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Forget Europe, Watch China

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I love it when we start out a week in the green. Though we may find out that the markets are a little illiquid today due to the Columbus Day holiday, everything is on fire early in the session. If you’re looking for the reason behind this bounce, look no further than Europe.

Although details are lacking about who exactly will do what, Germany and France have agreed to a plan that would recapitalize banks. Once again, we’re seeing signals that Europe is moving from denial to acceptance, and that the political wars being fought behind the scenes of this European debt crisis may be moving closer to an armistice.

With the situation in Europe in check for the moment (emphasis on the for the moment), I’m starting to turn my focus toward some CPI and PPI numbers later this week. Not here in the States, but in China, where they’ve been tightening for a while now out of inflationary concerns. If those numbers come out tame—which is the expectation—that could be an indication that China is ready to start ramping up production and begin growing again. That’s good news for the entire world.

This is not the time to get caught napping—in fact, last week and this week are the make or break weeks for Q4 and the market going into the end of the year. Increasing indications of stability in the EU and a Chinese economy that’s back online could be the recipe for a real surprise to the upside. In fact, I’m going to come right out and say it: if those inflation numbers come out as expected, put on your seatbelt, because barring a black swan event, I think we will see new highs by the end of the year. How about that?

I’m already adding to my exposure. Over the course of the last few months, the market has priced in another 2008 when that was not necessary. For those of us who have maintained that expectations for this earnings season had gotten too low, the Cassandra Effect has created some terrific bargains.

Meanwhile, as Adam Westphalen, chief investment officer of Mosaic Portfolio Strategists, mentioned on the show this morning, the negative interest rate environment is such that people are actually paying the government to tuck away their money in the government-sponsored mattress that is the 10-year. That simply will not last. As fear continues to exit the marketplace and confidence returns, that money will find its way somewhere where it can get a return.

We’re already seeing some of that asset allocation taking place early in today’s session. Fund managers in Europe, who have been exiting risk positions to repatriate capital, are sensing stability and putting money back into equities—that’s why everything’s up right now. Be careful, though: because of the holiday, this could be one of those days that falls off a cliff when Europe closes. Markets don’t move in straight lines—make sure you do your homework, and always be sure you have protection on your portfolio.

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John Ransom | Create Your Badge

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