Ahead of Wall Streeet - February 8, 2012 - Ahead of Wall Street

By Sheraz Mian,

Shutterstock photo

Wednesday, February 8, 2012

The improving odds of a Greek bailout and debt restructuring deal, following a key concession from the European Central Bank (ECB), should help stock market sentiment a bit today. But after the strong gains thus far in the market, we will need more than just the tentative outlines of a deal to push stocks higher significantly. Notwithstanding a Greece inspired boost at some stage in the next few days following an actual deal, the market doesn't really have much in terms of fresh catalysts.

A few positive looking earnings releases aside, today's market action will likely be reflecting the ECB's Greek concession and its impact on the drawn-out negotiations. This fresh gesture from the ECB is another sign of the positive role that the ECB has been playing lately in the Euro-zone crisis that has gone some way towards improving confidence in the otherwise dismal European picture. 

The fresh ECB gesture will bring down Greece's debt load, which should ease the way towards a debt restructuring agreement with private creditors and a new bailout deal from the EU/ECB/IMF troika. The ECB will swap its Greek government bond holdings, which it had purchased in the secondary market at huge discounts, at less than face value. After having insisted for long that it needed to get paid back in full on its Greek bond holdings, this gesture from the ECB helps Greece lower its debt liability by the difference between the bonds' face values and the ECB's cost base - estimated to be in the vicinity of € 11 billion. If Greek political leaders agree to the new tough measures demanded by its Euro-zone partners and the IMF, then the country should get a new €130 billion bailout in short order. Without this new bailout, Greece is pretty much certain to be unable to meet its mid-March refunding need for about € 14 5billion.

The ECB gesture is another sign of the greater pragmatism shown by the central bank under its new president, Mario Draghi. The central bank under Mr. Draghi has continued to shy away from whole-heartedly standing behind the beleaguered government bond markets of Italy and Spain. But it has nevertheless been far less reticent in implementing other confidence-boosting measures. The most prominent example of this newfound pragmatism is the ECB's massive liquidity operation in December that helped flush the Euro-zone banking sector with funds. Another round of similar operation is on the cards for later this month. This liquidity operation has not only helped improve confidence in the European financial system, but it has also had the indirect effect of easing pressures in the Italian and Spanish government bond markets. For this reason alone, some in the market have been characterizing the ECB's liquidity operation as a backdoor quantitative easing program - along the lines of what the Bernanke Fed has been going in the U.S,

On the earnings front, Sprint ( S) came out with a bigger than expected loss this morning, but the company had the best subscriber additions in the quarter in many years. Time Warner ( TWX ) beat expectations and announced a major share buyback program. We also have better than expected same-store sales numbers for January from McDonald's ( MCD ). Disney ( DIS ) beat on EPS after the close on Tuesday, but came short on revenue, with the studio business coming up with weaker revenue numbers.

Sheraz Mian
Director of Research

DISNEY WALT ( DIS ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks , US Markets
Referenced Stocks: DIS , MCD , S , TWX

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