Archive for the ‘Politics’ Category

New Template For Bank Bailouts?

Monday, March 25th, 2013

At the 01:25 mark of a March 17 video, we noted the “bearish” interpretation of the recent bailout in Cyprus would be that it set a precedent for how bank bailouts would be conducted in the future. The MarketWatch story below is what helped bring global markets off their intraday highs Monday:

The rescue program for Cyprus reached on Monday is a new template for addressing banking problems in the euro zone, said Dutch Finance Minister Jeroen Dijsselbloem, the chair of the Eurogroup of euro-zone finance ministers, according to Reuters. “If there is a risk in a bank, our first question should be ‘Okay, what are you in the bank going to do about that? What can you do to recapitalize yourself?’ If the bank can’t do it, then we’ll talk to shareholders and the bondholders, we’ll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders,” he said, according to the report.

Germany May Throw Markets Bearish Curve

Monday, September 24th, 2012

According to the Wall Street Journal (WSJ), Germany wants to delay Spain’s formal request for aid. If Spain continues to drag its feet, stocks, commodities, and precious metals could slip into correction mode. Below are the potentially bearish points from the September 24 story:

Progress on two of the euro zone’s most pressing concerns—containing the crises in Greece and Spain—faces holdups up in Germany, where Chancellor Angela Merkel is reluctant to ask parliament to vote on measures that are likely to raise fierce opposition from within her own coalition.

Spain’s decision on whether to seek bond-market intervention by the European Central Bank, as financial markets are hoping, is also in limbo. That is partly because Germany has signaled that it doesn’t want Spain to make the move.

Ms. Merkel’s aides are searching for a way to close the Greek shortfall without asking German lawmakers for more money. Any request for fresh bailouts would likely spur bruising, and politically damaging, fight in Germany’s lower house of parliament, the Bundestag.

On September 23, we outlined the five fundamental drivers that could spark a stock market correction. The first concern listed was “Spain may choose to delay a formal request for aid.” The news that Germany may be encouraging the delay only heightens our concern on this issue.

Even under a correction scenario, an S&P 500 push toward the 1,487 to 1,550 range may be needed to clear the post-QE euphoria. Silver (SLV) was the best performing major ETF during QE2. On Monday, SLV experienced a bearish MACD cross, which increases the odds of a correction. Trading For A Living by Dr. Alexander Elder provides some insight on this indicator:

MACD crossovers identify shifts in the balance of power between the bulls and the bears. When the black MACD line drops below the red MACD line, it shows that the bears dominate the market, and it is better to trade from the short side. When the black line moves below the red line, it gives a sell signal (see red arrow below).

MACD signals on daily charts are not nearly as important as those that appear on weekly or monthly charts, but the bearish cross on silver’s chart below does show QE-friendly assets are losing upside momentum. We took profits in SLV last week, but are not advocating shorting silver. Another push higher is possible, but any subsequent gains in SLV may be hard to sustain unless MACD improves.

Williams %R is another valuable tool to track momentum. On the daily chart of the S&P 500 below, the indicator is showing a discernible decline in bullish conviction. A move back above -20 would alleviate some of our short-term concerns.

Looking around the globe, numerous ETFs have waning upside momentum, which increases the odds of a more substantial correction.

On Monday we learned an index of business confidence in Germany, the biggest economy in Europe, fell for a fifth straight month. The FEZ ETF below dropped 0.70%.

According to Reuters, about 2,000 Chinese employees of an iPhone assembly company fought into the early hours of Monday, forcing the huge electronics plant where they work to be shut down. EEM was able to stay nearly flat on Monday (see below).

In a recent video, we outlined numerous ways to monitor the battle between risk-on and risk-off, including tracking the performance of stocks (SPY) relative to bonds (TLT). For the balance of the week, the primary driver of risk assets will be Spain. If Spain (EWP) outlines new measures as expected on Thursday and simultaneously requests help from the European Central Bank, stocks and QE-friendly ETFs could shoot higher again. But if Spain disappoints on any front this week, tired stocks and commodities could experience a “give back” period similar to what occurred in November 2010 (see two charts below).

We are currently maintaining a relatively high cash position. If the charts improve and the news from Europe allows, we are happy to jump back on the reflation train. Our shopping list includes QE2 winners such as silver, oil stocks (XOP), and mining companies (XME).

Germany May Allow Bond Buying

Tuesday, June 19th, 2012

The story of the day – from The Guardian:

Angela Merkel is poised to allow the eurozone’s €750bn (£605bn) bailout fund to buy up the bonds of crisis-hit governments in a desperate effort to drive down borrowing costs for Spain and Italy and prevent the single currency from imploding.

The Telegraph ran a similar story:

European leaders are poised to announce a 750 billion euro deal to bailout beleaguered Spain and Italy by buying the countries’ debts. Pan-European Government funds are set to be used to buy Spanish and Italian bonds, which have recently hit record highs – in a move which will send a strong signal to financial markets that the German administration is prepared to back its weaker economic neighbors.

The stories above are from reliable sources. Thus, we would expect them to be reasonably accurate relative to the next steps in Europe. Any bond-buying program should help risk markets in the short-to-intermediate term.

We continued to reduce our cash position today. We would have made larger incremental moves, but numerous 30- and 60-minute charts look tired. Tomorrow’s Fed announcement could spark big moves up or down, which is another reason to move at a measured pace in the short-term.

Greek Fear May Be Market Friendly

Sunday, June 17th, 2012

The video below highlights areas in several markets, including U.S. stocks (SPY), foreign stocks (VEU), commodities (DBC), semiconductors (SMH), and Treasuries (TLT), that give the short-term nod to the bulls. As of Friday’s close, the odds continue to favor some type of bottoming process that is well underway. Obviously, the Greeks may have something to say about the future direction of asset prices. A table of contents for the video is shown at the 42 second mark.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video: Investment Outlook


Video: Investment Outlook

If you have been following the situation in Europe closely, you know the vast majority of Greeks want to remain in the euro. The current election has been billed as a vote to “stay” or “go”. Under those conditions, it seems rational to believe most Greeks will let their fear of the unknown (leaving the euro) trump their anger at conservative leaders who helped create the disaster we call Greece. From a June 15 Daily Beast story:

Another recent poll shows that 8 of 10 Greeks want to stay in the euro zone, even if it means tougher times ahead. Returning to a modified drachma would bring bigger problems still, not least of all a return to rationing of food, fuel and medical supplies while the new currency is put into place. That fear is lost on no one. By Sunday, many of the top party leaders will likely have struck secret deals to bring the smaller party support to the negotiating table to form a coalition that can steer Greece clear of the edge of the abyss. If they fail this time, Greece is out of chances.

If the fear of leaving the euro wins out over the justifiable anger, the election this weekend should be market favorable, or at least not clearly market unfavorable. None of us know what will motivate Greeks in the voting booth, but with a strong finish to trading on Friday, the markets seem to be positioned for a less-than-cataclysmic outcome in Greece. The charts below show markets that appear to be making a strong attempt at a bullish turn.

Even if the Greek election proves to be market friendly at first blush, a government still needs to be formed. Any delays after the election could lead to short-term solvency problems for Greece. From a June 17 Financial Times story:

A delay in forming a coalition, or in the worst case, a recourse to a third election if negotiations fail, could cause Greek public finances to collapse. Officials at the finance ministry said last week that unless a delayed €1bn tranche of EU-IMF funding is paid, funds to pay pensions and public sector wages would be exhausted by July 20.

A possible gain for the bulls could come in the form of a boost for Europe’s firewall, a bailout chest designed to stem the spread of the crisis. From a June 16 Bloomberg story:

World leaders meeting in Mexico will agree to boost the $430 billion firewall the International Monetary Fund announced in April, host President Felipe Calderon said. “I estimate that there will be a larger capitalization than the pre-accord reached in Washington, which will be finalized here, but I don’t want to speculate by how much,” Calderon told reporters yesterday in the coastal resort of Los Cabos.

Bloomberg provided a good summary of what happens after the polls close in Greece on Sunday:

Exit polls will be released when voting ends at 7 p.m. in Athens, with a first official estimate due around 9:30 p.m. The final polls, published on June 1, showed no party set to win a majority. The election marks a revote after the May 6 ballot failed to yield a government.

A Sunday Wall Street Journal article describes the ultra-short honeymoon period for the next Greek leader:

Whichever party wins Sunday’s Greek vote will face Olympian hurdles with a central government facing a cash crunch within weeks, an economy in free fall and an angry public exhausted by two years of austerity measures. Greece’s reform program is also well off track, following weeks of political paralysis. The first task facing Sunday’s winner will be to come up with €11.5 billion—maybe more—in new austerity measures being demanded by the country’s creditors but which could further inflame public opinion. With state coffers running dry and a new bond redemption pending in August, Greece’s party leaders will be under tremendous pressure to avoid a political deadlock this time.

Our approach has been to monitor the health of the markets and adjust accordingly, while placing an emphasis on flexibility. Accordingly, we have tentatively reduced our large cash position in the last two weeks. If the bulls can maintain their short-term momentum, we are open to adding to the risk-on portion of our portfolio. Conversely, if the situation in Europe morphs into a deflationary snowball, flexibility will call for pushing the retreat plans to the forefront once again.

Europe-Driven Market Risk Remains Elevated

Sunday, June 3rd, 2012

Conducting our weekend Europe Google searches for the latest news yielded articles with a very familiar and vague tone about the “progress” across the pond. The excerpt below from a Reuters article represents a good example:

The goal is for EU leaders to agree to develop a road map to “fiscal union” at a June 28-29 EU summit, where top European officials including European Council President Herman Van Rompuy will present a set of initial proposals. European countries would then put the meat on the bones of the plan in the second half of 2012, several European sources have told Reuters, including a timetable for overhauling EU treaties, a step Berlin sees as vital for setting closer integration in stone.

Are they joking using terms and expressions such as “road map” and “initial proposals”? The market is not looking for the “meat” to come in the second half of 2012. It appears as if European leaders still do not grasp the severity of “messing with” the markets. The entire market for sovereign debt could unravel at a shocking rate if some concrete steps are not taken very soon.

Spain and Italy seem to want significant action and assistance, but they do not want to give up much in return. Does Spain really think the Germans are going to bail them out without outside oversight? Italy’s call for issuance of joint debt was given another “get real” response from Angela Merkel. Bloomberg reported on June 2:

Merkel rejected joint debt issuance in the 17-nation euro area as a solution, saying “under no circumstances” would she agree to Germany-backed euro bonds. Some “come along and ask for euro bonds, saying all we need are equal interest rates and everything will turn out all right,” Merkel said in a speech to members of her Christian Democratic Union in Berlin yesterday. Instead, what’s needed is an economic overhaul to tackle the lack of competitiveness in Europe, she said.

Germany is pushing for a central body to manage euro area finances. Angela Merkel also wants to see agreement on broad reforms in labor markets, social security systems, and tax policies. The problem for investors was summarized by Reuters:

Until states agree to these steps and the unprecedented loss of sovereignty they involve, German officials say Berlin will refuse to consider other initiatives like joint euro zone bonds or a “banking union” with cross-border deposit guarantees - steps Berlin says could only come in a second wave.

We highlighted slowing market momentum way back on May 7 when the S&P 500 was still at 1,370. The video below reviews global markets that remain in “prove it to me” mode. The market must give us tangible evidence of a possible bottoming process; something we have not seen yet. The video reviews bearish set-ups on the weekly charts of the NASDAQ (QQQ), S&P 100 (OEF), total stock market (VTI), small caps (IWM), and global stocks ex-U.S. (VEU). DeMark charts in multiple time frames are presented that align with the need for on-going investment risk management.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video: Bearish Charts Global Stocks

We headed into Friday’s session with very high cash levels. Based on what we saw by the close, we raised even more cash. Numerous DeMark exhaustion counts tell us to be open to a possible rally attempt between Tuesday and Friday. Without some tangible “meat” from Europe, the bears should maintain the upper hand. The ongoing risk in the market needs to be respected, something we will continue to do.

Elections In Greece and France Bring Change

Sunday, May 6th, 2012

The early read on elections in Greece points toward more uncertainty relative to implementation of the reforms needed to receive aid. The Financial Times reported a political analyst said Greece faces a “political earthquake” and as he summed up the early returns in Greece this way - “There is a whole generational shift happening in just one night.”

From Reuters/CNBC:

Greek voters enraged by economic hardship deserted governing parties in droves at elections on Sunday, according to exit polls that raised deep uncertainty about the country’s future in the euro zone. Initial vote counts indicated that the two parties supporting an EU/IMF bailout that is keeping Greece from bankruptcy would likely fall short of enough support to form a lasting coalition government.

From Reuters/CNBC on political change in France:

France crowned Francois Hollande as its first Socialist president in nearly two decades in an election on Sunday, marking a shift to the left at the heart of Europe and heralding a fight back against German-led austerity. Conservative President Nicolas Sarkozy, swamped by anger at a surge in unemployment during his five-year term, was the 11th euro zone leader to be swept from power by the economic crisis.

Greece In Default

Friday, March 9th, 2012

From Forbes:

UPDATE 2 (2:48 p.m.): ISDA has now declared that Greece’s restructuring does represent a default, meaning that credit default swaps will trigger.

Israel To Attack Iran?

Friday, February 3rd, 2012

Something we continue to keep an eye on - from the Washington Post:

Defense Secretary Leon Panetta has a lot on his mind these days, from cutting the defense budget to managing the drawdown of U.S. forces in Afghanistan. But his biggest worry is the growing possibility that Israel will attack Iran over the next few months. Panetta believes there is a strong likelihood that Israel will strike Iran in April, May or June — before Iran enters what Israelis described as a “zone of immunity” to commence building a nuclear bomb. Very soon, the Israelis fear, the Iranians will have stored enough enriched uranium in deep underground facilities to make a weapon — and only the United States could then stop them militarily.

Europe Has Solvency Problems - Defaults Likely

Friday, December 16th, 2011

We have read some of Kyle Bass’ (Hayman Capital Management) work in the past. He is one of the few people on Wall Street that actually takes the time to look at the numbers in Europe and the scope of the problem within the context of history. Mr. Bass believes defaults are coming in Europe, maybe sooner than most believe. The interview took place on December 14.

Mr. Bass has also noted the day before Mexico devalued their currency by 60% in 1994, officials stated we will not default, we will not devalue. If defaults are coming, they cannot tip their hand. Mr. Bass has also stated European banks are levered three times as much as U.S. banks. In the United States, we recapitalized our banks in the last crisis. With the exception of the U.K., Europe did not recapitalize their banks, which means the risks in Europe remain very high.

LINK to Kyle Bass’ December letter to clients. The letter’s closing comments are:

Trust has been lost, confidence in the system is being lost, and the ultimate consequence of this break down - sovereign defaults - are imminent. We continue to move ever closer to the great restructuring of soverign debt.

Political Issues Surface In Germany

Thursday, December 15th, 2011

Approving bailouts and giving up some of your country’s sovereignty is not easy as evidenced by recent events in Germany. According to Bloomberg:

The political turmoil engulfed Merkel’s administration five days after she secured what she called a “breakthrough” European deal to enforce stricter budget rules and to stem the financial contagion now in its third year. That uncertainty may disrupt her efforts to restore market confidence by pushing the steps agreed on in Brussels through parliament in Berlin.

“The FDP and Wulff are a distraction in many ways,” Joerg Forbrig, an analyst at German Marshall Fund of the United States, said by phone. “The FDP is basically in the process of dismantling itself as a party while serving in government.” It’s “the last thing Merkel needs right now.”