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Europe concerns vs incredible value

The worst of the stock market this year came after early August when the combined incompetence and political stupidity of European and US politicians saw our S&P/ASX 200 fall around 500 points in a week to hit a low of 3,986.

The fear and loathing continued with Greek debt dramas spreading to Italy, causing another low of 3,836.9 to be delivered on 26 September. We are now at 4,159.2 – that’s more than a 300-point buffer! But we are once again in the hands of European Union and US politicians and that partly explains why we seemed locked in no-man’s land.

The best portrayal of this locked-in zone is the S&P 500 which just can’t break out of the 1,250-1,270 cap on its progress. This numerically explains what’s happening right now. Professionals know there is unbelievable value in stocks if you have a long-term view, but right now the eurozone doubts mean there could easily be sell-offs and so traders, along with other short-term players, buy on the dips and won’t take many risks on the high side.

Is the bull market coming?

Unfortunately for those of us hanging out for the inevitable market rebound and the commencement of a bull market, not enough has been done in Europe to bring those in cash and bonds back to stocks.

The poor old Yanks love a Santa Claus rally, but it looks like the EU and Angela Merkel of Germany have stolen Christmas for the optimists out there. The German Chancellor plays a long game of discipline, which makes sense under most circumstances, but the current predicament the world is in requires monetary stimulation and support for banks; as ANZ boss Mike Smith says, credit markets are starting to resemble those in 2008 when Lehman Brothers failed.

If he is right, then the Germans will have to give in and spend some money to kick-start a Europe already heading into recession.

Over the weekend, the Dow lost only two points or so and is now at 11,866.39, but the Australian market has been performing dismally today. Stocks aren’t being helped by the impacts of continual downgrades by ratings agencies for countries as well as banks along with a failure to lower European bond yields.

“The risk of a disorderly sovereign debt unwind in Europe is very high,” Bruno Del Ama, CEO of Global X Management in New York said on CNBC. “The market realises that and is pricing it in.”

Doubt is holding back gains and while Wall Street has started higher for most of the week, the question marks are just too valuable for those who short-sell or who are taking profits.

Many investment companies are squaring up their books and this doesn’t help enthusiasm to buy. And in the end, the Europeans and even the US politicians with their arguments over the deficit have given nothing to promote stock-buying enthusiasm.

Symbolic of the challenges for the market to go higher was the Fitch downgrade of the moneymaking machine called Goldman Sachs! This reflects how difficult financial markets are expected to be!

Rally drivers

Finally, for those long-term investors needing some optimism before I go, Tobias Levkovich, chief US equity strategist at Citi Investment Research, told CNBC that there are “six forces” that will kick-off a big bull market in 12 to 18 months time.

And that could be the amount of time it takes to get some sense out of the politicians and regulators in Europe and in that time, the USA will have a new Congress and maybe a new president!

So what were those six forces? Try these:

  1. A US housing recovery
  2. US energy independence
  3. A manufacturing renaissance in the US
  4. Fiscal reform
  5. Technological gains with smart phones
  6. And an investment group in their late 30s to rival the good old baby boomers!

That’s Gen X to the rescue, and the fact they could have learnt something from their baby boomer parents is a nice a thought.

If this guy is right, then it confirms that current stock values are outrageously low.

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