Thursday, February 25, 2010

Greece and the EU in Denial

If you are an avid follower of financal news like us then you are no doubt aware of the Greek debt crisis.  In fact, you pretty much cannot avoid it.  We make no predictions on whether Greece will eventually receive a bailout but we are amazed at how quickly the situation has devolved into farce.  For entertainment purposes, let's take a look at some excerpts from recent articles written by the always excellent Ambrose Evans Pritchard:

"If one member of the eurozone were to step out for any reason, this would be a collapse of the entire system," said Carl Heinz Daube, director of the Finanzagentur.  "It is very hard to clarify to a man on the street why one country should step in to help another country," he told the Euromoney bond congress in London. 

So explain it Mr. Daube.  The entire system could certainly collapse if Greece is allowed to fail, but what does that tell you?  If one tiny part of the system can cause the whole thing to collapse, doesn't that imply that the system is terminally designed?  What if the next country that runs into trouble is several times the size of Greece?  It seems that the architects of the EU and Euro should take some responsibility for the current situation, no?

Germany's regulator BaFin fears that the Greek crisis risks setting off "downward spiral" across Southern Europe, posing a system risk to the financial system. It said German banks hold €522bn of state bonds from the region. 

So Greece needs to be bailed out because the German banks were foolish enough to lend them money.  Why should the German people pay for the mistakes made by the banks?  Nobody forced the German banks to throw money at Greece.

Moritz Kaemer, head of Europe ratings at Standard & Poor's, told the forum that "a sovereign default is not going to happen in the euro zone. Greece is still comfortably an investment grade." 

It is good to have such wonderful assurance of calm from the people who missed the housing bubble, the banking crisis and indeed every financial crisis of the last thirty years.  The rating agencies couldn't assess risk if their life depended on it and lucky for them, it doesn't.

Mr Kraemer said it would take Greece 33 years to reduce debt to the already high level of 100pc of GDP even if it manages to consolidate at the rate of the last growth cycle – in boom times that may not be repeated.

So in other words, Greece cannot possibly avoid default if market forces are allowed to work.  What a bunch of nonsensical double-talk when juxtaposed with the earlier statement.

Public and private sector unions joined forces to bring the country to a standstill for 24 hours, halting flights, trains, and shipping, and shutting schools and hospitals.

I am not quite sure what the people of Greece hope to accomplish by destroying their already fragile economy.  Sure, they are angry that their salaries and benefits are being cut but what are they proposing?  They simply don't have the money to pay for their expenses and the world is finally getting tired of accepting their debt.

Theodoros Pangalos, deputy prime minister, said Germany had no right to reproach Greece for anything after it devastated the country under the Nazi occupation, which left 300,000 dead. "They took away the gold that was in the Bank of Greece, and they never gave it back. They shouldn't complain so much about stealing and not being very specific about economic dealings," he told the BBC. 

It is good to see that Greek politicians can be just as big of idiots as American ones.  Clearly events that took place before TV broadcasts began have no relevance today.  Nobody forced the Greeks to join the EU or to adopt the Euro just a decade ago.  If they did not like the terms then they should not have joined.

Twisting the knife further, he said the current crop of EU leaders were of "very poor quality" and had botched this month's crisis summit in Brussels. "The people who are managing the fortunes of Europe were not up to the task," he said. 

Yes, it is the politicians of other countries fault that they cannot bail out your country faster.  Shame on them for letting you get yourselves into this situation.

Portuguese unions have called a general strike for early March. Spanish unions held marches in Madrid and Barcelona on Tuesday over pensions, but turnout was low.

The Portuguese and Spanish are obviously jealous of all of the attention that the Greeks have been getting so they are preparing publicity stunts.  Nice move.

The EU has always found ways to master crises over the last 60 years, and will most likely do so again, but this one feels different to EU veterans.

Sixty years of prosperity is a nice track record but what was it that happened just prior to that period of time?  I seem to remember some minor incidents.

Closing Remarks
What you have here is a total lack of recognition of any sort of responsibility by any party involved.  Nobody in the EU, the banks, the rating agencies, the Greek government or the Greek people want to own up to the fact that they contributed to the current situation.  In short, they are all in denial.  Thus, the situation will continue to get worse until the parties involved stand up and say "I helped get us into this situation and I will stop contributing to it."  Bailout or no bailout, temporary reprieve or not, this story will last as long as the finger pointing continues.

Tuesday, February 16, 2010

What Does One Hundred Trillion Dollars Look Like?

This is a Zimbabwe one hundred trillion dollar bill, which debuted on January 16th, 2009 with a value at the time equivalent to $30.  On April 12th this bill and all other Zimbabwe dollar notes basically became worthless when the Reserve Bank of Zimbabwe legalized the use of foreign currencies.  Maybe Zimbabwe dollars will make a good investment after all, since some individuals are trying to sell these bills as collectables.  We found one site that is asking $20 for each bill.

Thanks to Mike Maroney of for the best freebie of the day at the New York City Traders Expo.

Thursday, February 11, 2010

What's Wrong With Bank Stocks?

Since the middle of October, bank stocks have been trending down and are significantly under performing the general stock market.  Take a look at the following chart.  It compares the Dow (red), S&P 500 (yellow) and NASDAQ (green) with XLF, the Financial Sector Select SPDR (XLF).  XLF is composed of JP Morgan, Wells Fargo, Bank of America and other banking stocks:

As you can see, the divergence has developed since the middle of October, where most bank stocks peaked.  The general markets are comfortably up since that time.

Let's break down XLF by some of its major components.  Here is a comparison of JP Morgan, Citigroup, Bank of America and Wells Fargo.  Citigroup is the lone deviant, having peaked before the others back in August:

This trend is apparent in other financial stocks as well.  Here is a comparison of Goldman Sachs, Morgan Stanley, Credit Suisse and Deutsche Bank, all having peaked out in October as well:

So why is this a big deal?  Well, let's look at the last time that financial stocks started to diverge from the greater stock market.  Here is the first chart again, comparing XLF with the general market indices, but with a time frame from the middle of 2007 until the middle of 2008:

As you can see, the general market was basically flat while the financial stocks were down roughly 30%.  Of course we know what happened just a few months after this - Lehman Brothers went bust, the financial crisis went into full swing and stock markets crashed all around the world.  Are we headed for another financial collapse?  Nobody knows for sure and we do not have quite the divergence that we did back then (yet) but things look ominous.

The market technicals are flashing warning signs.  The economic fundamentals are also flashing warning signs, as the problems in Greece, Dubai, Venezuela and elsewhere continue to spread.  Perhaps contagion will develop into a full blown crisis, similar to what we experienced as collapse spread from mortgage lenders to Bear Stearns to Fannie Mae and Freddie Mac and finally to Lehman, AIG and the whole financial system.  Only time will tell.

Saturday, February 6, 2010

Stock, Gold and the Dollar Market Updates

Friday was a wild day in the markets so it feels like a good time to provide an update.

First up is stocks.  The S&P500 started the week off strong, with up days on Monday and Tuesday.  Wednesday was basically flat followed by a massive sell off on Thursday and a close on the lows for the day. Friday was another massive down day for much of the trading session before a huge rally in the last few hours resulted in a positive close for the day.  Before this massive rebound, we were predicting weekend rumors of a Black Monday style sell off during the next trading session.  Because of the late day rally, however, that possibility looks to be nullified.

Five day view of the S&P500 (click on images for larger views):

In December, we noted that the S&P500 had moved clearly above its 500 day moving average, an important technical level over the past decade.  Since that time, the market has dropped back down and bounced off that line, fell below it, and has now rallied back to the bottom of the line.  If this level starts acting as upward resistance over the next few weeks then stocks could be in big trouble:

The VIX has risen some but is still well within its downtrend.  We will continue to watch this closely, with a breakout being another major negative for stocks:

Next up is gold.  We have been bearish on gold since exiting our profitible position in early December.  We projected a fall in the spot price of gold over the next one to two months to $1000 and $100 on GLD.  Gold fell to around $1050 ($102.28 for GLD) on Friday before rebounding to $1064 ($104.68 on GLD) at the close.  We are still looking for GLD to fall below its 200 day moving average over the next few months, which is just below $100/$1000 an ounce, whereupon we will be large buyers:

We did add a small position in GLD on Friday when it fell below $103.  We entered this position because (1) our dollar index projection had been met (see next section) and (2) we noticed that, while gold and stocks were massively down at the time, most gold mining stocks were up big.  The gold miners typically lead the price action in gold, so we played the divergence.  If the dollar begins to fall while the miners continue climbing then we will hold on to our small position and may even add.

Finally comes the dollar.  Since December we were looking for the dollar to rise into the 80-82 range.  This area was reached on Friday, where the dollar closed at 80.21.  We have no real conviction on the dollar right now, though if it rises to near 82 in the next few weeks we will probably grow bearish:

In summary, stocks are at a very dangerous level but it is a bit premature to call a new bear market.  Gold has fallen far and fast since December and may have bottomed for now but the final bottom of this correction may still be several months away.  The dollar has met our upward target and we have no current projections for this index.