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Amazingly, it’s being reported that Europe has come to an agreement on bank recapitalization plans and Greek debt forgiveness. The banks will have to get their Tier 1 capital up to 9% by June. That 9% will be calculated based on the value of sovereign debt they hold after write-downs.
Back in July, Euro-banks were stress tested for Tier 1 capital of 5%, and that was assuming that all sovereign debt on the books could be valued at 100%. Greek debt forgiveness will be 50%. Euro-banks will add $140 billion to their balance sheets.
The EU is expected to appeal to China for investments in its banks. And China has sounded willing to help. That’s a good thing, as there aren’t that many ready sources of liquidity in the world today.
All in all, the market seems to like the news coming out of yesterday’s summit. And it occurs to me that if banks raise cash before Greek debt is actually written off, then we might even avoid the downside that I’ve assumed is unavoidable.
One thing that seems to be missing is the timetable for Greek default. It would be good to know exactly when the Euro-banks have to book the losses.
Investors certainly like the news today. The euro is up huge against the dollar, and that’s always good for stocks.
The stock market is set up for a strong end of year rally.
Economic numbers have been coming in better than expected, including yesterday’s durable goods, which showed the biggest jump in 6 months. Clearly, growth picked up in the third quarter, and those recession fears from late summer seem like a distant memory.
Third quarter GDP came in at 2.5% which was much better than expected.
Then there’s the potential for a jobs bill and program to help homeowner’s refinance underwater loans.
And finally, there’s earnings which, despite a few hiccups, have been good. Last night was huge day for the S&P 500, with 52 companies reporting.
One particularly interesting note form earnings reports has been the Asia/U.S. sales mix. For much of the last 2 years, companies have said that sales growth in Asia and other emerging markets has been a key driver of growth.
But recently, Ford (NYSE:F), UPS (NYSE:UPS), DuPont (NYSE:DD), Caterpillar (NYSE:CAT) and 3M (NYSE:MMM) all indicated that international growth was slowing and U.S. growth was picking up.
This is good news for the U.S. economy, and for the stock market. It makes me wonder when we’ll see a pick up in hiring. Because an increase in domestic demand has been the missing link. It may not be long until we see some positive employment data.
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