Is the EU Bailout Package Enough...?

Yet again the global financial markets yesterday cheered the fact that an ailing patient (EU) has being given a strong financial medicine. All the major Indices around the world were up by almost 4% on an average on account of this strong step by the EU members. A bailout package worth almost $1 trillion.

But the question is,

• Is this something to get overexcited and start buying stocks ?
• Is this bailout package enough to give a stability to the European financial system?

Well, the answer to the first question is NO. This is not something to get overexcited and start buying stocks. Most of the rally that happened yesterday was a short covering one and any market data do not point towards any kind of a fresh buying.

The answer to the second question is that YES it has partially given stability to the global financial system, especially EU, a short term stability. The medium and the long term risks still remain. This is clear by the fact that

• The yield on the Greece's and other crisis ridden EU nations two year bond fell by a hefty amount (For Greece it almost halved), however the yield on the 10 year saw only a minor correction
• The difference between the LIBOR and the overnight indexed swap rate, the so-called Libor-OIS spread that rises as a signal banks are less willing to lend, climbed yesterday even after the rescue announcement

Thus, I strongly believe that the outlook has just improved for a very near term and there are record deficits in just about every country EU and something ultimately needs to be done about them. The current measures is just to stop a complete vertical fall and to prevent it making it look like a bubble burst. However, the slide should continue.

Moreover, what it has done is integrating a political union from an economic union, whereas the case is always the opposite around the world. Hence, if the countries getting aid do not comply to the will of the political bosses (Germany & France), could lead to an altogether different crisis.

Hence, one should use this momentum lead rally only for trading that too with strict stop loss since, nothing too good has happened.

Contradictory Economics in US..

Ever heard of an Economy where the unemployment rate is continuously rising, but along side the overall automobile sales, retail sales, sales of expensive luxury goods is also rising along along side.

No, not heard of...?

Some of you might be thinking that its practically impossible, since if unemployment level is rising, then in a scenario like this how can the population afford all these luxuries.

But, in reality its TRUE.. Welcome to the biggest economy of the world, yes the United States of America.

This is precisely the case happening in US over the last one year period or so. What is happening is that the stimulus plan in America is letting so many of its people live "rent free" as they sit in defaulted homes not making a mortgage payment. This savings form not paying the rent allows them to shop and spend, and support the falling consumption driven American society.

Even the home foreclosures are on a rise, hence despite the foreclosures on a roll and the rising unemployment the people are striving in consumption based on Credit Cards and Auto Loans. So, the because of the government stimulus, the already indebted American Economy is consuming more by taking more and more loan.

People are not paying their mortgages because the Government is doing this-- as much as 15% of them are in trouble or just being defaulted on -- but they are keeping the cards and keeping the cars so that they can go out, lead their lives and shop like the old day.

So, once the Government starts withdrawing the stimulus package, the way Indian or Chinese or Australian government has done, the consumption, which is the back bone of US economy will break and the recession will loom again.

Hence, I would say that the fundamentals are not as good as it looks, especially in the developed world. The crisis as I had mentioned earlier has started to mount of other European nations and the markets have started to show signs of weakness.

So, remain cautious and invest in defensives. One such defensive stocks we are currently working on is Novartis. I will come up soon with a report on the same.

Happy Investing...