Ed’s Daily Notes for July 11th   Leave a comment

Bloomberg: Banco Espirito Santo Lifts Lid on Exposure to Group

Are the problems with Portugal’s second largest bank the cause of the recent sell-off in equity markets? I would say partially, but I don’t think it’s the entire story.

Europe has been a problem for years now, and it has never been properly fixed. They have done the economic equivalent of applying bandaids to a broken leg, hoping the broken bone will heal before anyone notices. On the other hand, even if this problem were to spread across Europe, the European Central Bank would undoubtedly step in and provide liquidity (more bandaids!). Until then, there will be some sell-off in equities directly involved in this situation.

But the overwhelming majority of American and international stocks don’t have significant exposure to Banco Espirito Santo, or even Portugal. Why would they sell-off? For that answer, I look to the “August effect”: August is a big vacation month in Europe, as well as among American fund managers. If you are planning a vacation in August, and you see Europe starting to bubble up as a problem, doesn’t it make sense to go ahead and pull some money off the table, especially if you were planning to do so anyway?

On top of this, and I credit my dad with this idea, there is the 6-month investment range. If you are an investor with a 6-month investment range, what do you see? In 6 months, the Federal Reserve will have officially ended quantitative easing, and might even be considering a rate hike. In light of that, it makes sense for these investors to take some profits.

Finally, the technicals were screaming for a sell-off, or at least an extended period of flat lining.

In summary, I don’t see this as just a European-sparked sell-off. It may have encouraged some selling, but that isn’t the whole story this week.

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Posted July 11, 2014 by edmcgon in Federal Reserve, Market Analysis, News

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