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12/7/2012 1:15:53 AM
How bad are financial conditions in Europe? So bad, that European stocks (NYSEARCA:VGK) just touched 18-month highs.
And why are they doing that? It's because of "optimism U.S. lawmakers will agree on a new budget and avoid the so-called fiscal cliff" - that's according to one very trusted media source, with lots of high priced terminals installed you know where.
The other extreme is the Dec. 6 edition of the Wall Street Journal (see below), whose front cover made no mention of S&P's latest Greece downgrade anywhere. Have they run out of words to describe the Greek situation? Or have reporters been bitten with crisis fatigue? Instead of where the Greece news should've ran, the headline "U.S. Gas Exports Clear Hurdle" appeared.
S&P (finally) downgraded Greece to BB+ and no that ugly credit score doesn't qualify as "investment grade." But even here, there's a silver lining. Greece's rating - according to S&P's alphabet soup chart - is nevertheless the highest tier of junk. (Does S&P have F- ratings or is that too real world?)
Here's a quick recap of three reasons why Europe's financial crisis (NYSEARCA:FXE) is getting worse:
What's occurring? The problems of over-indebted eurozone nations (NYSEARCA:FEZ) have spread to the healthy regions. Instead of the strong countries helping the weaker ones, as theorists argued would occur, the weak are making the strong weaker. And as a result, economic output throughout the entire eurozone region is decelerating.
Compare and contrast borrowing rates.
Germany pays 1.29% on its 10-year debt, France pays 1.98% on its
10-year debt, while Greece pays 14.37%, Portugal pays 7.35%, and
Spain pays 5.44%. In a true union, everyone pays the same borrowing
rate and not one basis point more.
If this seems far-fetched, consider that the first leg down from the 2007 highs was stronger than the first leg in 1929. The 2009-present counter trend rally was also stronger than the 1929-30. If the parallels persist, the next leg down should be more than a mere flesh wound.
Remember: The Great Depression erased 29 years worth of growth.
Interesting enough, if today's market erases 29 years worth of
growth, valuations (P/E ratios and dividend yields) would approach
levels seen in the early 1930s.