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Will Europe's Dominoes Tumble Towards America?


We must monitor the progression in an interconnected world.


In January, we posited the potential for European Disunion and wrote:

"Look for the Union to adopt more stringent guidelines in the coming year, including but not limited to distancing itself from the weaker links such as Greece and Ireland. Sovereign defaults, as a whole, should jockey for mind-share and that could conceivably spark a rally in the US Dollar, which could have ominous implications for the crowded carry trade."

In February, we penned A Five-Step Guide to Contagion and drew the parallel between the first phase of the financial crisis and the sovereign sequel.

"It's been a full year since Minyanville fingered Eastern Europe as a modern-day incarnation of a sub-prime borrower," we opined at the time, "The question is therefore begged, what if Greece is Fannie Mae, Portugal is Freddie Mac, Spain is AIG (AIG), Argentina is Wachovia Bank (WFC), and Ireland is Lehman Brothers?"

Of course, an Emmy Award-winning financial infotainment platform wasn't the only one to identify the potential contagion -- we were simply among the first.

The EU stepped in five months later and announced a trillion dollar bailout package and, as evidenced by the chart below, the dollar -- widely perceived to be a safety play as the eurozone simmered -- retreated in kind as perception simmered down.

Click to enlarge

Now, with Ireland on the hot seat, Portugal on deck, and Spain in the hole, the dollar is again a focus, particularly given how pervasive the carry trade is (long risk assets and short the dollar) as year-end approaches.

This past Friday, we pondered potential "Black Swans" in the Eurozone. While this Wall Street idiom refers to an "outlier" event, it doesn't mean it must be negative. I don't pretend to know if that posited potential "solution" would work -- unintended consequences, leverage, and the derivative machination make for an intricate equation -- but unless something sweeping this way comes, the bears will continue to whack-a-mole that continent one country at a time until the world's indebtedness wilts under its own weight.

The dollar remains a key tell, as do commodities, where volatility often precedes similar movement in their equity brethren. It's gonna get thin and thinner this week as folks head to their respective gobbles so adjust your risk accordingly and keep your head high. Profitability begins within.

Random Thoughts

  • First blush eyes? N's over S's, as stocks like Sandisk (SNDK) and Amazon (AMZN) pace the four-letter freaks and Grandma Goldman (GS) listens to chin music.

  • These are historically two of the strongest weeks of the year. Then again, weren't we supposed to sell in May and go away?

  • I ventured to my favorite sports bar yesterday (me lady in tow) to watch the Raiders game. It was like waking up in reality.

  • Remember when we monitored tech stocks as bang-for-the-buck plays into (third) quarter-end? It'll be all that and a bag of chips as those names are proxies for performance anxiety into year-end.

  • Higher rates out of QE2? Maybe something, maybe nothing, or maybe the first tangible sign of the erosion in confidence.

  • We're putting the final oomph into Festivus 2010, which will arrive in force on Friday night, December 3rd. It's gonna be some shindig with all sorts of human capital, including Peter Atwater, Jon Markman, Barry Ritholtz, Jeff Cooper, Smita Sadana, Dan Englander, Larry MacDonald, Sean Udall, Jeff Macke, Scott Redler, Pete Moses, Don McPherson, David Stockman, Jeff Saut, Michael Santoli, Peter Schiff, Mike Pento, Steve Smith, Johnny Cass, James Anderson, Steve Birenberg, Dave Dispenette, Diane Bullock, Yaron Sadon, Craig Mellow, Eugene Lindon, and of course, the snazzy Minyanville staffers and representatives from throughout the Minyanville community the world over.

  • If nothing else, we know how to host a party... particularly when it's for such a worthy cause.

  • Our levels of lore remain directly ahead: S&P 1200 and NDX 2150. You can draw those lines with a crayon, a pencil, or an invisible marker -- it's up to you. Just remember that in the absence of clarity, folks tend to become closet technicians and crowded levels make for tricky tapes.

  • Minyan BB insists Minyanville needs a theme song and submitted this. What say ye?

  • Did General Motors (GM) really include in their IPO prospectus that, "We have determined that our disclosure controls and procedures and our internal control over financial reporting are currently not effective. The lack of effective internal controls could materially adversely affect our financial condition and ability to carry out our business plan"?

  • What would happen if we found out China hijacked Internet traffic from all US Federal websites, including the military? Oh, they did?

  • The Minyanville NBA Eastern Conference All-Star Jersey -- autographed by the entire team -- is officially on the clock. Bidding will continue through Festivus 2010 and the winner will take home this snazzy prize!


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