Wow…talk about a market that is getting bombarded with mixed signals. On the one hand, we have a financial crisis in a tiny island nation in the Mediterranean and a bellwether transportation company telling us the end of the uptrend is here. On the other hand, we have a central bank telling us the party is far from over. Which side should we believe?
Let’s take a look at what is going on.
Showdown in Cyprus
Cypriot banks are on the verge of collapse. The forced write-downs, which private Greek bondholders had to swallow as part of the 2011 deal that “saved” Greece, have crippled two of Cyprus’ largest banks: Bank of Cyprus and Marfin Popular. In a repeat of what we saw happen in both Iceland and Ireland, these Cypriot banks have grown so large that their potential demise threatens to destroy the country’s economy.
In case you missed it this week, Cypriot leaders have asked for €17 billion in bailout funds. Unfortunately for Cyprus, European leaders – especially those in Germany – are not in a giving mood. They have pledged €10 billion but have told Cypriot leaders that they have to raise the rest themselves by issuing a levy on deposits held in Cypriot banks. That’s right…European leaders want to tax bank deposits instead of going after other stakeholders.
This could set a dangerous precedent for future bailouts – which we’re sure there will be – and it is also angering the Russians, the largest depositors in Cypriot banks.
So far, the Cypriot Parliament has refused to pass the legislation that would enact the levy, but it’s still an ongoing process. Nobody knows how it is going to shake out, but it could end up sending shockwaves through the global financial system if the parties involved can’t find a solution soon.
Gloomy Forecasts from FedEx
FedEx (NYSE:FDX) is considered an economic bellwether because of its global reach and its close integration with businesses and industries in every aspect of the economy. When FedEx is optimistic about the future, Wall Street tends to be more optimistic about the future. Conversely, when FedEx is pessimistic about the future, Wall Street tends to be more pessimistic about the future.
Well, FedEx announced on Wednesday that it is officially more pessimistic about the future. The company lowered its full-year earnings-per-share guidance from $6.20-$6.60 to $6.00-$6.20. It also announced it would be cutting its capital expenditures (CapEx) from $3.9 billion to $3.6 billion, which means the company won’t be growing as fast in the future. The company may even be grounding some of its aircraft.
FedEx did announce that its board of directors has authorized the company to repurchase up to 10 million shares of FDX stock, which may help the value of the stock in the short term, but it is another sign of economic stagnation. When a company shifts from CapEx spending to share buybacks to try and boost the value of its stock, it is a sign that the economy isn’t strong enough to support an aggressive growth curve.
Now that we’ve looked at a couple of the bearish factors, let’s take a look at the bullish side of the equation.
Helicopter Ben and the Federal Reserve
The Federal Reserve, via Chairman Ben Bernanke, has continued to signal that it stands ready to continue boosting the U.S. economy with an accommodative monetary policy for as long as it takes to get GDP growth back up and unemployment levels back down.
The Federal Open Market Committee (FOMC) released its latest monetary-policy statement yesterday, and as usual, everyone will be dissecting the release to see if there are any clues as to when the Fed may actually start to raise interest rates. Traders have been spooked a couple times in the past few months as language has emerged in the FOMC meeting minutes and elsewhere that suggested the Fed may rein in the expansion of its balance sheet sooner rather than later, but at least for now, interest rates are not changing.
The Bottom Line for Next Week
Since the FOMC reassured Wall Street that it isn’t going to take its foot off the accelerator any time soon and that it will continue to plow $85 billion into the economy each month as it buys U.S. Treasuries and agency mortgage-backed securities (MBS), we will most likely not see a dramatic pullback in the stock market. However, if the Fed is unable to keep bullish spirits high, the slowing economy and brewing trouble in Europe will most likely spark a pullback.