Buzz on the Street: Market Survives on a Wing and a Prayer
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
All day and every day, some of the stock market's best and brightest traders and money managers share their ideas, insights, and analysis in real-time on Minyanville's Buzz & Banter. Below are some excerpts from this week's Buzz. Click here for a 14 day free trial.
Note: Some links may require Buzz subscriptions.
Monday, June 4, 2012
Greek Elections & Civilization
As much as you can blame the Greeks for being lazy, corrupt, whatever, they have come up with some pretty good ideas over the last 2500 years or so. The latest intriguing idea is banning all election polls two weeks in advance of the election, which is where we are now. So, without that obvious market moving data hitting Bloomberg or Dow Jones, here is a link to a Greek English written newspaper and their twitter feed is @ekathimerini.
I did a little research over the weekend and when, not if, Greece drops the Euro they will really be hurt by inflation. Greece has effectively no oil or natural gas production, and they import twice as much food as they export, which boggles my mind. Farming is real work, so maybe that is the explanation. Post the new drachma, Greece will need a bailout, and the first one will be food until they finally figure out how to get back to the basics.
I find the @ekathimerini twitter feed useful, so I would recommend following it for the next few weeks as events unfold.
Michael A. Gayed
I was rather struck by the complete and utter despair media pundits were expressing over the state of the markets this past weekend, with apparently the only bulls left (other than me) too afraid to make the case for a significant move higher in equities to come. I have been making the case since the first week of April that we were likely entering a period of a mini-correction, and that if I was right that U.S. stocks would be resilient (S&P 500 believe it or not is still up over 2% for the year), that it would further the case for the "Spring Switch" out of bonds, and into stocks. Our own clients have been largely positioned in bonds since then, but the ATAC models we use for asset allocation are sensing a turn could be coming in the next few weeks. To me, this makes a lot of sense. Markets have cratered in Europe in May because of lack of policy action.
Yet, markets have a funny way of forcing the future rather than anticipating it. Remember when Congress first rejected TARP on September 29, 2008? That day, the Dow Jones Industrial Average dropped 777 points. Only a few short days later did Congress pass the program. Markets breaking down may now have the same effect in Europe, forcing urgency to solve the crisis. This, in turn, makes the bulls come back.
I stand by my original thesis which I have been consistent on throughout the year - that 2012 is likely a year of reflation, and that a significant move up in stocks is yet to come. And while we remain defensively positioned, I am beyond psyched for the next move into equities.
George Soros Speech Makes the Tweets Hit the Fan, and CNBC Runs a 'Markets in Turmoil' Special
On Friday, part of me thought we could be walking into the end of the world today, but as of the time I'm writing this, stocks are only slightly down -- though who knows what could happen later in the day, especially with the lousy action in financials and Apple (AAPL).
However, I wanted to call attention to two things I noticed from the weekend:
First, I received emails with links to George Soros' speech at the Festival of Economics in Italy from multiple people. The talking points of the speech: the failure of traditional economic theory in the current crisis and why Germany needs to step up to preserve the EU.
And apparently I wasn't alone -- search 'Soros' on Twitter and you'll see countless people in many languages talking about this piece.
Bull market in negativity?
Secondly, in reaction to the market meltdown on Friday, on Sunday night, CNBC ran a last-minute special called "Markets In Turmoil."
Incidentally, CNBC ran a special with that very same title on August 4, 2011 -- one day before S&P downgraded the US.
On the date of that last special, the S&P 500 closed at 1200. The market bottomed on a closing basis two months later at 1074.77 on October 4, before bouncing back up to close at 1419 on April 2, 2012.
In terms of sentiment, the popularity of Soros' EU crisis speech and CNBC's special indicate serious negativity (normally positive for equity markets), which could be constructive in terms of forming a near-term market bottom.
However, I'm continuing to tread lightly and I doubt I'll be changing my positioning today (70% in cash, long a few favored names, short Morgan Stanley (MS)).
Tuesday, June 5, 2012
A worthy Minyan keeps pointing to the trannies, and for good reason. Check the chart below and you'll see the correlation.
I may be wrong, but I'm bidding on some Apple (AAPL) calls and looking for other upside rentals. Nothing scientific--and tight stops--but the negativity is palpable and may be fadable (worth buying) on this Turnaround Tuesday.
I'll be back.
Click to enlarge
T Report: Schadenfreude Is a German Word
The market is relatively stable overnight and this morning. Yesterday we traded in fits and starts with brief moments of concern that Friday's sell-off would continue and brief moments of hope that Europe was going to do something to fix the situation in Europe. Trading was on light volume and liquidity seemed low as gaps of 5 pts on the S&P 500 seemed the norm.
With the U.K. shut for a second day due to the Queen's diamond jubilee, there isn't much of a read on credit markets in Europe. Spanish and Italian 10 year bond yields are better for the fifth day in a row in the case of Spain. 5 year yields are more mixed and CDS, without London, is effectively shut. Here in the U.S. with futures hovering around fair value the credit indices are stable with IG18 1 wider and nearing the 130 level, but HY18 finally outperforming and actually up an 1/8. HY managed to squeak out a small win yesterday in ETF land with HYG and JNK both up, and the EMBI index had some real strength. This is in spite of continued outflows from the funds, though with the ETF's now trading at less than a 1% discount we may see any arb driven activity slow.
Is the German Pot Calling the PIIGS Kettle Black?
We seem to get the daily barrage of messages and soundbites out of Germany demanding that countries stick to existing plans and that "austerity" is the only way forward. Germany continues to love to point the finger at the other countries and accuse them of borrowing too much and that these countries need to suck it up and pay what they owe. For now we will ignore the fact that Germany itself was one of the first countries to break the Maastricht Treaty. What Germany seems to be forgetting is that they jeopardized their own credit quality. With bunds at record lows, this may not be obvious, but for the past 2 years, Germany has been throwing around guarantees and commitments like they meant nothing.
I have argued since the beginning that all these guarantees were dangerous. Guarantees are more dangerous than CDS since it is truly impossible to figure out how much debt has been guaranteed or how likely the guarantees are to be honored. Zerohedge and Mark Grant (amongst others) have done a lot of work on the true size of various countries' obligations. Here is an estimate of what Spain's real indebtedness is. I don't completely agree with the numbers, but the point is extremely valid. Looking at just the debt outstanding for these countries is very misleading. Some account of their off-balance sheet, unfunded commitments and obligations needs to be taken into account.
Which brings us to Germany. Germany is the ultimate backstop and seems to have forgotten that debt exists in two states.
Debt Is Either Repaid or It Isn't
There are only two outcomes when you lend money. You either get repaid what you lent based on the original contract or you don't. It doesn't matter why you don't get paid what you expected, whether it is because of forced redenomination, restructuring, or default. What matters is that you don't get paid.
So while Germany is drawing a line in the sand, they seem to have forgotten the borrowers have two choices. Germany seems to be under the impression that no matter what they say or do these other countries will pay their debt. That Germany can cave in and let the other countries spend and grow and let the ECB provide immense liquidity and get paid. Or that Germany can remain firm on austerity and a deal is a deal rhetoric and still get paid back. But what if they are wrong?
What if at some point Greece, or worse, Spain or Italy finally say they have had enough of the finger pointing and blame game and are going to redenominated and stop certain payments altogether?
How Much Is Germany on the Hook For at the ECB?
If countries are leaving the Euro and the ECB is no longer going to be their central bank, the bonds held by the ECB in the SMP portfolio will be hit. With over €200 billion of SMP bonds, a 40% loss due to redenomination seems reasonable. That is an €80 billion hit to the ECB. The ECB cannot handle a loss of that size without either printing massive amounts of money or making a capital call on the member states. It would be ironic and nonsensical to print money to fund the loss, since the ECB could have printed less money and not had the loss in first place. On the capital call side, obviously the PIIGS aren't making it. I think a lot of the other smaller members may choose not to as well, since the ECB is joint and several. I'm not sure even France would participate. The uproar in France that Germany drove the situation to this point may be enough to get them to demand that Germany pick up the lion's share of the tab?
Then what happens to all the bonds being held at the ECB via LTRO and other facilities? The ECB holds government bonds, they hold bank bonds guaranteed by the government, and may even hold bank bonds outright. They will need to make margin calls on these facilities. Will all the banks be able to meet the margin calls? No. The weakest banks have already used the LTRO more than other banks. They are extremely leveraged and have no money left to meet those margin calls. If any governments had provided guarantees on their debt, now would be a great time to revoke those. Why take more losses for a bank that's going down, when you can change the law and jam the loss onto the ECB?
I find it hard to believe that the losses at the ECB won't be at least €100 billion and could easily be more. The liabilities are joint and several but could fall heavily on Germany.
How Much Is Germany on the Hook For via the EFSF and EU and IMF?
The EFSF has €110 billion of debt outstanding. That money in theory has been lent out to various countries. The EFSF will have losses and I expect those losses would be greater as a % of notional than the ECB's since more of the EFSF exposure is to Greece where the losses will be highest. In theory Germany is only obligated to make good on their "portion" of the debt. But if they do that, will other countries honor their commitments? I cannot imagine Spain and Italy will make payments on the debt that is outstanding even though they are guarantors, once they have gotten to the point of leaving the Euro.
While Germany may decide to pay the ECB money regardless of the cost, it might be easier to let EFSF bond holders take losses rather than adding more debt and taking on more responsibility than they are legally obligated to pay. The EFSF bonds remain horribly over rated as they don't account for how likely the guarantees are likely to be revoked or not paid when called upon. The EFSF will only make calls against guarantees once the situation has turned nasty, so the rating should reflect that. If you believe the countries are going to leave the EU, the EFSF bonds are a great short.
There are EU direct loans. More losses for Germany and France. There are costs of running the EU, to the extent one still exists. More of those expenses will have to be picked up by the remaining members (somehow it feels like there won't be any remaining members once this process starts).
The IMF is likely to come out best in terms of any loss on existing holdings, partly because they have been more conservative in their lending practices, but mostly because the countries will need them to provide additional loans after they exit.
I almost forgot the EIB and EBRD. Hard to believe that this won't create more demands for money from Germany? Possibly small, but the hits against Germany are starting to add up pretty quickly.
How Bad Will German Bank Losses Be?
The partially state owned bad bank, Commerzbank had big write-downs in Greece. Hard to imagine that they avoided even taking bigger exposures in Spain and Italy. Then there are the German worse banks or Landesbanks. They had some of the largest exposures to Greece. It would be simply shocking if they didn't have even bigger exposures to Spain and Italy.
These banks had enough "capital" or government support to make it through the Greek PSI process, but can they withstand hits of 10%-50% on their Spanish and Italian holdings? I highly doubt that without another huge infusion from the German government.
Then what about Deutsche Bank? By far it is in the best shape, but maybe you remember they were the first bank that Spain provided verbal guarantees in respect of regional debt. Why would Spain possibly honor that guarantee when they are abandoning the Euro and need all the money they can spare? What is Deutsche Bank going to do? Repossess Catalonia?
The PIIGS will all walk away from any guarantees they have made. That is even easier than stopping payment on bonds or forcing through a new currency. This will hit banks more than countries, but the losses may be so big that it makes it back up to the country level.
How Bad Is the Target2 Hit?
I have read a decent amount on this and remain confused. At one end, are arguments that the risk is massively overstated and losses would be minimal. Frankly I have found those articles rely too much on the same hope that was evident during PSI, where ECB bonds get paid par, because that's what they get. I think once countries are in full on exit mode, niceties like that will be thrown out the window. At the other extreme is arguments that the full size of Target2 balances would be at risk. Those articles honestly seem to be more realistic.
Target2 could cause more massive losses, and at the same time could force trade to grind to a halt. I think the trade disruptions in any case will be critical and the Target2 system breaking down would add to that problem.
Countries in Glass Houses Shouldn't Throw Stones
No wonder Josef Ackermann came out in favor of more support for Europe. He has the good sense to see how bad this is. I have focused on Germany here since they alone seem to believe that they can push the situation to the brink, get paid, and have no trouble, but if the defaults start (whether payment defaults or currency redenomination) then France and the other countries will be hit hard. France has its own set of Dexia guarantees and who knows what exposure their banks have to Spain and Italy?
Wednesday, June 6, 2012
The ECB press conference is underway with the markets expecting something big. Draghi's comments failed to deliver the knockout punch. The main changes were the extension of the main refinancing operations, or the 1-week, 1-month and 3-month mini-LTROs (called MTRO to be specific), to January 15, 2013. These were already regularly happening.
The one headline that can be seen as a bullish is Draghi stating to a reporter during the Q&A that the ECB is watching the data closely, but it has not deteriorated far enough to act. When it does, they are ready.
Some bullet points:
- He sees continued downside risks to remain 'elevated'.
- Raised 2013 inflation expectations from 0.9% to 2.3% to 1.0% to 2.2%.
- Raised 2012 inflation expectations from 2.1% to 2.7% to 2.3% to 2.5%.
- Calls for banks to strengthen balance sheets further.
- It's hard to tell whether another 3-year LTRO would be effective.
Italian and Spanish bonds are giving back all of their gains from this morning. Their 2-year notes were at one point both 15bps tighter on the day, but are now back to flat.
Just a quickie close-up look at the S&P 500 technicals here.
See the 60 minute chart below. After falling out of the bear flag on June 1st the index quickly fell 3% and found the bounceable bottom at 1267. As of this writing we have retraced exactly 61.8% of the move from the top of the bear flag to the lows. We have also just about filled last Friday's down-gap near 1309/1310. This is a decent area of resistance. If we can power through here its 1320 I am looking for.
Click to enlarge
The time to repair the roof is when the sun is shining.
-John F. Kennedy
The bounce that the charts indicated is here. (For more see my note on 6/5). The market was able to break the pattern of weak Friday closes and strong Monday opens. (please see 6/4 buzz)
Now we have witnessed another pattern too. Check out the inability of the NDX to take out the 20-day MA since the beginning of May. Today, it is trying to tag this important resistance. It's often unusual to have a sustained close above an important resistance zone, especially when the index has been unable to do so for an entire month.
I will be looking to lighten up my recently initiated long index positions, if the market starts pulling back from this resistance.
BUT, for what it's worth, I am not looking to short. Some of the indicators I follow are coming from extreme lows and even if the market declines, these indicators might make a higher low (positive divergence).
Click to enlarge
Thursday, June 7, 2012
Blade Runner, The Sequel?
The look of the next pullback may shape the lay of the land for the second half.
The initial low at S&P 1292 was the previous October pivot high at 1292.
Readers know that this was a major trading day square out off the major '08 low and the '09 low so that vibration has beaucoup significance potentially going forward.
To wit, a pullback to 1292ish now COULD trace out what looks and feels like an Inverse Head & Shoulders bottom near the 200 dma, the stuff of legend and lore of possible important historic lows---a H&S at the key 200.
IF such a pattern plays out I expect the index will genuflect with a rally attempt playing out. If indeed that plays out whether it is merely a snapper or a strong leg up that recaptures the 20 dma and then the 50 dma may be the pivot of the second half which will decide the fate of many a portfolio for the balance of 2012.
If the appearance of an inverse right shoulder is only a hologram and Mr. Market reverses does his best Blade Runner impersonation on a break of the shoulder blade, it suggests a hot and sticky summer in the city.
The market's hanging in there well enough following the disappointment in consumer credit, but do you see that reversal in oil today in the face of the Chinese rate cut?
Is that a sign of things to come?
Maybe so, maybe not, but I don't like it -- not one bit.
Click to enlarge
Hug Me, Kiss Me, Love Me
I have no dog in the "gold fight" but if I did, this is all I'd be watching. The broken red trendline on this weekly chart is absolutely begging for some "loving". If it gets dissed and $1,525 gives, there could be generalized puking for the rest of the summer down to at least the $1260-ish area where you find a 50% retracement of the entire move since late 2008.
Click to enlarge
Friday, June 8, 2012
Leaning Bullish But Be Careful!
We got the snap back rally after tagging the 200 day moving average now what? I have stated over the past three weeks that I'm choosing to watch from the grand stand and when I do step to the plate I'm swinging a very small stick. The market is looking for reasons to buy and not capitulate. When there is a psychological refusal to let the system cleanse itself the implications can be dire. Bulls are pinning hopes and dreams on central bankers and we received 2/3 of the Feds horseman (Governors in favor of QE and beyond) but Big Ben wouldn't commit. The late day fade spooked many who bought the dismal price action over the previous sessions. I was traveling for the balance of the week and while away from the mother ship I missed purchasing positions and chased the gift horse after they came down the stretch.
I'm holding Apple (AAPL), S&P 500 (SPY), Russell 2000 (IWM) and an odd lot of Facebook (FB). I took a flyer Wednesday and placing stops at respective near term lows. There are numerous indicators that suggest a rally can sustain itself for a period of more than a week. When I turned cautious and spoke of a market downdraft in early April this correction wasn't it. As we arrived at my target area of 1295 my instincts said sit it out. I'm cautious here, but I'm also early on my calls. As a trader we all face periods of slumps. The greatest (not me) hitters in baseball encounter moments of fatigue and failure. The hardest part of this game is removing yourself from emotion and taking yourself out of the action to enjoy family and life. As I head out early on a beautiful summer day I will leave you with this.
List of the top 12 countries in order of GDP and price action since their 2012 tops:
Most people say that is it is the intellect which makes a great scientist. They are wrong: it is character.
On 6/6, I shared my views on the recent signs of life in Facebook (FB). Currently, at $27.55, FB is at a 5-day high. A close here might spark interest from more buyers. There has been a noticeable change in its character lately.
But, given that FB remains one of the most emotionally invested stocks that I have seen in years, I expect it to be a difficult and choppy trade for some time. I think that no trading rules can bind action in such stocks and money management rules are more important than any analysis. I continue to take partial profits when it goes up in spikes and reinitiate my position when it retreats (if volume remains conducive).
Click to enlarge
Bullish Train Tracks for RGR
Sturm Ruger (RGR) is leaving bullish Train Tracks on its daily and looks higher.
It measures to 38.50 near term off the hourlies.
Click to enlarge
Click to enlarge
Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter