Market Overview

Something's Coming, Sept. 2011

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One cannot help but feel in this time period that something big is just around the corner. Whether it proves to be good or bad, it's as if something's coming. Though recently there has appeared to be a bit of a lull in the news, the world is spinning faster and faster every day.

Is there reason to believe that something big is around the corner? There are a number of global and political factors that I believe suggest that we are approaching a climactic point sometime soon in the global markets. It could be quite an eventful second half of September.

#1. The Future of the Euro

Not the least of the global factors at issue is the current debate of the euro currency going forward. With Italy turning to China for a bailout and Germany struggling to find a way to rescue the euro, the fate of the Eurozone currency is in question. According to a New York Times article, if Germany does not step up to resolve the debt crisis in Europe, American officials fear that "bank lending could freeze up and the result would be another sharp financial downturn on both sides of the Atlantic". Almost analogous to a marriage or any other sort of union, the true strength and stability of a partnership or union manifests itself during the rough times. As such, the current debate on whether to boot Greece from the Eurozone could make or break the euro currency.

#2. Wall Street Protests on Sept. 17

Another event that appears to suggest that something big is around the corner is the planned protests on Wall Street for Sept. 17. The Sept. 17 Wall Street protests could prove to be a mere spark or a wildfire. As protesters seek out their Tahrir Square moment in the US, the event could have a negative impact on markets as confidence in the US political system and financial system gets rattled in the wake of the voices of thousands of protesters. Although the possible demands of the possible protesters for the possible protest remain unclear, the event could erupt into a mess as thousands plan to pitch tents and camp out on Wall Street and various other locations to protest injustices in the US financial system. This beast could have teeth.

#3. US Economic Uncertainty

Along with the Wall Street protests, a major factor that appears to be pushing the socio-economic environment to a breaking point is the declining state of the US economy. As the poverty rate increases and unemployment does not improve, the socio-economic situation of the US could give way to further societal unrest and tears in the social fabric. Increasing crime and lawlessness in conjunction with a society constantly attempting to readjust its lifestyle owing to economic fluctuations could make for a weary, burnt-out, overworked, hungry, and frustrated populace; to say the least, such a situation would not be healthy and could compromise economic recovery efforts.

According to a recent article from Bloomberg, business economists recently cut their growth outlook for the US economy to 1.7 percent for 2011, less than the May forecast of 2.8 percent. Even further, "growth in 2012 will average 2.3 percent after a previous projection of 3.2 percent". In light of Okun's law (where the unemployment rate will fall by half of what the growth rate exceeds 3 percent), this outlook suggests that unemployment will remain unchanged through 2012. (One has to wonder how much the phenomenon of estranged workers and people giving up on the job search plays into what Okun's law suggests.) However, if continued unemployment causes further societal frustration and unrest with increasing crime, then our situation may become that much worse in the near future.

#4. US Political Uncertainty

Standard & Poor's cited political uncertainty in the US as one of the main reasons the agency downgraded the US debt rating. As the GOP presidential debates heat up, lines are going to be drawn with respect to factions in the Republican Party. Though there has been some talk of a frontrunner in the GOP race, it is unclear whether a clear leader will emerge anytime soon. While the heat from the Kulturkampf arising from the recent debt ceiling debate has tapered off a bit, it is unclear whether Republicans will be willing to work with Pres. Obama to boost the economy. As both Republicans and Democrats have radically different philosophies on how to fix the economy and negative outlooks for the near future, there is little hope that political uncertainty will diminish prior to the 2012 election. It is as if we are still waiting for the other shoe to drop from the recent debt ceiling debate and Pres. Obama's recent jobs speech.

Even so, we will have to see which candidate drives towards the front of the GOP race for president. There could very well be a major turning point approaching in the race for who gets to run against Pres. Obama.

#5. Developments in the Middle East

Perhaps the most significant factor to take into account with respect to a possible market disruption coming in the future is the possibility of a regional war in the Middle East. With Israel's embassy in Egypt being violently attacked by protesters, harsh words against Israel from the king of Jordan, and militaristic posturing by Turkey, the situation in the Middle East is getting tenser by the day. Furthermore, on Sept. 20 Palestine plans on submitting a bid for statehood to the United Nations.

Palestine's move for recognition in the international community as an official state could possibly spark a mass Arab uprising. The Israeli army has been distributing tear gas and stun grenades to citizens in anticipation of the UN assembly. While the US has announced that it would try to block a Palestinian statehood resolution and would veto it in the Security Council, the move by Palestine could give credence to the Palestinian effort and could increase attacks on Israel.

Aside from the specter of a third intifada, Turkey has recently sent three warships to guard Gaza-bound flotillas. And if all the above is not enough, Iran has stepped up operations at its first nuclear power plant. It appears that the walls are starting to close in around Israel from all directions, and as the walls begin to close in on Israel, the likelihood of a regional war in the Middle East increases. A regional war in the Middle East involving Israel and Iran would most likely drive up the price of oil thereby stunting and frustrating global economic recovery efforts. Such a war would also further increase uncertainty in the international economic community.

Something's Coming...Good or Bad?

Not long after the last time I felt that something big was coming, news broke that Osama bin Laden had been killed by US forces. The killing of bin Laden was a major event, but it did not affect the markets too much. Perhaps there is nothing big on the horizon in the immediate future that will affect the markets, but something could very well come in the last half of September. I am not saying that it would have to be aliens or the apocalypse, but many things appear to be coming to a head in the international sphere of politics and economics. The aftershocks of the global financial crisis appear to be increasing the heat that is driving the world to a boiling point. What will happen at that boiling point no one knows.

Of course, there could be something good on the horizon. But given all the possible things that could be bad, it is difficult to imagine what that "something good" could be. Perhaps a manned journey to Mars? The discovery of a planet that is similar to Earth? A new invention that changes the world perhaps? Even with the aforementioned ideas, there doesn't really appear to be any reason to expect that things will improve anytime soon.

If economic conditions do not improve thereby calling into question the viability of the euro and the US dollar, there could be a sudden worldwide push for a global currency to remedy the global financial crisis. I suppose the question of whether a global currency would be a good thing or a bad thing is a matter of perspective. But even in the midst of war, chaos, and natural disasters, we should try to hope for the best and prepare for the worst.

Nevertheless, even if the rest of the world is only preparing for the worst, I still think we would do well in hoping that something good is right around the corner. Economic pessimism can be counter-productive if permitted to fester. Even though I understand that the worst could happen, come what may I still hope that something good is on its way in the near future.
 

ACTION ITEMS:

Bullish:
Traders who believe that something good is right around the corner might want to consider the following trades:

  • Go long on SPDR Dow Jones Industrial Average ETF (NYSE: DIA).
  • Traders who think that Israel's economy will be resilient and strong despite international pressure and threats of hostile neighbors may want to go long on iShares MSCI Israel Capped Index Fund (NYSE: EIS).
  • Traders who want to hedge against a falling dollar and falling stocks might want to look into SPDR Gold Trust (ETF) (NYSE: GLD) and iShares Silver Trust (ETF) (NYSE: SLV).

Bearish:
Traders who believe that something bad is right around the corner might want to consider alternative positions:

  • Traders who believe that the euro's days are numbered may want to short the EURUSD currency pair.
  • Traders who believe that the Sept. 17 protests will incapacitate Wall Street may want to short the SPDR Dow Jones Industrial Average ETF (NYSE: DIA).

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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