Stocks rallied hard on Monday as banks in Europe and now China look ready to enjoy increased backing by the public purse. If there's one thing that's a sure cure for bank solvency concerns, it's an injection of taxpayer money.
The result was a massive surge across the spectrum of risky assets. Stocks, high-yield bonds, industrial commodities, the euro, and precious metals all moved higher. Safe havens like U.S. Treasury bonds and the U.S. dollar moved lower.
It was a beautiful thing. And it was the strongest one-day move since August. Unfortunately, it's catching most investors by surprise.
In China, the state-run Huijin Investment fund bought shares in four of the country's largest banks in what was the first state-backed bank share purchases since the 2008 financial crisis. The move comes in response to increasing doubts about the health of China's financial sector given heavy loan issuance to local governments as well as real estate speculators.
Now, it's clear for all to see that China is ready and willing to use its $3+ trillion foreign exchange reserve to backstop its banks no matter the cost. Banks included in the purchase were the Bank of China, the Agricultural Bank, Industrial and Commercial Bank of China, and the China Construction Bank.
Over in Europe, French president Sarkozy and German chancellor Merkel promised to deliver a "comprehensive solution" to the euro crisis that will focus mainly on European bank recapitalization -- which in turn will clear the way for deeper "haircuts" or forced losses on Greek government debt.
Separately, Malta became the 16th eurozone country to approve the so called "July 21" changes to the European bailout fund. Now, only Slovakia is left. Once all 17 countries have approved, the fund will be expanded and given new flexibility to directly buy government bonds as well as provide capital to banks. Approval is seen as a necessary precondition for the comprehensive solution Merkel and Sarkozy are speaking of.
With the economic fundamentals continuing to turn positive -- as represented by the Citigroup Economic Surprise Index moving ever closing to positive territory -- all this newfound policy support will only add fuel to the fire that's powering risky assets higher. Central banks are already in the game with the Federal Reserve, the European Central Bank, and the Bank of England all announcing major new policy initiatives lately.
Today, it was all about politicians using taxpayer funds to backstop their banks. While this may not be ethical or sit well with the free market purists out there, it's happening and it's a definite positive for a market that's been obsessed with downside risks over the last three months.
Most investors aren't positioned to benefit from the rebound. As I mentioned in my column last week, people have been funneling their cash into ultra-low yielding money market mutual funds at levels beyond what was seen during the March 2009 bear market low. Then, the economy was truly in a recession, job losses were mounting and stocks were trading below their 2002 lows. In fact, they had returned to levels not seen since 1996.
Another way to see this has been the surge into U.S. Treasury bonds, as represented by the iShares 20+ Year Treasury ETF (TLT) above.
By just about any measure you'd care to use, the situation is far better now. Yes, Europe has problems. And the U.S. economy is trying to fight through the body blows it has suffered this year. But companies are making money, banks are doing just fine, the economy is growing, people are spending, and some new jobs are being created.
Last week, I said that all this sets the stage for a powerful new stock market rally as the economy pushes confidence higher and persuades investors to put their cash back to work in risky assets. That's starting to happen now.
I continue to recommend recent additions to the Edge Letter sample portfolio including highlighted fast moving, economically sensitive stocks including memory specialist Micron Technology (MU), Russian steelmaker Mechel OAO (MTL), and Brazilian energy play Petroleo Brasilerio (PBR).
Shares of these three companies are up some 16%, 12%, and 8% respectively since I added them last week.
I found MU, MTL, and PBR with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Editor's note: Fidelity sponsors the Investor Pro section on MSN Money.)
Disclosure: Anthony has recommend MU to his newsletter subscribers.
Check out Anthony's new investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up.
The author can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
"Today, it was all about politicians using taxpayer funds to backstop their banks. While this may not be ethical or sit well with the free market purists out there, it's happening and it's a definite positive for a market that's been obsessed with downside risks over the last three months." Pretty much every day if you've been paying attention, I'd say.
Your correct about one thing...its not ethical, but what does that matter as long as the markets go up, right? The bankers get more bailouts. unethical but good for the market (and the banksters). Lets just cut to the chase, the problems of today are not a liquidity issue, they are an insolvency issue. The economies of many nations of the world are broke, but as long as we can pump up the markets all is well I guess hey 'Anthony.. The people who are protesting on Wall street and many other streets in the USA would very much disagree with your slanted banker shill analysis. They have had enough of the B.S and corruption that is Wall street and the phony ponzi economy. RALLY ON! BOO YAA!
Clueless?.......Buffoon?.......I don't know, seems like he's got the job,doing this??
Work the charts, Baby,,,,,Work the charts.
I'm all in......And lovin' it....Going back up, that is !!
Yesterday’s was a suckers rally.
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