Germany in the news: Market drops over 5% (UPDATES)

Big news in Europe starts off this post this Labor Day. German Chancellor Angela Merkel’s party lost weekend elections in her home state, stoking concern opposition is growing to bailouts for debt-saddled European nations. This in turn has caused the German DAX Index to tumble over 5% with only a few hours to go in trading. I will update this post after their market closes. But I do have a chart of the DAX Index for the past few years and you will clearly see that they have broken below the current lows and the implication is that our stock market will follow suit tomorrow. This would accelerate the drop and almost assure a drop below 11,000 again. Here's the chart of the DAX Index:

You can see that todays last data point is lower than the previous recent lows, implying a drop below the red line. Looking back over the years you can see this is an important level not to go below. Their lows correspond to our low of the timeframe when the Dow went to 6,400.

Again I repeat, this week is very important not just here in the US, but also in Germany as on Wednesday there is a vote as to whether they will support the bailout of the debtor nations in Europe like Greece and Italy and Spain. Then add to that news, we have the President's Jobs speech on Thursday and the markets will have a reaction to these events. Stay tuned!

UPDATE: 8:45am PST
From Reuters: "Italian economic growth is likely to fall short of the government's official forecast of 1.1 percent in 2011 and 1.3 percent in 2012, probably coming in under 1 percent, a senior government source said on Monday. "It will be very difficult for Italy to reach 1.1 percent growth this year and next," the official, who spoke on condition of anonymity, told Reuters."

Italy's stock benchmark FTSE MIB Index was down 4 percent, with UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP), Italy’s biggest banks, dropping 5.8 and 6.2 percent, respectively. Markets are getting very rattled in Europe.

Another Update will be given when the German market and European markets close.

UPDATE: 11:05am PST
Germany's DAX Index closed at 5,246 today, down 5.3% at the close. Following Germany's lead were other European Indexes such as France's CAC Index, down 4.7%, Britain's FTSE Index down 3.6% and Italy's FTSE MIB Index which was down 4.8%. This should send ripples in Asian markets tonight and our US markets tomorrow.

Events in Egypt and how they will affect trading on Monday

The events in Egypt continue to show no abatement of the demonstrations nor demonstrators calls for President Hosni Mubarak to step down. This will change the mindset in the Middle East. One consequence of this will be fear gripping their stock markets across the region. I expect there to be a flight to safety in market action on Monday both here, Europe and even possibly Asia. The dollar should get a boost as should the Swiss Franc. I do see our stock market with high volatility. If the events to not resolve themselves by Monday, there will be a selloff of stocks here. If things seem resolved by Monday, we could see a relief rally. Gold most likely will rise as will Silver no matter what the outcome for Monday.

Overview of the next few months in the economy, politics and the stock market

I believe in the coming few weeks there will be a great battle in the stock market for the very soul of the market. One group of players will be those Bears, who like me, believe we have been lied to and the markets manipulated to keep us happy. The other players are the Bulls, who believe the lies of the Government and the Fed and think things have been getting slowly better.

I do believe the stock markets will drop significantly in Sept and Oct., set up a angry Consumer and Electorate, who will then go to the polls in November and vote to "throw all the bums out". This will be followed by a Republican victory in the House of Representatives, which will mean a return to endless investigations using the new subpoena powers they will have in the Congress and they will continue to stop all legislation on Energy, Healthcare and of course any Social agenda to help the Unemployed.

A stock market rally will follow the election in support for the change and a Republican victory and election to a majority in the Congress. They will continue the Bush the tax, which are scheduled to expire in January 2011. They won't allow it to end as it has been big business for them to stop it, so the most affluent can keep their money, which, in part, pays for the politicians to vote their way. The consequence of which will be that deficits will be out of control going forward as will the interest payments we will need to pay each year to pay for all our debt. It will be an irresponsible policy move. Of course these newly elected members of Congress will get us into a catastrophe much quicker with reactionary new policies, and this will drive us faster to the Great Depression, Version 2.0.

I think the Fed has done an amazing job managing our psychology these past 18 months along with the Government. I haven't liked it, as I keep seeing the man behind the curtain pulling the strings, as you do. But the facts of what we see everyday is hard to change by hype and manipulation alone. We need to see positive change in our community with better Home prices and Sales, less For Lease signs from Commercial Real Estate problems, less unemployed and more hiring and the business community taking a bit more of the risk and investing in new capital equipment. That is why the stock market has been in a tight range between 11,600 and 9800 during this period, with no significant breakout in either direction. It has been a tradable range of -15.5% to as high as 18.4%, but the timing has not been very easy to trade as most of those moves happen within a few days in each direction and by the time one reacts 50-75% of the move is over. That works fine for Wall Street with their program trading, but isn't so good for the average individual investor.

The battles in the future are going to be between the have's and the have nots. It has already begun if you haven't noticed these past few years. The Middle Class is being slowly extinguished. Eventually Unions will become stronger again but if we aren't careful as a country, we are going to resemble a country in Central or South America, where workers fight to try and live and governments eventually turn like Venezuela. The wealthy in this country are playing a very dangerous game that is going to come back and bite them badly.

One must ask them the most difficult question, which some amongst them have finally asked themselves. When is enough, really enough! How much wealth must one have and when is it counterproductive to the society one lives in to garner more just for the sake of having it. Bill Gates asked himself that question, as did Warren Buffet. I salute them both. But how many more, which I will not name, come to the same realization. You made as much as you have because of the America of the past, which had a vibrant Middle Class. It is equally important for them to have a strong Middle Class as well. It keeps peace in the streets and hope in people's hearts. We need more of that now.

The anger of those politicians who are riling up voters and has spawned the Tea party, is a prime example of what I mean. Being a politician and saying "No" all the time, does not create great solutions to problems, where all can live with a truly compromised solution. They are one sided solutions and half the population is going to be unhappy with the change. We need genuine compromises by elder Statesmen (and Stateswomen) if we are ever going to attack the deficit, Social Security, Medicare, the Military Industrial complex and ensure our national and individual security.

So that's what I see ahead of us. You can make a difference by not letting your anger get the best of your choices. Think rationally, not emotionally, what is truly best for the majority of people and choose accordingly. As to the stock market, don't let the swings between the ranges drive you crazy. Pick a strategy and stick with it until it is proven correct or false. As the charts of the Dow 6 month, 3 year and 30 year show below, there is a great battle brewing both short term and long term. This too will be the effect and affect on the economy and the stock market as it is impossible to discern which leads which and which follows.

Serious accusations against North Korea could reignite a war.

While the stock market had its own problems so far this day, this from Yahoo! news:

North Korea, accused of waging the deadliest attack on the South Korean military since the Korean War, flatly denied sinking a warship Thursday and warned that retaliation would mean "all-out war."
Evidence presented Thursday to prove North Korea fired a torpedo that sank a South Korean ship was fabricated by Seoul, North Korean naval spokesman Col. Pak In Ho told broadcaster APTN in an exclusive interview in Pyongyang.

He warned that any move to sanction or strike North Korea would be met with force.
"If (South Korea) tries to deal any retaliation or punishment, or if they try sanctions or a strike on us .... we will answer to this with all-out war," he told APTN.

An international team of civilian and military investigators declared earlier in Seoul that a North Korean submarine fired a homing torpedo at the Cheonan on March 26, ripping the 1,200-ton ship in two.

Fifty-eight sailors were rescued, but 46 died — South Korea's worst military disaster since a truce ended the three-year Korean War in 1953. President Lee Myung-bak vowed to take "resolute countermeasures" and called an emergency security meeting for Friday.

This is very scary stuff and should be on more news outlets than it currently is. But this could affect markets already nervous over the European Unions troubles with debt and the Euro.

World Stock markets tumble with a President that no one believes when he speaks. A very bad combo!

There is no one in this Administration, especially President Bush, who can calm fears in this volatile stock market. In past years we believed our Presidents who came out to calm us all in the face of a recession. This President has spent all his "capital" on the lies of the war in Iraq and on the political fears he used to get his surveillance measures through the Congress. Now no matter what he says, no one is listening.

Recently I wrote that even though we had only a year left in the Bush presidency, he could still do a lot of damage in the remainder of his term. It looks as though he isn't resting until he has a perfect record of being the worst President in history. That will be his legacy for all time. He deserves what he gets. It's called "karma".