Fiscal Pain in Spain Triggers Market Pullback

by Bryan Perry | April 11, 2012 12:30 pm

The European debt crisis remains an open wound that continues to fester against the backdrop of a broader global economic recovery. Yields on Spanish debt are on the rise, joining that of Italian and Portuguese bond yields. But the Spain situation takes on a more serious tone because that country is too big to save and too big to fail in terms of bailout prospects. The European Central Bank recently raised the amount of what it calls its “firewall” of ready liquidity to $800 billion euro, sensing the pain that’s hitting Spain’s bond market.

If that weren’t enough to ponder, the citizens of France are about to elect a champion of socialism, as its first round of presidential elections is set for April 22, with a run-off date set for May 6. Front-runner Francois Hollande, a socialist candidate, proposes hiring 60,000 school staff and creating 150,000 state-aided jobs if he wins. He also announced plans to freeze fuel prices for three months, increase a back-to-school bonus for poorer families by 25% and slap a 75% top income-tax rate on people earning more than 1 million euros ($1.3 million) a year. It’s nothing more than a blueprint for tax-and-spend fiscal policy, and big money will simply flee France for Monte Carlo.

On our side of the pond, things are much improved. The March ADP (NASDAQ:ADP[1]) report showed growth of 209,000 private-sector jobs. The ISM Index for March came in at 53.4, versus 53.0 consensus, and auto and trucks sales were firmly higher for the month. Add better-than-expected same-store retail sales figures for March and you’d think the bulls would be off to the races.

Recent findings from our friends at ChangeWave Research confirm my view about strong prospects for a very upbeat first-quarter earnings season. Nearly 25% of respondents say their company sales will come in “above plan” for Q1 2012. That’s three points more than the previous quarter. This is the second quarterly uptick in a row for corporate sales growth, with the rate of improvement actually accelerating this quarter.

But oh how fickle Mr. Market can be: Even though the economic calendar has favored the bulls and oil prices are backing down after a huge build in inventories reported this week, the release of the latest Fed minutes took the market by surprise. Knee-jerk selling ensued when it became clear that the Fed now is less likely to engage in any further quantitative easing.

This should be viewed as a vote of confidence for investors as it sends the message that the economy can begin to stand on its own without massive intervention. It’s like taking the patient off of the IV tube because his system is being restored back to health.

I view this negative reaction as an excellent buying opportunity for Cash Machine investors. We haven’t had too many constructive pullbacks in the first quarter, and this development is a major positive for financial markets.

It’s time to buy the dip.

Source URL: https://investorplace.com/2012/04/fiscal-pain-in-spain-triggers-market-pullback-ad/

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