ETF Periscope: Davos Sounds Similar Notes to What the Upcoming EU Summit Will Be Singing

“If it’s a penny for your thoughts and you put in your two cents worth, then someone, somewhere is making a penny.” – Steven Wright

As the World Economic Forum (WEF) wraps up its annual meeting in Davos, Switzerland, on Sunday, a large chunk of its agenda will be reexamined around the table of the first European Union summit of 2012, which convenes on Monday.

And, judging by Wall Street’s response last week to large chunks of chatter that emerged from the closely watched “meeting of the minds” of world leaders and key financial and business experts, the euro-zone seems to remain the central concern of investors for what is likely to be the indeterminable future.

There is no question that Wall Street is primarily in an uptrend. Dating back from late November of 2011, the Dow Jones Industrial Average (DJIA) has skyrocketed a whopping 11.5% as of market close last Friday. The steep gains hardly came in a straight and steady progression, however, as a new round of euro-jitters shook up the market mid-December.

Still, the uncertainty seems to have given way to a certain degree of New Year optimism as solid U.S. corporate 4Q earnings have, on the whole, been slightly better than expected, and economic indicators out of Washington seem to indicate an economy that is moving very slowly and in tiny increments, yet somehow is managing to achieve a degree of steady growth.

January’s market gains have been consistent, at least for the first three weeks, as all three of the major indexes have moved steadily into the Bull’s camp. However, that trend tapered off somewhat last week as a consistent trickle of negative sentiment emerged out of Davos.

The result was that the Dow suffered its first losing week since mid-December, and was the first time this year that doubt appeared to reassert itself, though every time a wave of selling seemed to threaten to dominate, a succession of buyers responded and more or less righted the ship.

Landing at 12,660, DJIA was off 0.5% for the week. The benchmark S&P 500 Index (SPX) was up, but just barely, ending at 1,366, up 0.5%. Lastly, the Nasdaq Composite Index (COMP) turned in the best performance of the trio, coming in at a 1.1% profit.

What emerges from the EU summit should reveal the depths that the euro crisis has been effectively baked into the market.

A key point of overlap between Davos and Brussels, where the EU summit shall take place, is the recognition of the need of a “firewall.” This term references a necessary level of funds that are widely regarded by the European Central Bank (ECB), the International Monetary Fund (IMF), and many euro-zone leaders to be sufficient to handle a default by one or more of the PIIGS (Portugal, Ireland, Italy, Greece and Spain.)

Many world leaders at Davos, including U.S. Treasury Secretary Timothy Geithner and U.K. Prime Minister David Cameron, have re-emphasized a demand that Europe adds substantial funds to accomplish such a firewall.

The scale of the current debt crisis can be better seen when you take a look at the numbers currently put aside to halt the dominos from toppling should defaults actually go into affect. The European Financial Stability Facility (EFSF) boasts a total of 780 billion euros, while providing lenders the ability to access 440 billion euros. Geithner, in particular, has been shouting for months that the euro-zone members need to increase the leverage of the fund to accomplish that purpose. The IMF, meanwhile, is currently seeking to raise about 750 billion in euros in order to better handle additional issues that might arise out of the euro-zone crisis.

There may continue to be enough positive news from the corporate earnings reports due out next week to deflect from any negative noise from across the pond. While one could balance out the other, a concurrence of sentiment from corporate America and the EU could set the tone for the market in a clear way.

In either direction.

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

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