouTube video is just an excuse. The Arab Spring has changed the political structure in the Middle East and citizens feel they have more freedom to express their feelings in a mob format. A growing number of Muslims in many of those countries hate the U.S. and that hatred is boiling up in these demonstrations. I would bet that less than 5% of those demonstrating have actually seen the YouTube video.
The problem is that these dormant feelings that were repressed under the various dictators are now coming out. It is not a big leap to go from burning embassies and fast food restaurants to attacking oil installations owned by U.S. companies or to prevent the oil from being shipped to the USA. Storm clouds are forming.
The high prices and "potential" disruptions in oil supplies will give the president and the IEA additional cover to organize a release of oil from the Strategic Petroleum Reserves. With oil prices at $100 and threatening to go higher during a period of weak demand the odds of a SPR release are increasing.
The chief economist for the IEA, Fatih Birol, said on Friday, "Oil prices today, in this economic context, are unbearable for consumers. High prices together with other factors could push the global economy back into recession." Sounds like the stage being set for a SPR release.
The price for gasoline rose to more than $4 per gallon in eight states last week. The national average for all formulations as reported by the Fed was $4.00. That is the highest EVER for the second week of September. If gasoline prices move over $4 the economy is going to crash.
Historical Gasoline Price Chart
The U.S. sanctions against Iran were set to expire on Sunday along with the waivers for 20 countries who were the biggest purchasers of Iranian oil. I thought "finally the waivers will not be renewed and the sanctions will actually matter." Late Friday the U.S. renewed the waivers for Japan, Belgium, the Czech Republic, France, Germany, Greece, Italy, the Netherlands, Poland, Spain, and the United Kingdom. So much for wishful thinking. The waivers for South Korea, India and China, the largest buyers of Iranian oil, don't expire until December.
EU leaders are working on a new set of sanctions that may be announced in October. British Foreign Secretary William Hague told Reuters the leaders had shown a very strong level of support for further sanctions.
Israeli's PM Netanyahu said on Friday that Israel cannot depend on the U.S. to act on Iran or to force them to halt their nuclear program. He said "those in the international community who refuse to put red lines before Iran don't have a moral right to place a red light before Israel." Basically that was a jab at the U.S. and the attempts by President Obama to prevent any action on Iran until after the election. It raises the odds that Israel may attack Iran on its own.
WTI Crude Chart
Brent Crude Chart
Now that Bernanke has appointed himself keeper of the markets or Head Bull we have to try and figure out how to play the new game. Clearly, "Don't fight the Fed" has taken on an entirely new meaning. Actually it is "Don't fight the central banks" because other countries have joined the stimulus party. The ECB announced unlimited bond buying last week. India announced a significant new program this week. Brazil announced a reserve ratio cut to free up 30 billion reais ($15 billion) on Friday. Japan warned the U.S. QE would have a negative impact on the Japanese currency and they were going to be forced to take a similar action in self defense. China just announced a $57 billion infrastructure program. I could go on but you get the picture. Let's all race to see who can create the most worthless currency. It is party central for the equity markets thanks to the new Global Central Bank Put. The Bernanke put has changed into the Bernanke call because instead of just protecting the markets from falling he is now going to push them to new highs.
Since cheap money means expensive everything else how are we going to play this? With the markets at multiyear highs we are in breakout mode. That does not mean we will go straight up but I believe the trend will remain positive until just before the election. After the election we will have another completely different set of problems regardless of the winner.
For me this means I am in permanent dip buying mode. We are bound to have some headlines from Europe, the Middle East and the economy or from a bad earnings report that pushes the markets into profit taking mode. The only question is "how long."
Real support is so far below us that any reasonable bout of profit taking would almost seem like a correction. However, the amount of cash on the sidelines that will have to move into equities over the next two weeks is staggering. Remember, Art Cashin said 65% of traders were betting on a Fed disappointment. That means they were short or flat. Assuming that translates into fund managers and money managers in general even at a smaller percentage that means there is a lot of cash that needs to be quickly invested in equities.
I have reported dozens of times over the last year about the tremendous imbalance in the weekly cash flows. For instance on a given week $2 billion may have gone into equity funds but $10 billion into bond funds. Since Bernanke specifically said he was going to push equities, and by default commodities, to new levels it would be stupid to remain in bonds.
So, the game plan is to expect higher highs in the markets. High quality blue chip stocks should be a cornerstone of our investment plan with a few small caps thrown in to spice up the portfolio.
I printed this year end price target graphic last week. I have updated it using Friday's close. At this point only TWO of the 45 analysts were expecting a higher number at year end. However, the new targets are coming fast. Several analysts updated targets over 1500 on Friday. Two were at 1525 and one 1550 given the expected impact of QE3. If your target was too low you should not beat yourself up. You are in good company and it is not yet year end.
Year End Price Targets as of January 2012
The S&P rallied to roughly 1475 intraday on Friday before giving back -10 points into the close. On the NYSE there were $1.1 billion in sell on close orders. Given the +300 point Dow gain for the week, the EU meetings and the meltdown in the Middle East, I am surprised we closed positive. That should have been ample reasons to take profits.
When QE2 was announced there was a massive spike for three days and then three weeks of profit taking and consolidation. Bernanke had hinted in his Jackson Hole speech in Sept-2010 that QE was coming. The S&P rallied +150 points over the next two months. When QE2 was announced the S&P gained another +30 points but then stalled at 1225.
There was no worry over a big dip. Everyone knew it was just profit taking. On December 1st the S&P spiked +41 points in two days on a short squeeze and then began a +161 point rally over the next three months.
This time around the Jackson Hole speech was much closer and there was less buildup. After the post speech spike we went sideways for six days waiting on the actual announcement. That means there was less time and less conviction for people to get long.
S&P Chart - QE2
What I am trying to say here is the odds are very good there will be relatively few dips and the trend should stabilize into positive gains into quarter end and then into the election. As the election nears we could see some volatility due to uncertainty. My crystal ball does not work after the election. When we get there we will worry about it then.
What I don't expect is another blast off day on Monday. The 1475 level could be a challenge just because it is a major number and the S&P has gained +65 points in a week. There should be a dip in our future but I expect it to be short and shallow. A decent dip would take us back to 1426 but that may be too much to ask.
On a side note QE3 does not mean individual stocks are not going to be crushed if they report bad news. Bad things happen in bull markets but they are mostly ignored.
S&P Chart - Daily
The Dow gained +53 points to close at 13,589 and only 575 points below the all time closing high of 14,164 on Oct-8th 2007. That is 4.2% and we could easily make that level before the end of the quarter. That would make great advertising for the funds to be able to say the "markets are at historic highs, are you invested?"
The Dow has no real support or resistance anywhere close. The high for Friday was 13,653 and that works for resistance next week. Initial support is in the 13,325 range where we levitated for a week waiting on the FOMC announcement. The March closing high at 13,279 could also be support. However, any material dip should be bought almost immediately so support is a vague concept today.
The Nasdaq is still more than -1,800 points below its historic high close from March 2000 at 5048.62. That being said it is at a new multiyear high at 3,183. Closest support is 3100 followed by 3085. Either of those numbers would be a major decline and I don't expect it without some major earnings warning or maybe multiple warnings.
The economic headlines should be few and earnings won't heat up for three weeks so traders will be buying in hopes of profiting from QE3.
The Dow Transports rebounded from 4940 to 5231 between Labor Day and the post QE3 announcement. With fuel prices at historic highs this is a major accomplishment. If the transports can move over and close over 5325 we should be good to go for a retest of the resistance from early 2012 at 5375. The Transports are confirming the Dow rally.
Dow Transport Chart
The market exists to make fools out of the most people possible. Last week 65% were expecting it to go down. Instead the market exploded to the upside. Next week the majority of traders and investors are going to be expecting it to go higher. Let's hope this time it is different and what we expect to occur actually comes to pass.
On Saturday a Chinese government office predicted full year GDP growth of 7.7% to 7.8%, up from the official target of 7.5%. The director of the Economic Projection Department said new programs and the approval of the $57 billion in infrastructure projects would produce an economic rebound in the last half of the year. Premier Wen Jiabao promised more tax cuts and measures to boost consumer spending. This may help the markets on Monday.
In news surrounding the EU meeting on Saturday a senior lawmaker in German Chancellor Angela Merkel's governing coalition said Germany's parliament is unlikely to approve a third rescue package for Greece. He said German officials have no faith in Greece's ability to satisfy creditor demands for reform. He said the Troika (ECB, EU, IMF) were not getting satisfactory answers from the Greek government on previously promised reforms. He said Greece still needs to cut another $14.7 billion in spending over the next two years in order to bring it in line with its promises. Until then Greece cannot expect more money from the eurozone. He said Germans want to help Greece but they are not stupid.
Also on Saturday tens of thousands of people from all over Spain rallied in the capital in protest of crippling austerity measures enacted to try and avoid the requirement for a bailout. With unemployment at 25% and the government raising taxes and slashing spending the country is under intense pressure from the public. Spain is expected to present another set of reforms to the eurozone by month end and that suggests they are preparing for a bailout request. The presentation will be on Sept 27th and a formal request for bond buying under the new ECB program could be requested then. Only 65,000 protestors showed up at the rally in Madrid and that was far less than the 1.5 million that protested in Barcelona only four days earlier.
Europe remains our headline risk for Monday. The violence in the Middle East appears to be abating.
Enter passively, exit aggressively!
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"The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of socialism is the equal sharing of misery.â€