Will European Elections Trigger the Next Phase of the Global Financial Crisis?
Chicken Little, once the most popular poultry around, is again quite lonely.
Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.
The greatest trick the devil ever pulled was convincing the world he didn’t exist.
--Verbil Kint, The Usual Suspects
Europe is falling apart, there’s gridlock in Washington, and the US economy grew at an anemic 2.2% pace last quarter despite more than $10 trillion in stimulus. Still, there’s an age-old adage on Wall Street that the reaction to news is more important than the news itself—and despite a steady dose of dour news, the S&P and NASDAQ are both enjoying double-digit gains this year.
I was pretty bullish heading into 2012 and I’m extremely bullish “looking through” to a millennial generation that doesn’t care about the difference between experience and skills. As we’re apt to say in Minyanville, however, the destination we arrive at pales in comparison to the path we take to get there, and that journey is increasingly concerning me.
Forget for a moment that Spain is trading at levels last seen in March 2009, when this artificially stimulated rally—not to be confused with a legitimate economic recovery—began. In a finance-based, derivative-laced global economy, what happens across the pond most certainly matters for stateside investors, and dare I say citizens. It’s not like we can wipe away Spanish debt—as they did in Greece, returning 25 cents for every dollar invested—much less that of the entire eurozone, without causing some serious socioeconomic waves.
In terms of catalysts, the French—and Greek—elections take place this weekend and the smart money is betting that Nicholas Sarkozy will be ousted. This should result in deeper deficits for France and make them look more like Italy—yet another domino—than Germany, the perceived savior of the eurozone. Germany can’t and won’t do it alone; and if the German market breaches DAX 6500, my technical lens suggests that it has room to DAX 5800, a 14% decline from current levels.
And it’s not just the specter of risk aversion in Europe that is keeping me up at night. The US is facing a fiscal cliff at year-end—a problem which may or may not be solved, but is scary nonetheless. The only thing supporting stocks is low interest rates and obscene levels of government intervention, and yes, that can continue. As an investor, you need to always see both sides of the trade—and now you do.
I've been plenty wrong before but I would be remiss if I didn't share that I haven't slept much the last few nights, and that "Sleep-O-Meter," long dormant, has a pretty powerful track record. I tried to enjoy The Jacob’s Cure charity benefit last night but as I looked around the ballroom, a distinct intuition emerged, one that hasn't happened since September 2008; I wanted to jump on a table and scream, "PAY ATTENTION TO WHAT IS HAPPENING!"
I'm no drama queen, but I'll always put it out there for better or for worse. In the interest of full disclosure, I'll also share that I've got a partial position in September S&P puts and intend to add to those with a strict stop above S&P 1420 (I, and folks a lot smarter than me, update our insights each day in real-time on the Buzz & Banter; click here for a free two week trial.)
We’ve got a slew of stateside data to deal with into the weekend as well, including the payroll data tomorrow. While these numbers tend to be volatile (and quite manipulated, if you ask me), I would offer that a slight miss—in the 125K-150K range, versus expectations of 160K—would be the worst-case scenario, as it would hold the QE-thusiasts at bay, at least for another day.
Finally, if I'm dead wrong—and the price action of late suggests I may well be—I'll lose 20 handles (which is where my stop is set), which will sting, but won't knock me out of the game. Trading, in its purest form, is an attempt to identify the disconnect between perception and reality, and capturing that chasm with a stylistic approach that manages risk rather than chases reward.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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