From John Kinnucan of BroadBand Capital Management
Be Careful What You Wish For, Such As ECB Printing Money
Last month, global equity markets fairly demanded that the ECB hurry up and print, through buying euro zone debt. Effete euro elites publicly demurred at first, insisting that unlike crass Anglo-Saxons, they didn’t let financial markets push them around. Shortly thereafter, to markets’ thrill, LTRO was launched, i.e. backdoor money printing, since any sentient investor realizes that the debt being bought by the ECB is effectively like a loan to a family member: One should only expect repayment if the recipient has a chance encounter with a winning lottery ticket.
Market euphoria over this intensely desired outcome was briefly interrupted a week later, when investors had a look at the shockingly bloated ECB balance sheet, causing a Euro chart breakdown, with a concomitant breakout for the dollar. This now unremitting dollar strength will doubtless temper company outlooks due to be delivered in the next few weeks. Ironically, it is the most crowded trade of late, the Dow Dividend Darlings, whose earnings are likely to be singularly impacted by this newfound dollar strength, as at current rates the dollar is looking to be ~10% higher in H1/12 vs. H1/11.
This deleterious currency effect will be hitting just as the accelerating global slowdown is set to finally impact US companies’ earnings. While bulls are fond of downplaying any effect from Europe, the fact is that 40% of S&P revenues arrive from abroad. Even if Europe is a relatively small part of the total, the knock-on effects from weakness elsewhere will be substantial.
Exhibit A here may very well be the stock responsible for the Dow’s outperformance last year: IBM. Equity markets gave a pass to the “shocking” ORCL miss a few weeks ago, but with stocks now considerably higher, and investors much giddier (see latest AAII/Investors’ Intelligence sentiment polls), market reaction might not be quite so forgiving of a similar performance by another major tech bellwether, not to mention numerous other companies who will no doubt be similarly impacted.