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Before the Tape 9-15-11
This is our daily market commentary. For more insights and investment strategies including FREE Special Reports on how to prepare for the Great Crisis, swing by www.gainspainscapital.com
The usual options expiration rally appears to have kicked off in earnest on Tuesday afternoon and carried into Wednesday’s action. The numerous European rumors only added fuel to the fire, allowing the move to be swift and dramatic.
The overall picture for the Euro remains the same: political intervention is occurring both verbally and in the form of financial bailouts:
Greece 'integral' to the eurozone, say European leaders
The leaders of Greece, France and Germany have said that Greece is an "integral" part of the eurozone.
It follows a telephone call between Greek Prime Minister George Papandreou, French President Nicolas Sarkozy and German Chancellor Angela Merkel.
Greece also reiterated that it is determined to meet all the deficit reductions plans it agreed to in exchange for its two bailouts.
Concerns continue that Greece will default on its debt.
http://www.bbc.co.uk/news/business-14924089
The primary reason for this political grandstanding is French and German bank exposure to Greek debt. The secondary reason is the precedent a Greek default would set: what would stop other debt-ridden EU nations, particularly Spain and Italy, from following suit?
Greek is the small player in this mess. Its only significance is the precedent it will set. Spain and Italy (GDPs of $1.46 trillion and $2.1 trillion respectively) are the real issues facing the EU’s solvency.
According to the Bureau of International Settlements, worldwide exposure to Greek debt is $277 billion. Worldwide exposure to Spain, on the other hand, is north of $1 trillion.
Meanwhile the market continues to price in a 100% guarantee of a Greek default. And Greek banks, while not publicly declared insolvent, are trading at $1 and change:
Does this look like a solvent institution to you?
Traders are shooting for 1,200 on the S&P 500 abetted by a coordinated Central Bank intervention this morning.
Global markets extend gains after central bank intervention
Wall Street has climbed around 100 points in early trading, the FTSE 100 is 121.46 points higher at 5348.48 while the German and French markets are both up nearly 4%. The euro has moved ahead, touching $1.3937 before falling back to $1.3867, still above the $1.3775 at which it was trading before a joint announcement from all the world's major central banks. The banks, including the Bank of England, the US Federal Reserve, the Bank of Japan and the Swiss central bank, said they would re-launch three month dollar liquidity operations in the final three months of the year to ease the funding squeeze on European banks.
This move reeks of desperation. The fact it occurred during options expiration further illustrates one of our long-held views: the Central Banks intervene during options expiration week whenever possible to permit the largest upside move (See the Fed’s juicing of the market post-QE 1 in 2010).
However, the bearish flag pattern we’ve outlined remains in play.
An alternate look at the markets is a potential H&S pattern:
Both patterns target the S&P 500 sub-1000. In the short-term, the S&P 500 rally of the last few days is forming a bearish rising wedge:
France has its own problems and won’t be able to bail out Greece.
EU warned of credit crunch threat, French banks hit
European finance ministers have been warned confidentially of the danger of a renewed credit crunch as a "systemic" crisis in euro zone sovereign debt spills over to banks, according to documents obtained by Reuters on Wednesday.
In a report prepared for ministers meeting in Poland on Friday and Saturday, senior EU officials said the 17-nation currency area faces a "risk of a vicious circle between sovereign debt, bank funding and negative growth."
http://www.reuters.com/article/2011/09/14/us-eurozone-idUSTRE78B24R20110914
Geithner went to Europe to tell them to clean up their act. This is like a heroin addict telling a drunk to seek therapy.
China officials are playing Good Cop Bad Cop with Europe.
Wen sets preconditions to help Europe
Wen Jiabao, Chinese premier, has called on debt-laden European countries to put their “own houses in order” before asking China for a bail-out, in a sign of Beijing’s reluctance to be cast as a saviour for the global economy.
Speaking at the opening on Wednesday of the World Economic Forum in Dalian, China, Mr Wen also publicly linked Chinese investments for the first time with long-standing political demands, indicating a possible hardening of China’s position towards crisis-hit Europe.
http://www.ft.com/intl/cms/s/0/b234ad8a-de98-11e0-a228-00144feabdc0.html#axzz1Y2kXzS6Y
The notion that China is doing anything other than talking its book (the EU is its single largest export market) is absurd. China is itself undergoing a Crisis and will likely face systemic risk in the coming months. And let us not forget how atrocious China has been on timing interventions (see the Morgan Stanley purchase before the 2008 collapse).
Back at the ranch, the US housing market is abysmal.
Mortgage default warnings surged in August
Banks have stepped up their actions against homeowners who have fallen behind on their mortgage payments, setting the stage for a fresh wave of foreclosures.
The number of U.S. homes that received an initial default notice -- the first step in the foreclosure process -- jumped 33 percent in August from July, foreclosure listing firm RealtyTrac Inc. said Thursday.
The increase represents a nine-month high and the biggest monthly gain in four years. The spike signals banks are starting to take swifter action against homeowners, nearly a year after processing issues led to a sharp slowdown in foreclosures.
http://finance.yahoo.com/news/Mortgage-default-warnings-apf-157937671.html
Obama has made the Presidency an eBay auction:
Obama Sends Out Creepy Email: 'Sometime Soon, Can We Meet For Dinner?'
President Barack Obama's reelection campaign just sent out this creepy email, with the subject line "Sometime soon, can we meet for dinner," asking supporters to donate to his campaign for a chance to have dinner with Obama.
"Maybe I'll get to thank you in person," it says.
Obama's team has run a similar fundraising gimmick before — and the email says he plans on continuing it throughout the campaign.
While amusing, this is a mere distraction from the ongoing political drama in DC. Bernanke and the Fed will be a primary issue for the 2012 Campaign.
Republican candidates unite to attack Fed
Republican candidates for president squabbled over social security, foreign wars and the economy but presented a largely united front on one issue – the need to rein in the power of the Federal Reserve.
Rick Perry, the Texas governor who has been criticised for saying Ben Bernanke, the Fed chairman, has behaved in an “almost treasonous” manner in his management of monetary policy, declined to back away from his statement in Monday’s televised debate.
http://www.ft.com/intl/cms/s/0/0243237a-ddb7-11e0-b6db-00144feabdc0.html#axzz1Y2mW9B00
Our view is that the coordinated intervention was an attempt to prop up the markets to set up for a disappointment from the Fed’s meeting next week. The likelihood of QE 3 grows small and smaller with each passing day. The Fed got the same effect with verbal intervention… why does it need to engage in monetary intervention?
This is our daily market commentary. For more insights and investment strategies including FREE Special Reports on how to prepare for the Great Crisis, swing by www.gainspainscapital.com
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"Geithner went to Europe to tell them to clean up their act. This is like a heroin addict telling a drunk to seek therapy."
Spot On ...your pen is getting sharper Mr Summers ...and funnier ;)