Friday, October 28, 2011

How the Crisis in Europe Will Affect YOU

Several European nations have already been downgraded and if several nations begin defaulting on their debt, the results could be devastating.

That devastation would first plague the European countries, then soon seep its way into our own nation. According to Douglas J. Elliott – fellow at the Brookings Institution – a European recession would have a domino effect and create a similarly dismal situation right here in the U.S.

These four crucial American sectors would be greatly (and quite negatively) affected in the aftermath of defaulting nations in the euro zone:

Business and consumer confidence: Good luck finding any business owner, employee or consumer who isn't already frightened about what's lurking ahead. If the worst-case-scenario does occur, our economy would surely experience even worst consumer spending cuts and job losses.

There's still hope; not much, but some. CNNMoney reported that there is a 25% chance of that worst-case scenario coming to fruition. That process would bring about a series of defaults in nations including Portugal, Greece, Ireland, Italy, and Spain.

Trade: If Europe falls into any deeper of a recession, our $400 billion exports would be slashed badly as well. Until Europe could afford to pay for those U.S imports, America would suffer the loss in sales and, conversely, be forced to cut jobs in related fields.

On a global scale, other countries who rely heavily on exports to Europe would face the same situation – leaving the global trade market in a rather dire position.

Investment: Economic data shows that American firms have more than #1 trillion of direct investment in the European Union. A major hit to Europe's economy would slash through investor profits. Our investments in other countries would also be affected because of the overall domino affect in the global investing community.

Financial flows: Banks and bank subsidiaries have about $2.7 trillion in loans and commitments to governments, corporations, and governments in Europe. An additional $2 trillion “more of exposure to the United Kingdom.”

The progress we've made in dealing with our own financial crisis thus far would be demolished in lieu of further credit losses.

But who knows, they say every cloud has a silver lining. Perhaps Europe's leaders will come together this week and have some good news with improvements on the way to combat the core of the problem. A little imagination, innovation, and level-headed reason-ability can go a long way...

The technical details of the recapitalization will matter as well. If designed badly, the plan could even do harm by encouraging European banks to cut back on lending and to sell existing assets. A serious credit crunch would likely plunge Europe into recession.

Finally, strong-arming investors into "voluntarily" accepting losses of 40% to 60% on their Greek government bonds will certainly add to the risks of contagion if market concerns about other troubled eurozone countries spike again at some point.

Whatever happens this week, the U.S. government would be wise to prepare and encourage the Europeans to take the necessary steps.

Not to mention the International Monetary Fund that could continue assisting a bailout in Europe.

While we certainly aren't happy about spending our tax dollars for Europe's problems, maybe it'll come back to help save us from further economic disaster in the long run.

Barton Biggs: The Good, the Bad & the Ugly in This Market

For Barton Biggs, there's a good, a bad, and an ugly part of the current market environment. This 50 year veteran of Wall Street has told his grandchildren to seek their fortunes in other ways - even though he still personally thinks "the investment business is a great game" and has no intention to retire.

The good news is things could be worse. Biggs, the founder of hedge fund Traxis Partners and former Morgan Stanley global strategist says in the attached video, the era of range bound volatility has been "a little easier" to navigate than the financial meltdown of 2008.

But the bad news is investors now face continuously agonizing tests of their convictions. The heightened volatility requires ongoing "market judgments" that must be made correctly for fund managers to outperform.

As for the ugly, he won't personally get involved in the "craziness" of leveraged and inverse ETFs. He's convinced they are the culprits creating the volatility that's turning off investors. He calls this "very, very bad for the future of equities in America."

As of Wednesday, Biggs said he raised his net long position (or stock market exposure) to 72% from 40% in September. While most would consider that a fairly bullish stance, Biggs sees it as being a "cowardly lion" and worries that if markets continue to rise he'll "have to scramble to keep up."

One thing he's not worried about is the possibility the U.S. could soon get hit with another downgrade. "Credit (ratings) agencies are a joke," he says. Biggs, similar to a discussion we had on Breakout just this past Monday, says the markets don't care what S&P, Moody's, and Fitch do.

If you think that is blunt, wait until you hear him discuss the "maniacs and crazies" in the commodities markets, and an "extremely over valued Euro."

While any number of accolades and compliments have been bestowed upon this legend of finance, Biggs says of his 30 year run at Morgan Stanley: "We weren't geniuses. We were just in the right place at the right time."

This Is What A Global Fiat Bailout Looks Like On One Chart

Presented without comment - except to say the 11% rise in Silver since Friday (and 16.7% rise since last Thursday's lows) is the highest 4-day move since 7/18/11 and is over 2 standard deviations on a long-run mean.

Look Toward Energy Stocks After Markets Take a Breather : NFLX, XLE, GLD

It was another choppy session Tuesday, filled with rumors, fake-out moves and some earnings disasters — see Netflix (NASDAQ:NFLX).

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In the case of the S&P 500, the index yesterday put in an outside day and found support right at 1,230, which, of course, is where it broke out higher from last Friday. The stochastics oscillator remains in overbought territory, suggesting the index might need to pause a little up here. It is important to note, however, that oscillators can remain in their respective overbought or oversold territories for extended periods of time.

Given how sharply the stocks in general lifted off the early October lows, I think it’s unlikely that we see those lows again anytime in the next few months. Rather, my base case remains that equities pause somewhat in the very near future, followed by higher prices into year’s end.

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One group of stocks that looks especially juicy for higher prices into year’s end is the energy sector as measured by the SPDR Energy Sector ETF (AMEX:XLE). After falling hard in August and September, the sector rallied sharply into a resistance area near $70, where it again couldn’t break through Monday.

After some backing and filling, I do expect the energy sector to push higher and above $70, possibly toward the $75 area. Individual energy stocks, however, might offer better risk/reward than this index.

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Gold and silver both rallied yesterday and broke out of their recent congestion areas ever so slightly. Going long either metal here is far from a high-probability trade purely looking at the chart, but a solid daily close above $168 on the SPDR Gold Trust (AMEX:GLD) might offer a better confirmed long-side entry signal.

Then there are the European stocks, which by looking at Germany’s blue-chip stock index, the DAX, also are coming into a smidge of resistance in the very near term.

German DAX
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Much like the major U.S. equity indices, however, the DAX too has come quickly off the October lows and — after last week breaking above the 38.2% Fibonacci retracement level of the July-to-October downward movement — might have room up to around 6,500, which is where the 61.8% retracement line comes in.

The DAX will be an important index to watch and track if and when we push to higher levels as the fourth-quarter rally continues after a brief pause in the immediate term.

Eurozone on the verge of triggering a shift in trends

I am not one to discuss fundamentals or macro views, but this situation in Europe is beginning to morph into a media frenzy. Price action in the marketplace is changing rapidly in short periods of time based on the latest press releases coming from the Eurozone summit.

I cannot help but comment on the seemingly arbitrary actions coming from this high profile meeting. Nothing has happened that market participants were not already privy too. The European Union is going to strengthen their EFSF fund by levering it up roughly 4 : 1. I have yet to hear how exactly they plan on doing this, but this action was no surprise to anyone that has read an article about the sovereign debt crisis in the past month.

There was also discussion about backstopping European banks’ capital position. Since European banks are holding billions (Euros) of risky sovereign debt instruments, it would make sense that their capitalization is a primary concern of Eurozone leaders based on current fiscal conditions. I would argue that the banks should be well capitalized regardless of economic or fiscal conditions in order for a nation to have a strong, vibrant economy that has the potential to grow organically.

The final piece of this week’s political nonsense involves write-downs on Greek debt in the neighborhood of 50% – 60% in order to stabilize Greece’s debt to GDP ratio. Apparently Eurozone leaders want to structure the write down so as to avoid payouts by credit default swaps which act as insurance against default. How does a bond take a 50% – 60% valuation mark down without a creating an event that would trigger the payout of CDS swaps?

If a write down of that magnitude does not trigger the CDS swaps, then I would argue they are useless as a tool to hedge against the default risk carried by sovereign debt instruments. If the CDS swaps do not payout as projected by European politicians, the risk assumed by those purchasing government debt obligations around the world would be altered immediately.

The impact this might have on the future pricing of risk for government debt instruments could be extremely detrimental to their ability to raise funds in the private market. Additionally, the write downs would hurt European banks’ capital positions immediately. If the CDS swaps were to pay out, bank capital ratios would suffer as those who took on counter party risk would be forced to cover their obligations thereby straining capital positions even further potentially.

Price action today suggested that the equity markets approved of the package that European leaders were working on. However, the biggest push higher came when news was released that China was interested in purchasing high quality debt instruments as a means to help prop up poorly capitalized banks and sovereign nations in the Eurozone through an IMF facility.

The market did an immediate about-face which saw the Dollar selloff while the S&P 500 rallied higher into the close reversing a great deal of Tuesday’s losses. Inquiring minds wish to know where we go from here? I would be lying if I said I knew for sure which direction Mr. Market favored, however that did not stop me from looking for possible clues.

It has been a while since I checked out the short-term momentum charts that are focused on the number of stocks in U.S. domestic equity markets that are trading above their 20 & 50 period moving averages. The charts below illustrate the current market momentum:

Equities Trading Above the 20 Period Moving Average

Stock Above the 20 Day Average

It is rather obvious that when we look at the number of stocks trading above their 20 period moving average that momentum is running quite high presently. This chart would indicate that in the short-term time frames equities are currently overbought.

Equities Trading Above the 50 Period Moving Average

Stock Above the 50 Day Average

A similar conclusion can be drawn when we look at the number of stocks trading above their 50 period moving averages. It is rather obvious at this point in time that in the short to intermediate term time frames, stocks are currently at overbought levels. This is not to say that stocks will not continue to work higher, but a pullback is becoming more and more likely.

Additional evidence that would support the possibility that a pullback is likely would be the recent bottom being carved out in the price action of the U.S. Dollar Index. The U.S. Dollar has been under selling pressure since the beginning of October, but has recently started to show signs that it could be stabilizing and setting up to rally higher.

The daily chart of the U.S. Dollar Index is shown below:

US Dollar Chart

The U.S. Dollar Index is sitting right at major support and is oversold based on historical price action. If the Dollar begins to push higher in coming days and weeks it is going to push equity prices considerably lower. Other risk assets such as gold, silver, and oil would also be negatively impacted by higher Dollar prices.

Members of my service know that I focus on several sectors to help give me a better idea about the broader equity markets. I regularly look at the financial sector (XLF), the Dow Jones Transportation Index (IYT), emerging markets (EEM), and the Russell 2000 Index (IWM) for clues about future price action in the S&P 500.

During my regular evening scan I noticed that all 4 sector/index ETF’s are trading at or near major overhead resistance. With the exception of the Dow Jones Transportation Index (IYT), the other 3 underlying assets have yet to breakout over their August 31st highs. The significance of August 31st is that is the date when the S&P 500 Index put in a major reversal right at the 1,230 price level before turning lower. It took nearly two months to regain the 1,230 level and its significance continues to hold sway.

The daily chart of IWM is shown below illustrating its failure to breakout over the August 31st highs:

IWM Russell 2000 ETF

The chart above illustrates clearly that IWM has failed to breakout above the August 31st highs. I am going to be watching IWM, XLF, & EEM closely in coming days to see if they are able to breakout similarly to the S&P 500. If they start to rollover, it will not be long before the S&P 500 likely follows suit.

Currently the underlying signals are arguing for lower prices in the short to intermediate term. While it is entirely possible that the S&P 500 rallies higher from here, it is without question that current market conditions are overbought in the short to intermediate terms.

Key sectors and indices are not showing follow through to the upside to help solidify the S&P 500′s recent break above the key 1,230 price level. Additionally, the U.S. Dollar Index is currently trading right at key support in addition to being oversold. At this time I am not playing the S&P 500 in either direction, but I will be watching the underlying price action in the U.S. Dollar Index closely. I will be watching for additional clues in the days ahead.

Market and headline risk is high presently.

Silver Waits to Begin Breakout

To 250 million people in 51 countries in the world the word for money is the same word as the word for silver. Silver literally means money. According to Noble Laureate Milton Friedman the majority of monetary metal throughout history has been silver, not gold. Gold is the money of kings while silver is the money of gentlemen.

Before we make a case for silver being money, let’s take a look at what is money? I believe money is the grease or oil that lubricates the supply lines that bring goods and services to where they are needed. Without money our economy would be reduced to barter. The problem with barter is that you would not only have to find someone that has what you want but he would also have to have what you want in return. Let’s face it, in this modern world of infinite goods and services this would be a complete disaster.

So no matter what we use as a medium of exchange be it gold, silver, paper or sea shells we need an unrestricted supply of money to keep the economy lubricated. Money is a unit of storage or a proxy for value that must be something completely different from what is being exchanged. This is why money must float freely in value to coincide with the law of supply and demand.

What is the true value of silver? I have no idea. Silver like anything else will fluctuate with the laws of supply and demand. I do know this. If you are waiting for industry or the fiat printing of paper to send silver through the roof, you may be waiting a long time. That is because like a beautiful work of art is in the eye of the beholder the value of silver as money is perceived. It doesn’t come with an instruction manual.

So here’s where I come down on this. A dollar used to have stamped on it “Silver Certificate.”

george dollar

They were produced in response to silver agitation by citizens who were angered by the Fourth Coinage Act. The Coinage Act had effectively placed the United States on the Gold Standard which was fine but with each subsequent act the value of the dollar was debased. So in 1878 Silver Certificates were printed. One silver certificate could be traded for a silver dollar. Well in 1960 silver was trading for $1.29 which meant that a silver dollar was worth more than a silver certificate. In March 1964 Secretary of the Treasury C. Douglas Dillon halted redemption of silver certificates for silver dollars and while you could still trade with Silver Certificates. The new currency was the Federal Reserve note which still exists today.

I like to buy on AMPEX so I was on their web site and it would take 37 one dollar Federal Reserve notes to buy one American Eagle One Dollar coin. Last Spring in the last week of April it would have taken over 50 one dollar Federal Reserve notes to buy one American Eagle One Dollar coin. So I ask you, in the long term, which way do you think silver will go? Let’s take a look at a chart of Spot Silver below (click to enlarge).

george chart 10 15

As you can see silver has been in a consolidation period for the last month. For those of you that like the market to move at warp speed let me save you the suspense. It doesn’t.

In conclusion, after the volatility that silver has gone through since January of this year I think it’s healthy for it to consolidate. When Silver breaks out again it will be to the upside.

Credit Default Swaps Useless as Hedge Against Default; CDS on Greece a Purposeful Sham; Derivatives King Always Wins

As a result of labeling 50% haircuts "voluntary", Credit Default Swap contracts have proven to be useless when it comes to protecting against sovereign default. The serious implication is investors will need to find another way to hedge.

Bloomberg reports Greece Default Swaps Failure to Trigger Casts Doubt on Contracts as Hedge

The European Union’s ability to write down 50 percent of banks’ Greek bond holdings without triggering $3.7 billion in debt-insurance contracts threatens to undermine confidence in credit-default swaps as a hedge and force up borrowing costs.

As part of today’s accord aimed at resolving the euro region’s sovereign debt crisis, politicians and central bankers said they “invite Greece, private investors and all parties concerned to develop a voluntary bond exchange” into new securities. If the International Swaps & Derivatives Association agrees the exchange isn’t compulsory, credit-default swaps tied to the nation’s debt shouldn’t pay out.

“It will raise some very serious question marks over the value of CDS contracts,” said Harpreet Parhar, a strategist at Credit Agricole SA in London. “For euro sovereigns in particular, the CDS market is likely to remain wary.”

This approach may undermine confidence in credit-default swaps as a hedge and force banks to look at other ways of laying off risk, according to Pilar Gomez-Bravo, the senior adviser at Negentropy Capital in London, which oversees about 200 million euros ($277 million).

“If they find a way to avoid a trigger event in the CDS, then people will doubt the value of credit-default swaps in general, leading to more dislocations in the market,” she said.

“It is symptomatic of the regulatory and legal goalposts being constantly shifted either randomly or to suit political interests,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “For genuine long-term investors, either financial or non-financial, it’s a major liability.”
CDS on Greece a Purposeful Sham

Janet Tavakoli writes “Standard” Credit Default Swaps on Greece Are a Sham and It’s Not a Surprise
“Customers” that accepted ISDA documentation when buying credit default protection on Greece are now discovering that ISDA defends the position that a 50% discount on Greek debt is “voluntary” and therefore not a credit event for credit default swap payment purposes according to its documents.

First Step in a CDS: Protect Yourself from the ISDA Cartel

As previous sovereign problems have illustrated, the only way to buy protection is to rewrite the flawed ISDA “standard” document and agree to new more sensible terms, before concluding the initial trade. One has to first protect oneself from the ISDA cartel “standard” documentation before one can buy sovereign default protection, or any other protection for that matter.

This isn’t the first time investors have been burned in the sovereign credit default swap market. Hedge funds Eternity Global Master Fund Ltd. and HBK Master Fund LP thought they purchased protection against an Argentina default and sued when J.P. Morgan refused to pay off on Argentina credit protection contracts they had purchased.

At issue was the definition of restructuring. Did Argentina's "voluntary debt exchange" in November of 2001 meet the definition of a restructuring? The Republic of Argentina gave bondholders the option to turn in their bonds in exchange for secured loans backed by certain Argentine federal tax revenues. J.P. Morgan claimed this didn't meet the definition of restructuring, at least for the protection it sold to Eternity.

J.P. Morgan's story was different when it wanted to collect on the protection it bought from Daehon, a South Korean Bank. J.P. Morgan claimed its slightly different contract language met the definition of restructuring under the credit default protection contract it had with the South Korean Bank.

In other words, J.P. Morgan made sure its contract language would allow it to get paid when it bought protection and would make it harder for its counterparty to get paid when it sold protection.

Language Arbitrage: You’re Not a Sucker, You’re a Customer

Banks that play this game call it “language arbitrage.” Anyone that bought sovereign credit protection on Greece after accepting ISDA “standard” documentation without modifying the language now finds that they are on the wrong side of an “arbitrage.” An arbitrage is a riskless money pump. In this case, it means that money has been pumped out of credit default protection buyers with no risk to their counterparties, the financial institutions that ostensibly sold them credit default protection on Greece.
Derivatives King Always Wins

Note how the "Derivatives King" JP Morgan wins on its contracts, even on both sides of essentially the same bet.

By the way, I have a couple of questions:

  1. What the hell are banks doing in all these derivatives markets in the first place?

  2. Isn't it time banks act like banks instead of arbitrage hedge funds?


Reader Scott writes ...
One look at the ISDA membership should disabuse anyone of the notion that this is some kind of neutral judge. The big banks that write most of the derivative contract also compose the group that defines a credit event. This is not much different than have a baseball pitcher call the balls and strikes. How this is legal is beyond me.

Five Stocks Underrepresented Among ETFs: RIG, GIS, BHP, CAT, KFT

Investors looking for ETFs to act as proxies for certain stocks have no shortage of options. Want a fund a with large weight to Apple (Nasdaq: AAPL) so you don't have to pay Apple's triple-digit price tag? There's an ETF for that. Want oil equities exposure with a bias to Exxon Mobil (NYSE: XOM) without an exclusive commitment to that stock? There's an ETF for that, too.

Those are just two examples. There are plenty more. However, there are also more than a few examples of large, well-known stocks that are underrepresented in the ETF arena. Here are five, that in our opinion, should be weighted a bit more heavily by ETFs. In no particular order...

Transocean (NYSE: RIG): Transocean is the world's largest provider of offshore drilling services and as the world's largest provider of anything related to the oil business, one might think RIG was easy to find in the ETF world. It's not. The Oil Services HOLDRS (AMEX: OIH) offers a weight of just under 10% to RIG, making it the only ETF to allocate a noteworthy portion of its weight to this stock. Transocean is based in Switzerland and it's nowhere to be found in the iShares MSCI Switzerland Index Fund (NYSE: EWL).

General Mills (NYSE: GIS): It's not hard to find General Mills rival Kraft (NYSE: KFT) in ETFs, probably because the latter is a Dow stock and bigger than Big G. That's too bad because General Mills has consistently outperformed Kraft in recent years. Plus, Big G is a reliable dividend stock and it's “just” the second-largest U.S. food company. Only the Global X Food ETF (NYSE: EATX) features General Mills a prominent holding.

BHP Billiton (NYSE: BHP): The only excuse here, and it's a weak one, is that BHP is not a U.S.-based company. This is the largest mining company in the world and has a market value of close to $208 billion. The fact that just two ETFs, the iShares MSCI Australia Index Fund (NYSE: EWA) and the PowerShares BLDRS Asia 50 Index (Nasdaq: ADRA), give double-digit allocations to BHP is stunning.

Caterpillar (NYSE: CAT): As Roger Nusbaum noted earlier this week, Caterpillar is a good example of a situation where it's best to own the stock directly instead of using an ETF as a proxy. A lot of ETFs hold CAT, but not a lot feature the world's largest maker of construction and mining equipment prominently. With CAT flirting with $100 again, that's disappointing.

An Easy-To-Understand Guide To Last Night's Euro "Resolution"

Let’s not sugarcoat tonight’s “resolution” – this is merely a temporary measure that will buy them more time to resolve the true cause of the currency crisis. Let’s take a brief look at some of the key points of tonight’s statement (read it in full here):

“All Member States of the euro area are fully determined to continue their policy of fiscal consolidation and structural reforms. A particular effort will be required of those Member States who are experiencing tensions in sovereign debt markets.”

Translation: Austerity will continue. This is more of the same. Trade deficit nations undergoing a balance sheet recession will be forced into further budget consolidation which will continue to put downward pressure on growth and ultimately worsen the fiscal picture.

“We commend Italy’s commitment to achieve a balanced budget by 2013 and a structural budget surplus in 2014, bringing about a reduction in gross government debt to 113% of GDP in 2014, as well as the foreseen introduction of a balanced budget rule in the constitution by mid 2012.”

Translation: they still believe Italy and the other periphery trade deficit nations can undergo austerity, external sector outflows and debt improvements. Greece has already proven this wrong.

“We reiterate our determination to continue providing support to all countries under programmes until they have regained market access, provided they fully implement those programmes.”

Translation: The ECB will temporarily enter markets in order to avoid catastrophe, but will not become the fiscal issuer required to resolve the crisis.

“To this end we invite Greece, private investors and all parties concerned to develop a voluntary bond exchange with a nominal discount of 50% on notional Greek debt held by private investors. The Euro zone Member States would contribute to the PSI package up to 30 bn euro. On that basis, the official sector stands ready to provide additional programme financing of up to 100 bn euro until 2014, including the required recapitalisation of Greek banks.”

Translation: Greece is the offering to the German austerity Gods. Bondholders will take a haircut on the $120B Greek debt they own, but will also be recapitalized. This is really nothing more than a peace offering to those who want to see the banks “take a loss”.

“Being part of a monetary union has far reaching implications and implies a much closer coordination and surveillance to ensure stability and sustainability of the whole area. The current crisis shows the need to address this much more effectively. Therefore, while strengthening our crisis tools within the euro area, we will make further progress in integrating economic and fiscal policies by reinforcing coordination, surveillance and discipline. We will develop the necessary policies to support the functioning of the single currency area.”

Translation: We know we need a fiscal union of some sort, but we can’t get everyone on board. This is a work in progress.

“The EFSF will have the flexibility to use these two options simultaneously, deploying them depending on the specific objective pursued and on market circumstances. The leverage effect of each option will vary, depending on their specific features and market conditions, but could be up to four or five.”

Translation: A larger EFSF will help to stem the bleeding and reduces the odds of a worst case scenario where we experience a Lehman type event. The leveraging of the EFSF ensures that Europe’s banks will not be allowed to fail and cause massive private sector contagion.

“Financing of capital increase: Banks should first use private sources of capital, including through restructuring and conversion of debt to equity instruments. Banks should be subject to constraints regarding the distribution of dividends and bonus payments until the target has been attained. If necessary, national governments should provide support , and if this support is not available, recapitalisation should be funded via a loan from the EFSF in the case of Eurozone countries.”

Translation: Substantial capital has been set aside in the case of widespread bank failures or recapitalization needs. Again, this fends off the worst case scenario where a massive banking crisis spreads into the private sector.

Conclusion: This is a step in the right direction. By recapitalizing banks and enlarging the EFSF they have set a nice sized rifle on the table. Unfortunately, this is just more of the same in greater size. Ultimately, none of these measures will resolve the true cause of the crisis which is rooted in the currency and the incomplete currency union. Until Europe resolves the imbalance caused by the single currency there is no reason to believe this crisis has ended. I still believe the ultimate resolution here will involve fiscal transfers of some sort directly to the sovereigns that resolves the lack of sovereignty issue. That likely means e-bonds or a central Treasury at some point. We are clearly not there though this statement buys them time.

For now, we can breathe a sigh of relief knowing that we aren’t on the verge of Lehman 2.0. Unfortunately, we can’t expect this to resolve the sovereign debt crisis as austerity will continue and the current measures do not attack the lack of sovereignty issue. All in all, this removes the worst case scenario, but virtually guarantees a muddle through scenario. If budgets worsen on the periphery we should expect to revisit this issue in the coming quarters and the crisis will once again ripple through the market forcing Euro leaders into greater action. Perhaps a true resolution is not far in the future. Unfortunately, it likely means more market volatility before leaders realize the true gravity of this situation.

A Fast-Food Dividend Stock for Hungry Income Investors : MCD

McDonald’s (NYSE:MCD) – This most-famous-of-all fast-food chains operates in more than 100 countries. Internationally, people love the quality and quick service McDonald’s provides, and shareholders have benefited from MCD’s huge cash flow and its history of returning cash to stockholders through buybacks and dividend hikes.

Following another tremendous quarter announced Friday, MCD stock gapped higher, which supports the current move. Analysts’ consensus target price has been raised to $109. Technically, MCD is breaking from a “deep V” with a target price of $110.

McDonald's MCD

S&P 500 Extends Biggest Monthly Rally Since 1974 on Europe Deal

U.S. stocks rose, extending the biggest monthly rally since 1974 for the Standard & Poor’s 500 Index, as European leaders agreed to expand a bailout fund to $1.4 trillion and American economic growth accelerated.

Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) advanced at least 8.3 percent, following gains in European lenders. The Dow Jones Transportation Average, a proxy for the economy, jumped 4.5 percent. The index extended its October rally to 20 percent and is poised for its best monthly gain since 1939. Alcoa Inc. (AA) and General Electric Co. climbed more than 6.2 percent to pace gains in companies most-dependent on economic growth.

The S&P 500 rose 3.4 percent to 1,284.59 at 4 p.m. New York time, erasing its 2011 loss and rising to the highest level since Aug. 1. The gauge has climbed 14 percent so far in October. The Dow Jones Industrial Average added 339.51 points, or 2.9 percent, to 12,208.55. The Russell 2000 Index of small companies rallied 5.3 percent and is up 19 percent in October. About 11.9 billion shares changed hands on U.S. exchanges at 4:30 p.m., or 29 percent above the three-month average.

“This sort of half-baked solution out of Europe comes at a good time,” Michael Shaoul, chairman of Marketfield Asset Management in New York, which oversees $1 billion, said in a telephone interview. “The market simply wanted to say -- OK, we’ll give them a chance to work things out. They can mess it up, but my best guess is we put this behind us.”

Concern over Europe’s debt crisis sent the S&P 500 to a one-year low earlier this month. The index came within 1 percent of extending its decline from its April peak to 20 percent, the common definition of a bear market. Since then, it has risen 17 percent on optimism Europe would contain its crisis. (more)