Fed May Announce An Extension Of Operation TWIST
Markets rallied on Thursday on various reports that the ECB and Euro zone member nations have developed a plan “B” and the bank stands ready to take further action in the event Greece exits the Euro zone and Euro currency. Overnight, the Bank of England announced that it is extending and launching new initiatives, which strongly resemble the ECB LTRO measures, to provide additional liquidity to the banking system. Early hour futures indicate a follow-through of the positive momentum from yesterday, indicating a higher open. Investors should be aware that today marks quadruple witching day, where contracts for stock index, stock index option, stock index futures, and single stock options expire. As such, late afternoon volatility should be expected, but should not be viewed as an indication of future activity. Rather, the news that will drive market activity next week will surely be this weekend‘s Greek elections. Based on the recent economic data in Europe as well as in the United States, we believe that regardless of the outcome of the elections, that additional liquidity measures are increasingly likely. In the U.S. weak retail sales indicate that consumer spending may be dampening, while the reversal of momentum in labor markets is pointing to a further slowdown in growth. As such, we see a rise in probability that the Fed may announce an extension of Operation TWIST as soon as next Wednesday after the FOMC meeting.
The next big worry for markets are the rising bond yields in Spain and Italy as well as the questions surrounding the solvency of Spanish banks (who are getting hurt as a result of the rising yields). After the Greek elections, and with trouble looming, expect Germany to become more pro-active in helping quell the crisis. As a matter of fact, over the coming weeks, Germany’s upper and lower house will be voting on a resolution proposed by Angela Merkel, designed to support Spanish, Italian and to a lesser extent French banks.
As we enter earnings season, this may provide some additional anxiety to investors. However, we believe that given the recent pessimism and downward revisions to EPS expectations, this earnings season could once again help drive markets higher.
It is very possible that the combination of additional easing, better than thought earnings, and having the Greek elections over with could help ignite a market rally by mid-July. The members of the investment committee continue to monitor all available data points and are discussing this very fluid situation daily. For the time being, we will continue to be defensive in our investment strategy, but may determine to commit additional capital to high quality, high dividend paying stocks if we believe the worst of the uncertainty and crisis is behind us. Tune into Money Matters by visiting our website Click Here weekdays at 10:05 AM to hear our analysis and commentary.
The Gary Goldberg Financial Services Strategic Investment Committee
Optimistic by Nature, Defensive by Strategy