Cracks in the Facade
(Excerpts from Stock World Weekly)
The S&P downgraded nine eurozone countries on Friday, announcing the following actions: the lowering of long-term ratings on Cyprus, Italy, Portugal and Spain by two notches, and the lowering of long-term ratings on Austria, France, Malta, Slovakia and Slovenia by one notch. It affirmed the long-term ratings on Belgium, Estonia, Finland, Germany, Ireland, Luxembourg and the Netherlands. According to S&P, Friday’s ratings actions were “primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone...
S&P also released a FAQ explaining its action, including this gem: “We believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues.”
Reading the S&P FAQ, Bruce Krasting surmised, "you have to conclude that the conditions that would force a return of the legacy currencies will happen, and they will happen in the next twelve months." This emphasis on austerity is already producing predictable results. For example, in Spain, unemployment increased by a full two percent in a single quarter (Q4 Spanish Unemployment Soars By Most Since Lehman, Hits “Astronomical” 23.3%)
There was certainly no shortage of gloomy news, ranging from the disappointing Initial Jobless Claims numbers, the weak Retail Sales numbers, and the stark assessment of the current state of the eurozone by Standard & Poor’s.
Chinese stocks were down last week as hopes for additional stimulus from the Chinese Central bank faded. China’s small and medium-sized manufacturing vendors are struggling with falling demand and rising prices for both materials and labor.
Tension continued building in the Middle East. The U.S. is significantly increasing its presence in the region as CVN Carl Vinson carrier group joined the CVN Stennis in the Arabian Sea, just off the Straits of Hormuz. Everything changed on Thursday, when news came out that an embargo on Iranian oil by the European Union is likely to be delayed by six months while member nations secure alternative sources for their energy needs. This news rocked the oil markets, with oil dropping over two Dollar in less than two hours.
Summing up the action and commenting on the situation in the U.S. Treasury market, Lee Adler, wrote, “The Treasury rally got some help this week from a surge in Federal Withholding Tax collections that is helping to keep new supply down. Whereas new supply had been exceeding TBAC estimates for the past couple of months, it has come back in line with estimates, and could be reduced even further in the weeks ahead if the sudden growth of withholding taxes persists.
“In addition to reduced supply, a renewal of the European panic with Friday’s S&P sovereign downgrades has Treasury yields again melting down, in spite of the fact that foreign central banks continue to sell their holdings. Another way of looking at it is that this buying panic is allowing FCBs to liquidate without destabilizing the market, which otherwise probably would have happened. The string of FCB selling has now reached 6 consecutive weeks which is unprecedented and suggests a structural change as central banks need to deploy funds at home. That problem for the US can be swept under the rug as long as Europe’s problems are bigger and the resulting capital flight boosts the Treasury market.” (European Panic Sweeps 700 Pound Gorilla Under The Rug)
Looking ahead, Lee opined, “The market may have given bears a glimmer of light on Friday, but so far, that’s all it is, a glimmer, mostly in the form of an increase in short term sell signals in the screening data. There were no material changes in any of the broad market indicators or price projections, although they have come down a little since Tuesday and Wednesday. I would say that what happens in Europe on Monday could point the way for the US when it reopens on Tuesday, but all too often we’ve seen the US reverse European action that takes place when the US is closed. A down day in the US on Tuesday could begin to trigger intermediate sell signals.” (Bears Get A Glimmer of An Opening)
During a meeting between Li Yang, vice-director of the Chinese Academy of Social Sciences, and Treasury Secretary Timothy Geithner, Geithner responded to a question regarding the next round of quantitative easing by saying, “[the Fed doesn’t] have tools or ammunition left.” But when asked if the recent activity involving currency swaps and liquidity injections by six central banks is a form of QE3, Geithner admitted, “You could say that.” (China Advisor: Geithner Said No Tools Left For QE3) (See also: A Thinly Veiled Bail)
The European Central Bank (ECB) has been pursuing its own program of providing liquidity to the markets, to debatable effect, as described by Peter Tchir of TF Market Advisors. Commenting on Monday’s (Jan. 9) press conference by Merkozy, Peter wrote, “It appears that the ECB skipped QE and went straight to QGG (Quantitative Gift Giving). They aren’t buying too much sovereign debt, but they are willing to lend to banks using any collateral they can scrape up. They are fully encouraging banks to issue bonds to themselves, get a government guarantee, and post it at the ECB for some fresh money. I think that while many investors have been staring at the SMP (Secondary Market Programme) and whining that full QE isn’t being applied, the ECB has gone beyond that with other programs...
Between SMP and all these weird collateralized lending programs, the ECB has been pumping money into the system, and a big portion of their purchases, and lending, is against assets that are highly likely to default! Quantitative Easing implies some ability to get paid back or to stop easing by selling assets back to the market. Quantitative Gift Giving is simply throwing money at assets that will never be repaid.” (Remember When The Dynamic Duo Was Batman And Robin)
Update: Zero Hedge reported (on Monday) that S&P is saying that a Greek default may be imminent: "Time for the dominos to fall where they may: head of sovereign ratings at S&P Kraemer spoke on Bloomberg TV...
"And the punchline:
- KRAEMER SAYS HE BELIEVES GREECE WILL DEFAULT SHORTLY - RTRS
"The only thing he did not add is that the default will be Coercive. What happens next is anyone's guess, but whatever it is it is certainly priced in. Also, let's not forget that the inability of the market to react to any news ever again is most certainly priced in."
In other news on Monday, Zero Hedge also reported that S&P Downgrades EFSF From AAA To AA+, May Cut More If Sovereign Downgrades Continue: "And so the latest inevitable outcome of the French downgrade from AAA has arrived, after the S&P just downgraded the EFSF, that pillar of European stability, from AAA to AA+. S&P adds: "if we were to conclude that sufficient offsetting credit enhancements are, in our opinion, not likely to be forthcoming, we would likely change the outlook to negative to mirror the negative outlooks of France and Austria. Under those circumstances we would expect to lower the ratings on the EFSF if we lowered the long-term sovereign credit ratings on the EFSF's 'AAA' or 'AA+' rated members to below 'AA+'." In other words, as everyone but Europe apparently knew, the EFSF is only as strong as the rating of its weakest member. And now the rhetoric on how AAA is not really necessary for the EFSF, begins, to be followed by AA, next A, then BBB and finally how as long as the EFSF is not D-rated all is well."
The prevailing bearishness makes it easy to ignore some bullish signs, such as this week’s Beige Book showing demand for commercial real estate picking up in multiple cities, including New York, Dallas, San Francisco, Atlanta and Chicago. It also showed a slight uptick in commercial and industrial lending in Dallas and San Francisco, and broad-based improvements in loan quality. Moreover, as Zero Hedge noted above, the market does not seem to be reacting to the bad news flow out of Europe, it seems to be functioning under the decoupling theory, also called the "head in the sand" theory.
John F. Carlucci at dshort.com sees a bullish signal in the $OEXA200R (Percentage of S&P 100 stocks above their 200 DMA - chart below.) According to John, “OEXA200R remained encouragingly above 65% all week and ended at 69%. Of the three secondary indicators: RSI is above 50 and positive, MACD has not yet crossed into positive territory, and slow STO is above 50 and positive. Conclusion: The market has become tradable. However, traders must stay on their toes and keep the following commentary in mind.” He then discussed his concerns and reservations regarding the eurozone.
John also noted that over the last 21 years, the S&P has not been below or so close to its 200 DMA for this long without falling into a cyclical bear market. The last two cyclical bear corrections took at least 1 1/2 years to reach bottom. If the correction beginning in July 2011 turns into another cyclical bear, projecting 1 1/2 to 2 years out would put the next S&P bottom somewhere between the end of 2012 and mid-2013. Regarding the "tentative" good news in the U.S. economy, and whether it will counter the turmoil in Europe, and elsewhere, John thinks we'll know soon enough. (Best Stock Market Indicator Ever: Weekend Update)
One of the trade ideas submitted this week by Pharmboy is a buy-write on AMRN. Pharmboy wrote, “I like Amarin (AMRN, $7.17) - once a high flier (down 60% from its high) - for its Lovazza (purified fish oil) and good outcome in trials for lowering triglycerides in patients. I think starting a small, speculative position in the company is worthwhile. But I would not go gung ho. There are still risks involved. I like buying 100 shares of stock and selling one June 2012 $8 call and selling one June 2012 $6 put for $2.60 or better combined.” AMRN was trading at $7.17 on Friday, and the June $8 call was at $1.75, and the $6 put was at $1.10.
To learn more about the buy-write strategy go here >
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