Kiss an Angel Good Morning

All the anxiety and apprehension about Europe’s debt stalemate culminated in a tense European summit last week that allowed Germany’s Chancellor, Angela Merkel, to cede some important ground to stabilize Spanish and problematic European banks. While serious issues remain in Europe, it appears European leaders took important steps toward more central control over the banking system. The moves may begin a process to stabilize the Euro (European currency).

All of the new integration moves could not have occurred without the blessing of Angela Merkel. The tough German Chancellor is facing severe pressure among many Germans who feel Germany should not yield to the slothfulness of southern European work rules and tax authority. While the tough stance may be philosophically correct, the two-year negotiations were heading toward a breaking point when viewed from the eyes of Spanish and Italian bond yields. Angela blinked and investors said “Thank You” with a huge rally on Friday.

In return for allowing the direct recapitalization of banks by the bailout funds, Germany won agreement on a single banking supervisory agency, with the European Central Bank playing a major role, a shift bringing it closer to the powers of the United States Federal Reserve. Believe me, even though this sounds good, the EU still has a long way to go to get to economic and fiscal integration. However, the moves last week soften the views of the northern and southern Europeans allowing Spanish and Italian bonds and stocks to rebound from historic low levels.

Like all major compromising negotiations, the success will depend on how quickly and sufficiently the countries deal with the details. Without real integration, the good news from the summit will soon fade away into the summer heat. Let’s hope cooler heads prevail and the Europeans do what they need to do.

Now, the fun part begins in the U.S. market. A new round of quarterly earnings will illustrate who performed well in the face of a global slide in economic activity. My bet is that forecasts will remain subdued but earnings progress will still remain solid. I will save any comments about the Supreme Court ruling on healthcare legislation largely because it remains confusing and difficult to decipher. However, I still believe big drug companies supporting healthy dividend yields will remain a favorite sector for investors.

Have a great week,

Roger N. Steed
July 2, 2012

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