Why Cyprus Won't Hold Back the Dow

With the stock market near record highs, investors are on edge, and the slightest hint of trouble can cause near-panic. Given the news over the weekend that not only will the European island nation of Cyprus need a bailout, but it will also come at the expense of bank depositors, visions of Great Depression-era bank runs and rhetoric about the confiscation of funds led to massive sell-offs in overseas stock markets. Yet as Fool contributor Morgan Housel noted earlier this morning, Cyprus' bailout doesn't deserve the huge hype that it's getting. At least in the U.S., investors seem to have gotten that message, as the Dow Jones Industrials (DJINDICES: ^DJI  ) have recovered from initial losses of more than 100 points to trade down just 31 points as of 10:55 a.m. EDT. Broader markets are down roughly half a percent.

Within the Dow, banking stocks took the most substantial hit, with Bank of America (NYSE: BAC  ) down more than 1% and JPMorgan Chase (NYSE: JPM  ) falling 1.2%. The biggest threat from the Cypriot bailout is that bank customers in other countries will leap to the almost certainly false conclusion that their own deposits are at risk. With FDIC insurance, U.S. depositors are protected, but with ordinary Americans already predisposed against the banking industry, anything that leads more bank customers to withdraw deposits will only put an additional strain on the financial system.

Elsewhere, Incyte (NASDAQ: INCY  ) declined 7.2% after the company reported that a patient taking its myelofibrosis drug ruxolitinib contracted a disease called progressive multifocal leukoencephalopathy. Although this is the first case of PML associated with the drug, Incyte will get an independent assessment of the findings and could have to take additional steps in order to ensure the safety of the drug.

Finally, J. C. Penney (NYSE: JCP  ) soared more than 8% as two pieces of news helped boost the struggling retailer. One analyst said the company's Joe Fresh concept has had a successful launch among customers, while a research group examining the value of the retailer's real estate estimated that Penney could earn $1.2 billion in rental income by subletting store locations. Any move to unlock income will help the company, as it has been burning cash at an alarming rate during its restructuring.

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  • Report this Comment On March 18, 2013, at 11:31 AM, koniotis1 wrote:

    I have heard a lot of "analysts" say that this is a good deal. I am sorry to say there is nothing good about it. For exchange of 10 billion needed to save the banks Cyprus is asked to steal 6 billion from depositors which will cause a flight of upto 30 billion once the banks re-open. So where will the lost 30 billion come from? No-one seems to address that because they simply have no answer to that. A second bailout? Well if the first one was so difficult to vote then what makes anyone think a second one will be voted? The ELA, well that was entertained in the beginning but there is no commitment by the ECB to do such a thing, hence the really hard time passing the bill through the Cypriot parliament. Christine Lagarde said that this is a "stability" levy. Nothin more destabilizing for an economy than a bank run. Did she actually say that with a straight face or is there complete absences of basic econmic knowledge of the capitalistic model.

    To make the story short, Pandora's box is open, and not just in the sense that the Cypriot economy will be destroyed, it already has been, but because the Eurogroup has shown the world that it can come up with some really dum ideas. Perfect if you want to shield the eurozone from a financial crisis and send the right signals to the markets. Apparently the leaders of the Eurozone are not ready to do what is nececcessary to keep the Euro together, and as long as the ECB does not function as a true central bank dictating monetry policy, but it is left at the hands of politicians and the politics of re-election, there is no salvation for the single currency.

    The markets have picked up on it and hence their first reaction. Savers will pick up on it. Somehow the swiss franc will look as a so much better currency to keep your savings in the next few days.

    That is unless those that have vested interests in holding the signle currency together decide that it is time for a true monetary union.

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