Thursday, October 27, 2011

Two Front Relief Rally

Acting with unity, purpose and decisiveness, European leaders announced a plan to address their debt problems.  This positive news came at the same time as the announcement that U.S. 3rd quarter GDP grew at a 2.5% annualized rate.  Clearly, GDP growth at this level dispels the fear that we are in recession or quickly heading for recession. 
So what type of deal did the European leaders strike?
·         Bank Recapitalization to the tune of about $106 billion.  European banks have until June 2012 to raise their Tier 1 capital ratio to 9%.
·         Creditors will take a 50% haircut on Greek debt.  The restructured debt will be guaranteed by a $130 billion combined European Union / International Monetary Fund / Member State bailout fund.
·         The European Financial Stability Fund will be leveraged 4 to 5 times to support approximately $1 trillion in debt. 
Markets surged on Thursday with the Dow Industrials rising 339 points, the S&P 500 index gaining 42 points and the NASDAQ increasing 88 points.  Since September 30, we have seen a 13.5% rise in the S&P 500 index.  We wouldn’t be surprised to see a pullback from current levels over the near term, as is common with rapid advances in the market.  But, the good news on two fronts, Europe and the U.S. economy, removes a dark cloud that had been hanging over the markets.