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Ahead of Wall Street

Wednesday, February 22, 2012

Stocks will likely struggle for direction given the absence of any positive catalysts that can push them to new highs. Greece will remain in the news, as the country suffered a credit rating downgrade from Fitch following the release of details about the private sector debt swap. There is growing unease in the market that while the latest deal may have averted the possibility of a disruptive near-term default, but it is not expected to provide the last word on the country’s struggles to stay within the union either.

Greece’s bond swap with its private creditors will help bring down its debt load by €107 billion. This is accomplished by forcing bond holders to accept a 53.5% loss on the face value of their holdings. This bond swap, coupled with a tough new austerity package that the country had to agree to implement as a price for a second bailout, will reduce its level of indebtedness from the current 164% of GDP to around 120% by 2020. But many in the market are justifiably skeptical of these estimates from IMF, which is a party to the bailout.

In addition to a host of assumptions about privatization proceeds and the direction of interest rates, the IMF forecast for 2020 depends on the Greek economy growing at over 2% annually over the next seven years after staying flat this year. Please keep in mind that Greek economy has been in a recession over the last four years that has resulted in the economy shrinking in excess of a cumulative 16% in that time period. Given the severity of the new austerity measures that accompanied the latest bailout deal, the economy is more likely to remain in the red for quite some time. 

On the earnings front, luxury homebuilder Toll Brothers (TOL - Analyst Report) came out with weaker than expected results this morning. Dell came modestly short of EPS expectations after the close on Tuesday and also provided weak guidance for the current quarter. Brocade Communications (BRCD - Snapshot Report) came out with better than expected results. Hewlett-Packard (HP - Analyst Report) reports after the close today.

Sheraz Mian

Director of Research