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European Elections: At Full Speed Toward the Debt Iceberg


France and Greece foment a return to free-wheeling deficit spending while daring the currency markets to tank the euro.

MINYANVILLE ORIGINAL The beginning of Europe's austerity crusade dates back to Thanksgiving of last year, when Germany essentially failed an auction of its bonds. That was the "come to Jesus" moment that got the ball rolling on the notion that the Ponzi scheme known as "sovereign debt" financing had to come to an end or else. Coincidence or causality, it also marked the beginning of the equities run that saw the S&P 500 (^GSPC) rise 22% in about 4 months.

Fast-forward to the first week of April, when Italy's "technical" government bowed to the unions on labor reforms, abandoned any kind of serious fiscal plan, and set in motion the suicidal idea (see Spain on the Brink as Italy Commits Fiscal Suicide) that austerity and tight deficit controls is no way to go through life. Spanish and Italian governments have since been leaning heavily toward resuming higher deficit spending, and Sunday's election of a socialist in France, and a strong showing in Greece by any group willing to backtrack on the terms of the recent bailout, have all but buried any notion of embracing fiscal sanity. Again, coincidence or causality, the first week of April marked what increasingly appears to have been a meaningful top in equities.

I have regularly been updating the behavior of corporate bond buyers (orgy-like indulgence), and of course we all know that there is nothing better for stocks than enough bad news to get the Fed moving on the next wave of money printing. So purely from the standpoint of money-flows, whether from corporate buyers or government printers, all is not lost for risk assets. But let's not kid ourselves either: Printing money works only as long as the currency being created doesn't crater on the lap of those who claim to be printing prosperity. Once the currency tanks, "les jeux sont fait, rien ne va plus," a roulette game expression (how appropriate) that's evolved into meaning that the "game is up."

So is the game up for the euro? Yes and "who knows." Yes in the sense that the euro in its current form cannot exist. As I often argued, from day one the euro has been a figment of Brussels' arrogance, a chimera surviving on the siren song of "interest rates for nothing and deficits for free" (with my sincerest apologies to Dire Straits). "Who knows" in the sense that on the other side of its restructuring, the euro may well reemerge as a face-saving currency for the stronger European countries such as Germany, Holland, and Scandinavia.

Furthermore, even if the EU were to give up on the euro ghost, unless Europe wants to plunge in a "Mad Max" world, the transition back to other currencies must occur gradually, with exchange rate trading bands widened over periods of years before returning to free-trading currency crosses (keep in mind also that many European countries, witness Italy, used to use "trading bands" on a regular basis during times of internal problems). Let this be something to chew on for all those planning to short the euro with impunity.

In other less wonky news from earnings season:
  • While purchases by insiders are always "better than not," not all insiders' trading skills are created equal. To wit, Akamai's (AKAM) Tom Leighton. Tuesday the stock popped on news that he bought 100,000 shares at $33.14. Unfortunately, the last time he bought shares was in May of last year at $32.66 just before the stock got cut almost in half in a matter of three months. That said, I am gradually taking in the short side of my pre-earnings "delta neutral" position (subscription to Buzz & Banter required to view link), but as much as I disagree with it, the selling has been nothing short of brutal and DeMark indicators don't yet signal downside exhaustion.
  • What do Allot Communications (ALLT), Adtran (ADTN), Acme Packet (APKT) and Infinera (INFN) have in common? They have all stuck their necks out by suggesting that analysts maybe underestimating 2H 2012 carriers' spending on Deep Packet Inspection (DIP), Session Border Control (SBC), and optical transport equipment. And don't ignore Cisco's (CSCO) purchase of privately held Truvisio to increase its relevance in the real-time network monitoring space. Investors' reaction has been one of clear disbelief. Gullible me is inclined to think that when so many different companies sing the same tune together, the timing of their visibility might end up being a bit off (early 2013 as opposed to late 2012?), but the size of the opportunity will be well worth the wait. I'd particularly highlight Infinera, which could be off to the races if the reasoned speculation that it may have snagged Verizon (VZ) as an early adopter of the new DTN-X product proves correct.
  • I can't find reasons to disagree with Stifel Nicolaus' take on the quarter reported by Solid State Drive maker OCZ Technologies (OCZ). Sales may be growing nicely but the balance sheet is turning into a train wreck, especially DSOs and cash flow. Those are the accounting equivalent of two grenades with the pins pulled. Woulda coulda shoulda taken my profits when they were there instead of watching it do a round trip, but that's the way it goes. I'm hanging on to a token call position for now, and I'm waiting to put the OCZ stock proceeds to work in Fusion-io (FIO) if/when it creeps back toward my buy range (high teens).
  • As I write this on Sunday night, the S&P futures are down 15 handles, and all kinds of bearish DeMark breaks are brewing behind the counts. Should they come to pass, i.e. should these breaks be "qualified," downside targets sit in the 1270-1280 range. For now, though, it's only wait and see.
Editor's Note: At Minyanville we often argue that markets and stocks are driven by four primary attributes: the fundamentals, the technicals, the structural, and psychology. In this weekly piece, trader Fil Zucchi will attempt to digest these four measures to come to actionable recommendations, but with a couple of twists: Rather than relying on standard technical analysis, he will examine the technicals through the lenses of "DeMark" indicators. And rather than highlighting straight entry and exit points for stocks, he will use options to gain long / short exposure, control risk, and generate cash flow. Investors should note: This column will be written 1-2 days prior to publication, so by the time it appears the prices of the securities mentioned may have changed.
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