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Can Stocks Continue to Ignore Sovereign Risk?


Despite the rise in equities, keep an eye on swap spreads, the US dollar, and protectionism.

The back-half of the week arrives with sovereign sandbags being put in place.

German Chancellor Angela Merkel laid out her plan for Greek aid through IMF loans and European governments, should the need arrive.

ECB Chief Jean-Claude Trichet will leave emergency collateral rules in place into 2011 which is a stance shift.

Finally, word arrived that the Dubai government will inject $9.5 billion into its state-owned holding company, Dubai World, which triggered a 9.5% tightening in overnight spreads.

Interestingly, the meaningful moves in sovereign spreads away from Dubai were more worrisome tightening in Japan (+7%), the USA (+5.6%), Slovakia (+5%), France (+4%) and the Netherlands (+4%). It's all relative, we know -- spreads still indicate a 24% default risk in Dubai vs. 6% in Japan or 3.5% in the USA -- but the fact we're even having these discussions is in and of itself indicative of the world we live in.

Switching gears, there's been some odd action across action classes the last few days, the relative strength of equities notwithstanding. While it's difficult to get a handle on all the moving parts given the interconnectedness of global markets, my mind started to wander to the potential unintended consequences of our current financial course. In no particular order:

  • 10-Year Swap Spreads Inverted. How many quant geeks saw that one coming and could it start a quant contagion?

  • The US Dollar is up more than 10% from the November low. At what point does the crowded carry trade begin to unwind?

  • The seeds of protectionism continue to sow. We've spoken about USA-Toyota (TM), Google (GOOG)-China (see the front-page WSJ article today) and heck, even Danica Patrick is mixing it up! I'll say it again -- protectionism is a world away from globalization on the prosperity spectrum.

Will it matter, does it now? Greece may be the word, but duration is the key. Corporate credit markets have been en fuego and that's been the precursor for seismic equity shifts.

The bull case dictates corporate coffers will put that money to work -- raise dividends (Starbucks (SBUX), Raytheon (RTN)), trigger LBO's and buy back stock-and all else being equal, they likely will. The purpose of yesterday's column was to identify dynamics that could derail the Bovine Express before it runs over thy fair maiden.

S&P 1150 and BKX 50 remain bullish backstops; S&P 1200 is the next tangible resistance. With quarter-end less than a week away and performance anxiety percolating, emotions will run rampant on the street over the next few sessions. Remember, emotion is the enemy when trading, so leave it for weddings and funerals and let's make some cake as we ready for the Sweet Sixteen.

A Change of Heart

Last November, with the DJIA at 9700, Minyan Mason Slaine-fresh off the prior DJIA 10,000 call he made as the tape teetered near DJIA 8000 over the summer-updated his vibe on the 'Ville, presciently predicting that we would see DJIA 11,200 by March. His five primary reasons, as stated at the time, were:

1. The "realization that cash is trash."

2. A rush of M&A activity.

3. Share buybacks by corporate America.

4. $1 trillion in corporate liquidity.

5. "Wide comprehension" that business has stabilized. I just got a tongue-in-cheek update from the savvy seer and consistent with the spirit of community, I wanna share it with ye faithful. And I quote:


How's my Dow 11200 call by the end of 1st quarter looking? I may miss it by a little bit.

I am now turning negative for first time in over a year. Risk spreads are too low and we are in a bit of a bubble. Very dangerous

Hope your well.

As always, it's one man's humble opinion (his, not mine) but as we stand in the world's largest casino, it's always a good idea to watch the guy with the hot dice.

Random Thoughts

  • The most interesting thing on my screen? A positive greenback, despite the European assurances that we should move along, there's nothing to see here.

  • The most bullish thing on my screen? The 2:1 positive breadth, with a nod to the 1.4% gain in the BKX (banking index).

  • Red Beans in the Green Sea? Mother Morgan (MS), Toyota, Ambac (ABK,-25%), Research in Motion (RIMM), Baidu (BIDU) and a bespeckled energy patch.

  • When I told the fine folks at Bloomberg I had a face for radio, I didn't expect them to actually stick me in a radio booth! Either way, the very talented Keith McCollough and I had several strong conversations, here and here, for those with an interest. Please note the dry mouth in the first segment--I couldn't buy a stitch of saliva-and the A.D.D. moment later on. Hey, it's live. It's all good.

  • President Fish -- my best friend, college roommate, and business partner -- and I are gonna hunker down tonight and root for the Orange. We don't have our big man but hopefully -- quite hopefully -- the young men will use that as motivation.

  • Good luck Minyans, and let's be careful out there.


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