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Europe Expected, And Got Nothing From EU Summit!

  • Written by Syndicated Publisher 1 Comment1 Comment Comments
    May 25, 2012

    The European Union’s informal Wednesday summit meeting on the eurozone crisis ended last night with results similar to last weekend’s G-8 meeting in the U.S.

    The leaders emerged to announce they agreed that they’d like Greece to remain in the eurozone, but had made no progress on agreeing how to accomplish that, or anything else.  But they will continue to work on it in advance of their next meeting June 29.

    European stock markets expected nothing from the meeting, and factored that expected lack of progress into stock prices yesterday, with major European markets including Germany, France, and the U.K. plunging an average of more than 2.5%.

    But they’re bouncing back some this morning in spite of quite ugly new economic reports.

    The U.K. announced a downward revision in its recessionary 1st quarter GDP contraction to minus –0.3% from the previously reported –0.2%.

    Germany’s Ifo Business Climate Index unexpectedly declined in May, dropping to 106.9 from 109.9 in April. It is its first decline in six months, and puts it at its lowest level since last November.

    Germany’s PMI fell to 49.6 in May from 50.5 in April. Any number under 50 in PMI numbers indicates recessionary contraction.

    It was also reported that France’s PMI fell to 44.7 in May from 45.9 in April.

    And it was reported that the overall euro-zone’s PMI fell to a 35-month low of 45.9 in May from 46.7 in April.

    Europe’s economic slowdown is even worse than previously thought and still headed in the wrong direction.

    Meanwhile, in Asia, China’s HSBC PMI was reported as declining again, to 48.7 from 49.3 in April.

    Marc Faber backtracks on crash prediction.

    Marc Faber, famed Swiss economist and editor of the Gloom Boom and Doom Report, caused a minor fuss with a prediction a few weeks ago that “unless there is a massive QE3 program the U.S. market could experience a 1987 style crash in the second half of the year”.

    It was a feeling subsequently expressed to us by a number of readers in their e’mails, probably influenced by Farber’s comments.

    But Faber has now back-tracked on that prediction, explaining in a Bloomberg interview that circumstances have changed, saying that, “I said if the markets do not correct meaningfully, and continue to rise into July and August, then the likelihood of a crash would increase. But instead, now we are in the midst of a very significant correction.”

    On the subject of market crashes.

    There have only been two market crashes in the U.S. in market history as far back as I have data (well over 100 years). One was in 1929, and the other 58 years later, in 1987. The surrounding conditions in place at both were completely different, as were the causes of the collapses.

    That makes it quite difficult, if not impossible to tell when, or even if, we will ever see another.

    But since 1987 there have been hundreds of crash predictions.

    Those who were around in the 1980’s probably recall that for four or five years after the 1987 crash, every September the media would roll out articles warning of the possibility (the probability to the more aggressive) of a market crash. The reasoning? Because both the 1929 and 1987 crashes had taken place in October.

    It might be well to remember that in 1929 and in 1987 no one was predicting even a correction let alone a crash. They were times of strong economies and markets where investors were caught by surprise by the plunges.

    I’d be leery of crash predictions in a time when global economies are already slowing and global uncertainties and worries have been high for a couple of years, and when the more nervous investors have been switching from stocks to bonds for several years in spite of an impressive bull market since early 2009.  

    The one time that conditions were extremely similar to 1929 was in the 1999 stock market bubble, when after record long 9-year bull markets without corrections, it was again supposedly a ‘new era’ in which even bear markets were events of the past and would never be seen again.

    But no. Even then, the subsequent 2000-2002 bear market did not come close to including a crash, but was a typical serious bear market that took a couple of years to play out, with numerous short-term bounces on the way down. 

    But, as a little aside, I recall one investor in 1988 who was sure he knew how to predict crashes to the day, based on how the 1987 crash had developed.

    In the week prior to the ‘Black Monday’ crash on October 19, 1987, the Dow was down 3.8% on Wednesday, 2.3% on Thursday, and 4.6% on Friday, before the crash of 22.6% on Monday.

    So all through 1988 and into 1989, every time the market was down on Wednesday, again on Thursday, and was falling again on Friday, by early afternoon on Friday he would call our subscription office very excited and agitated, and tell them to warn me that I needed to get a hotline on immediately telling subscribers to get out of the market because there was going to be a crash of at least 20% on Monday. When it didn’t happen the first time, in subsequent calls he said we had just been lucky, adding an explanation of why it hadn’t happened, but was sure to this time. That must have happened 4 or 5 times before he apparently gave up on the idea.

    If only it was that easy to predict the recurrence of something that has only happened twice in three generations.

    Subscribers to Street Smart Report: There is a hotline from last evening, and an in-depth U.S. Market report from yesterday afternoon in the subscribers’ area of the Street Smart Report website. And please stay tuned to the hotline for more potential portfolio changes!

    To read my weekend newspaper column click here: This Is Crazy! Where Are The Promised Regulations- May 18, 2012

    Images: Flickr (licence attribution)

    About The Author

    Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!
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