ThinkMarkets - Trading and Investing Thoughts About The Markets

Ratings Agencies Ramifications

2012-02-20T22:48:00.000-06:00

Well, let's wait and see what Moody's, S&P, and Fitch have to say about this "deal."

http://hat4uk.wordpress.com/2012/02/21/greek-debt-3-am-a-deal-is-declared-but-ratings-agencies-lukewarm/

Deal or No Deal...No Deal?

2012-02-20T00:00:00.002-06:00

No deal? Greeks kick themselves out of the euro?

http://hat4uk.wordpress.com/2012/02/19/greek-d-day-slog-us-source-confirms-wall-st-plans-as-secret-berlin-timetable-emerges/

http://www.allvoices.com/news/11552474-secret-german-plans-for-greece-to-go-bankrupt

The Greek Default Plan

2012-02-16T23:54:00.004-06:00

Barclays Capital (Barcap) has The Greek Default Plan.

JP Morgan has it, too.

Short Opportunity Of A Lifetime?

2011-12-05T15:17:00.002-06:00

Well, it's been two weeks since I gave the two-week notice for the bears to wait. The rally of 7% in the markets last week went further than I expected above the 50-day moving average. I think there was some leaking of information on Monday that contributed to the big moves on Monday and the public announcement on Wednesday of the coordinated central bank global dollar liquidity.

However, the S&P did not cross the 200-day moving average (1265) convincingly. A failure to close above the 200-day signals that there's a strong possibility this is the opportunity that the bears have been looking for! Last week and today were excellent opportunities to open shorts and buy puts of >3 months. As banks and other institutions hedge their bets of a failing euro and eurozone, the cascading dominoes of self-preservation will fall.

If by some miracle, we close convincingly above 1265, we may need to reevaluate. But for now, this looks like the short opportunity of a lifetime. Today, the S&P is rumored to put all euro zone countries on negative watch this evening. And so it begins... We'll have to see how the markets act this week up until the summit on Friday. A failure to reach any meaningful agreements with adequate details could spark an ugly Monday next week. Grab your popcorn. It will be an interesting week. Although the Dow closed up 78.41 to 12097.83, the VIX was up 1.16% to 27.84.

Europe Out of Control

2011-11-25T13:16:00.002-06:00

Italian two-year bonds hit a record 7.82%!

Euro-debt problems getting out of control. Greece looking for 75% haircuts. Germany not backing eurobonds. Spain 10-years were at 6.57% this week. Disaster of German bund auctions (only 60% demand). National pride issues starting to crop up as friction between European countries. Belgium downgraded by S&P from AA+ to AA. Dexia deal is in trouble and more banks could fail. The eurozone is falling apart!

Bank recapitalizations sure to cause heavy selling into the first half of 2013. I expect a further downward in the markets. Along the way down, we make spike up to a lowered 50-day moving average. Then. we have the big failure there to a crash of undeterminable proportions. Clearly, the trend is down, though.

Super Uncertainty ^ 2

2011-11-21T15:19:00.005-06:00

Well, looks like the next catalyst down might be the US Super Committee's failure to get a deal done. Today, the Dow sold off over 340 points but then rallied to close down 249 to 11547. There was a rumor from Max Baucus that the Super Committee still has a few hours before announcing that a deal is dead. Not holding my breath, but you never know. The S&P closed down 23 to 1193. We have now closed below 1209 and await the Super Committee's results. A break below S&P 1185 on Super Committee's news would be very negative.

Over the weekend, Spain voted a change in government. Mariano Rajoy is now Spain's new PM. With a 23% unemployment rate, this news doesn't change much of the reality of lack of growth to get out of debt.

There were also fatal clashes in Egypt. The Egyptian cabinet resigned Monday night.

Uncertainty x Uncertainty = Uncertainty ^2. Not a good situation for investors. One bit of "positive" news was that the VIX didn't rise that much today as one might expect (up 2.84% to 32.91), so we'll have to see if we break down from here there's a bit more upside before we crash. A global sell-off, broad-based similar to today, will take down just about everything but cash and shorts. Stocks can fall much faster than they rise, so there could be an excellent opportunity to make some money here if you're short or want to average in on the way down.

Bears - Give It a Couple Of Weeks

2011-11-18T15:00:00.006-06:00

Another light volume day. Not much movement or much news. Europe holding off news before Spanish elections this weekend. Dow closed up 26 to 11796.23. S&P closed virtually flat at 1215.72.

Looking for a close below 1209 on the S&P to see conviction in the selling. I give this market two weeks to start to crumble in a cascading manner.

Italian banks may need another $8.2 billion in capital.

Super Committee results next week. Spanish elections over the weekend. ECB ruled out as lender of last resort. IMF previously ruled out as lender of last resort.

France's AAA rating potentially downgraded soon.

Have a great weekend!

Clash of the Titans

2011-11-17T15:18:00.008-06:00

Continued selling on light volume. Dow down 134.33 to close at 11771.26. S&P down 20.69 to close at 1216.22. Surprisingly strong support for the S&P at 1209.

European fears are growing. The crisis is spinning out of control, and the politicians continue to be way behind finding any credible solutions.

Spanish 10-year bonds yielding 6.975% vs. 5.986 in July.

Spain's finance minister Elena Salgado says that the ECB must keep on supporting government bonds by buying them until some other instrument is put in place. Well, the problem is that the Germany has been adamant that the ECB doesn't want to be the lender of last resort. France and Germany are clashing on the ECB's rescue role. The IMF has already expressed that it doesn't want to be in this role as well. So, I guess nobody's going to do it. Merkel has already been reluctant to do Eurobonds, and these would take too much time to develop and implement. The EFSF is nowhere in sight or sound.

Although we have new governments in Greece and Italy, protesters in both countries took the streets today to protest austerity measures, again. In New York, Occupy Wall Street (OWS) protestors took to the streets marching on the NYSE. There was literally blood in the streets, as protestors clashed with police. Protestors were injured, as well as the police.

In the US, there are rumors that the Super Committee is deadlocked again. In France, there are rumors the actual downgrade of the AAA rating is imminent, for real this time.

So, the global economy is unraveling, and there are no credible solutions in the US or across the pond in Europe. Politicians are scratching their heads while Rome burns. It seems that the only time any real action will take place is when it's already too late and the situation has reached catastrophic proportions.

Europe Waking Up To Harsh Realities

2011-11-16T11:32:00.008-06:00

Seems like the Europeans are now starting to wake up to the harsh realities. The pressure they're feeling is causing them to pass on the pressure where they can:

Janus "two-faced" Merkel is saying that Germany is ready to cede some sovereignty to the EU. Germans are not going to like this. She is also saying the the ECB doesn't have the possibility of solving the euro problem. What?! What happened to the "grand plan?" Oh that.... There IS no plan. Surprise, surprise.

So, as you might expect, countries might get "pushed" out of the euro.

Italy's biggest bank, Unicredit, is seeking broader ECB rules. Who said there wasn't going to be another Lehman in Europe? There are definitely failure concerns.

France's second-largest bank, Société Générale SA, plans to cut "several hundred" jobs in 2012.

Forget deflation, WTI crude oil hit 102 today. More pressure on the global economy.

George Karatzaferis, head of the LAOS party, and Antonis Samaras, head of the New Democracy conservatives, have both refused to sign pledges to implement harsh austerity measures. Refusing to put signatures in writing is putting the Greek bailout at risk. Seems like a pretty expensive risk, two signatures for 8 billion euros.

European leaders are playing with fire, and Rome, nay, the world, will burn...

Fitch in the last hour of trading says that the credit outlook U.S. Banks could worsen if the European crisis is not resolved in a timely and orderly manner. Dow plunged 190 points to close at 11905.97 at the close. S&P down 20.29 to close at 1236.92. Euro went down .51% to 1.347. If the selling continues, tomorrow could be UGLY!

Monti's Cabinet - Pandora's Box?

2011-11-15T15:31:00.003-06:00

Well, the market had another low volume melt-up day. We lost some momentum going into the close, so the Dow closed up just 17.18 to 12096.16. S&P up 6.03 to 1257.81.

Italian 10-year bond yields topped 7% again. The market rallied on news that Monti is assembling his cabinet to reveal to President Napolitano tomorrow. Let's just hope this cabinet is not Pandora's Box.

The EC is cracking down on ratings agencies, Moody's, S&P, and Fitch. France's AAA rating is looking vulnerable (already trading like AA+), so I'm sure the EC wants to do what it can to gain influence over these agencies as well, for perception reasons.

The EUR/USD dropped to 1.3532, so euro confidence weakening. VIX is at 31.22, so fear is still relatively high.

Feels like we're bracing for everyone to wake up one day and realize the truth that, "There is no spoon," or there is no short-term solution to the Eurozone problems. These debt problems took a long time to build, and will take a long time to resolve. In the meantime, there will be a lot of pain. Implementing austerity measures is just the start, if the new Greece and Italy governments can actually execute.

Extremely Light Volume Day

2011-11-14T15:11:00.013-06:00

Drifting lower on the lowest volume of the year. More skeletons coming out of the closets. Politicians big on talk, but little on any real action leading to any real solutions. Europe continuing to destabilize:

Today, Merkel's CDU party voted to offer euro states a "voluntary" means of leaving the currency. I guess she's finally realizing that Plan A wasn't working... here's another hope for a plan. Not a good sign for the stability of the Eurozone or the euro. EU Politicians are so behind the curve in getting in front of the issues. Very reactive... not good for confidence.

Italy sold 3 billion euros of five-year bonds for 6.9%, the highest yield in 14 years! Not a good auction. Still unsustainable.

Spanish 10-year yields were up 25 basis points to 6.11%. More signs of contagion spreading to Spain.

Monti and Papademos are in the honeymoon phase, but it doesn't look like things will look rosy afterwards. Change in leadership, but not a change in problems. There are still major uphill battles ahead to fix the austerity and growth problems in Europe. Markets appear to be stuck like a deer in the headlights not sure what to do. Any major negative headline could kick off another cascading round of selling.

The Contagion Has Spread To Spain

2011-11-11T23:30:00.009-06:00

Today, the market cheered the swearing in of Papademos as the head of Greece's new unity government and Italy's passing of the austerity package the Senate. A little uncertainty was removed today, but only a little, as most of this was news we already knew. However, we'll give the markets a cheer for one good day of seemingly positive relief. Papandreou can probably sleep better tonight and have more peaceful days ahead.

The ECB has been active buying Italian bonds, bringing the 10-year down to 6.4%. Although this is good news for today, major questions still remain as to where the funds will come for the EFSF and how long the ECB can keep Italy and other European countries afloat. Bottom line is that Italy is too big to fail and too big to bailout. This could have major repercussions on credit and equity markets around the world. At the same time the ECB is buying, major European banks are planning to dump 300 billion euros of Italian government debt.

The ECB is also losing credibility as the Portugal PM says that the ECB should not print money to pay for the debts of undisciplined countries. The Slovak PM is saying the same, that the ECB should not be focusing on buying bonds of distressed euro countries (the German "wise men" call heavily indebted euro zone states).

Italy might be saved for today, but now there are reports that the economic recovery in Spain has ground to a complete halt and might slip into recession as soon as the current fourth quarter.

Today's positive action on the upside, however, was on extremely light volume, over 30% below average, and the lightest since July, so odds still favor a move downward. The line in the sand is still around 1275 for the S&P. If we can't break convincingly above 1275 next week, we're on our way downward, probably in a major way over the next year. If we can break above 1275 convincingly next week, we might have to switch our stance to be more bullish and reevaluate the double-dip scenario.

Overall, significant risks still remain about

the new government in Greece (waking up to the realities after the initial transition ceremony honeymoon is over-- hey, today was after all 11-11-11, also a good day for wedding ceremonies in Vegas),
what the new government in Italy will look like and if Berlusconi will really leave,
both new governments' ability to deal with the EU bailout plans (Greece and Italy),
where the EFSF money will come from and how it will be used,
bank recapitalizations and the effects on capital investments in Emerging Markets,
how long the ECB can keep buying Italian bonds (auction next week),
speculation of plans for countries to leave the Eurozone and the euro,
the supercommittee hopes in the US, and now,
the contagion in the rest of Europe, particularly Spain.

Also, just in time for Thanksgiving and Christmas, MF Global fired 1066 employees today from the broker-dealer. Rosenberg refers to MF Global as the canary in the coalmine, merely the 2011 version of Bear Stearns as there is "never just one cockroach." Clients are fuming mad the frozen accounts and positions and not having access to them, as well they should be. Now, former employees can join the bandwagon. What a mess!

Eurozone and UK At Risk of Recession

2011-11-10T12:48:00.004-06:00

Don't shoot the messenger, but Mr. Rehn of the EU Commission says that the Eurozone and the UK are likely to go into recession. The Growth forecast for 2012 was revised down from 1.5 percent to .5 percent.

So, if the Eurozone goes into recession, the US will likely double-dip. In an interconnected global economy, no matter how "good" things appear to be in the US, a contraction in Europe will bring us back down into a double dip scenario.

There is also speculation of plans for countries to be allowed to leave the Eurozone, and the ECB says it has no more ammo. So, the question is, how long can they keep Italy afloat?

The Italian 10-Year dipped below 7% to 6.9%, but today, it paid a record 6.087% for the 1-Year Treasuries at the auction. Just last month, it was only 3.57%.

6.1% for 1-Year Paper?! Unsustainable.

Are you reading for the Armageddon scenario? The UK Treasury is sure getting ready for 'economic Armageddon' if the euro falls apart, so it might be wise to get your portfolio ready, too.

The Great European Sell-Off Has Begun

2011-11-09T09:18:00.014-06:00

Blood in the streets today. LCH Clearnet raised the margin requirements for Italian bonds due in seven-to-10 years to 11.65% vs. 6.65% on October 7. Italian 10-year bonds at 7.4%! Rick Santelli said the yield could rise to 10% within a week. Implausible? Well, he called the US 10-year Treasury yield going under 2%, so I wouldn't call his call that farfetched. This is a dream turned into a nightmare for BNP Paribas and Credit Agricole.

The first domino that sets off the Great European Sell-Off has fallen. We were looking for a catalyst, and I think we've found IT.

Who will step in and buy the Italian bonds? ECB? IMF? The US???!!! The US has its own problems with the supercommittee gridlock over $1.2 trillion in proposed spending cuts and revenue increases over the next 10 years.

We are now past the point of no return. The damage has already been done. More selling likely to come...

We have now failed the 200 day moving average (SPX 1275)!

The SPX chart pattern looks eerily similar to May 2008, when we failed the 200 day moving average. After that failure, the market crashed from 1425 to its low of 666, a ~53% plunge in 10 months.

Seems like a big unimaginable drop, but it has happened, so it's possible we could get a repeat. This time, it's Sovereigns, so it's possible that it could get even worse...

Grand Plan Falling Apart?

2011-11-08T09:46:00.009-06:00

Well, it looks like the grand plan is not looking so grand anymore... maybe more of a theoretical idea and hope...

Here's more of the reality:

Italy - Berlosconi today only had 308 out of 316 budget votes and doesn't have the majority to survive a no-confidence vote. If he is gone, will the technical government really be able to implement austerity reforms? Italian Government Bonds 10-Year Yield has risen now to 6.77%! More uncertainty.

Greece - Papademos now slated to head the government. Another political change. Will he be successful in implementing austerity reforms? Will Samaras put in writing that he agrees to the bailout terms? Will the 50% haircuts go through, and what are the long-term implications? Will Greece end up leaving the euro and eventually go back to the drachma? Will there be runs on the Greek banks? More and more uncertainty.

EFSF - No countries want to volunteer funds. Leveraging it is a bad idea and possibly a violation of the EU treaty. Can you fix leverage with more leverage? Set up ANOTHER “Special Purpose Investment Vehicle?” Will public/private investors and China participate? Not enough firepower. Who wants to buy these bonds if the EFSF may end up insufficient and going broke itself? More and more and more uncertainty.

Bank Recapitalization - Negative feedback loop to comply with the 9% minimum capital ratios. Will the selling off of assets and reducing of risk shrink credit even further and drain the Emerging Markets of the projected 500 billion euros? Uncertainty galore!

With all of the real uncertainty of new European developments, it's amazing that the US stock market has held up as well as it has.

Also, the VIX is still hovering around 30, which can either be incredibly bullish or incredibly bearish.

Bullish VIX: Historically a VIX this high is unsustainable and has provided good entry points for long-term investors. It's been painful for bears who have been in all cash. That's why I wouldn't recommend 100% cash, in case this market goes up from here. NO ONE can predict the markets day-to-day accurately, so always be prepared if you're wrong.

Bearish VIX: However, that's assuming that we don't double-dip. If we crater from here and the VIX goes to 80, like it did in October 2008, then this is an incredibly risky time to get in. Cash and shorts are great. Averaging in on the way down would be a good way to take advantage of pullbacks. If we fail to break convincingly above the 200 day moving average on the S&P (around 1275), then look for a repeat of 2007-2009 crash, maybe even a worse scenario since we're talking sovereigns now.

MF Global - Check's In the Mail!

2011-11-07T16:45:00.003-06:00

What a mess for clients of MF Global!

Bounced checks, bad transfers, missing money, frozen accounts. If positions were transferred, but not all of the positions, I can't imagine the number of margin issues that would have resulted, not to mention frozen accounts with the inaccessible cash/collateral supposedly at MF Global.

To top it off, account balances were debited even though checks did not clear.

If I submitted a wire, I would expect the money to be wired NOT to receive bad checks in the mail.

Clearly, the plumbing was broken. Can't imagine how frustrated and angry the clients must feel. The money never should have been commingled. Hope all of the client money is still accounted for.

Where's a good plumber when you need one? It's so hard to find good help these days.

Leveraged EFSF - a water pistol?

2011-11-07T12:18:00.004-06:00

Morgan Stanley's Joachem Fels says that the leveraged EFSF is looking more like a water pistol than a bazooka.

Let's hope that the Euro Finance Chiefs can make the EFSF into something more effective, because a water pistol won't do anything stop the BIG BEAR that has been mauling each of the European economies.

How you fix leverage with more leverage in the EFSF without creating potentially more risks is puzzling indeed. Would be very interesting to find out what this magical solution actually looks like.

Demand for EFSF bonds was weak today (3 billion euros of orders today vs 44.5 billion euros of orders for its first offering on Jan. 25), so if the bailout fund doesn't work, we're back to square one. There are definitely concerns about EFSF being a relatively new issuer and about its sustainability as well.

Two Trillion Euro Clawback - Emerging Markets Drain

2011-11-07T10:20:00.004-06:00

Recapitalization of European banks could result in a drop in overall lending to emerging markets of over 500 billion euros! Ouch!

Shrinking the balance sheet and complying with the 9% minimum capital ratios are just reinforcing the negative feedback loop. Raise capital and reduce risk, sell off assets, cut lending, shrink credit, economies worsen... rinse.. repeat...

For a global interconnected economy, this could get really bad, really fast. We're not talking just businesses anymore, we're talking sovereigns and emerging economies.

Top Five Reasons Why Darth Debt Is The Sith Lord:

2011-11-07T08:36:00.004-06:00

Top Five Reasons Why Darth Debt Is The Sith Lord:

5. He remains hidden, undetectable, until his influence has infected the whole body in a deadly manner (financial debt contagion – US and Europe)

4. He makes you a mindless slave as long as he is your master. There are always two: The master (debt) and the apprentice (reckless government fiscal spending and leadership). Inevitably the rebels revolt (Greece, Italy, etc).

3. He promises to give you all of what you want (welfare, out of control spending), but he takes away what you need to survive (responsibility, fiscal sustainability).

2. He causes the government body to motion for Votes of No Confidence (Greece, Italy). Once the Sith Lord has control, he is almost impossible to defeat and his existence threatens unity in the state.

1. The only way to have financial peace is to kill both him AND his apprentice completely (100% haircut and a balanced budget would probably get rid of them in Greece)!

He and his apprentice will probably pop up again in Italy, Portugal, Ireland, Spain, etc, though…

and the rebel fight continues…

Italy's Berlusconi - One Day Left?

2011-11-06T19:07:00.003-06:00

Italy's Berlusconi may only have one day left. There's a Tuesday vote on public finance that he may not survive. The rebels are attacking

Opposition proposing a no-confidence vote in the government. With all of these Vote of No Confidence motions, does this remind remind anyone of Star Wars Episode I: The Phantom Menace?

Let's hope that the Sith Lord is not in control... Help us Obi-Wan... you're our only hope!

May the Force be with you! Translation: May God help us all!

Italian bonds, look out!

Debt crisis now spreading to France

2011-11-06T15:29:00.004-06:00

Well, now that G-Pap appears to be gone, it looks like trying to ring fence the debt crisis in Greece might be too little too late.

France is now preparing for impending budget cuts. Looks like the Greeks weren't the only ones working through the weekend... so were the French government ministers. Sarkozy's government needs to trim another 6 to 9 billion euros from the budget. If France loses its AAA rating, more dominoes would go off, hopefully not as bad as when the US lost its AAA rating, but we'll just have to wait and see what develops. We'll also still need to watch the US to see if if any grand agreement comes out of the super committee (not holding my breath); otherwise, we may see further US downgrades in credit ratings from S&P.

Papandreou vs. Samaras Deadlock

2011-11-06T08:56:00.004-06:00

Samaras really wants Papandreou out before the New Democracy will work together.

Papandreou, however, really wants a new coalition to form before he resigns.

The EU wants to establish rapidly a national unity government to implement a new bailout programme.

It appears to be a deadlock. Consensus is elusive. Samaras won't cooperate with the new coalition without G-Pap resigning first. G-Pap won't resign until new coalition government is formed.

The behind the scenes negotiations/bickering will need to be resolved before, yet another, meeting in Brussells of the 17 euro zone finance ministers on Monday night.

Will Greece end up leaving the euro and go back to the drachma? It wouldn't solve the current problems.. it would only make them worse, but logic is sometimes thrown out when political tensions are high.

ECB May Stop Purchasing Italian Bonds

2011-11-05T22:11:00.004-05:00

Reuters is now reporting that the ECB may stop purchasing Italian bonds. Given that the Italian 10-year yields spiked to 6.3% even when the ECB was buying these bonds, this would be a very negative sign for Italy and the rest of the EU nations. Interest over 6% is unsustainable for Italy's debt and is now in the danger zone.

Markets on Monday will probably begin shifting focus from Greece to Italy. Unfortunately, since Berlusconi appears powerless to implement real austerity in Italy's government, the EUR will probably take a hit and volatility will remain. With the EFSF now lacking firepower (IMF won't contribute and no other G-20 nations are stepping up), one can't help but wonder where the funds for the EFSF are going to come from. No wonder no one wants to buy EFSF bonds... the EFSF could end up broke. So much for the leveraged EFSF part of the grand comprehensive plan.

European Debt Contagion

2011-11-05T18:00:00.008-05:00

Even though George Papandreou won the confidence vote 153 yes to 145 no, it may already be too late. European debt contagion has already been occurring, and may not be able to be stopped.

With G-Pap bringing up the referendum, his credibility is in question. That very act may have been the domino to set off the match to light the European tinderbox. Forming a new coalition will be challenging, and Samaras is power hungry. We’ll see whether the EU accepts the terms and will still release the 8 billion euros.

The crisis looks like it’s already spreading to Italy, and I expect Italy to be the focus next week. Italian 10-years yields at historic highs(6.3%!), spreads to German Bunds widening, and Berlusconi getting pressure to step down. In addition austerity demands not done, and the G-20 failed to find support for the EFSF, so if contagion continues, where is the firepower going to come from, and will it be enough?

Next week will be interesting to see if the contagion can be contained or whether it will spread like a cancer. Vix still is at 30.16 (above 30). If we fail the 200 day moving average on the S&P, look out below (see the chart of May 2008 where the S&P failed in a similar manner to see what we could be facing)…