Art Cashin: "Why Fixing Greece Presents Problems"

Trader talk from Art Cashin, via UBS Fin Services

Rescue Rumors Rally Markets Yet Again – The U.S. stock market began Tuesday’s session on the upside amid speculation that Trichet’s return from a conference might mean that the European Union was getting ready to address the Greek crisis. The rumors remained vague and the early strength began to fade at mid-morning. Around 11:30 or so things began to shift, and shift dramatically. Reuters carried a report that an unnamed, but reportedly highly placed, German official said that the EU would provide a firewall to contain and address the Greek problem. Instantly, the dollar went into freefall. As is the current custom, that led to simultaneous spikes in gold, oil, and stocks. The stock market peaked around 12:20 when other anonymous European sources expressed doubt about the imminence of a rescue package. That caused stocks to give back about one-third of the rally. They then churned choppily sideways for the balance of the day.

Cashin quotes Gartman on why a bailout is not so simple. For other views, we present the earlier critical section of the Maastricht treaty which is a little less ambiguous as to what is allowed and what isn't as part of the EMU charter.

Why Fixing Greece Presents Problems – The nature of the European Union makes it especially difficult to resolve the Greek crisis. Rather than reinvent the wheel, let me quote from my pal, the always lucid and readable, Dennis Gartman. In outlining the situation, he wrote:

The further problem is that the Lisbon Treaty… the very framework of the European Union… forbids one state coming to the fiscal aid of another if the latter is unable or incapable if meeting the fiscal laws set down within the Treaty. This supposed “no-bailout” clause was the most difficult part ofthe Treaty when it was written and when it was voted upon, but it is the central tenant of the Union. Germany mandated it, and without the clause Germany would not have signed on to the Union itself.

The clause intended to keep Europe fiscally sound, and although there were and there are plenty of loopholes that allow for some “fudging” of the fiscal rules, its passage allowed the Union to evolve and for a decade or so thrive.

The only way out of the problem is what is known as Article 122 of the Treaty that will allow other European states to come to the fiscal aid of another state if the latter is suffering fiscal difficulties caused by  "exceptional circumstances beyond its control.” Let the "lawyer-ing" begin, for what are “exceptional circumstances” and who will define them. The Germans are convinced that “exceptional circumstances” are events such as earthquakes or other natural disasters that are truly beyond the control of government. This is what Germany believes it signed on to, but Greece is hoping that it can prove that its current problems are of a nature that are indeed “exceptional” and were beyond its abilities to control. As we said, let the "lawyer-ing" begin in earnest, for Greece is going to try to prove that its own fiscal idiocy over the years derived from forces beyond its reach. We wish the Greek lawyers good luck on this matter. They shall need it.

If some resolution to the Greek Problem is achieved…either through German/French support or via the IMF…then it is but a matter of time until Portugal, Spain, Italy et al raise their hands individually or collectively and ask, “What about us?” Therein lies the problem. The Greek problem, when all is said and done, is on its own resolvable. All that must needs happen is for the German government to put a clothespin on its metaphorical nose so it cannot smell the bad odor of what it may chose to do and accept the “exceptional circumstances” clause of Article 122 of the Lisbon Treaty and bail Athens out. But Germany knows that Portugal, Spain, Italy et al are right behind Greece and will follow hard upon. Bonn bailed out Berlin, but will Bonn really want to bail out Athens… Lisbon…Madrid… Rome… and then Ankara, Sophia and others in the near future and the far?

As Dennis perfectly puts it, the EU must find a mechanism, in fact, a ruse, to allow it to rescue Greece  without violating its own “constitution”. Further, it must deal with a long list of other potential rescuees. It’s like Bear, Fannie, Freddie and Lehman on a sovereign basis. This may be a tough Spring – that’s if Spring ever arrives.

A few other amusing tidbits from Art:

Revisiting A Chart Formation – Maybe – In Monday’s Comments, we discussed the sharp “Rescue Rumor Rally” that popped up Friday afternoon. As we wrapped up that discussion, we wrote the following:

That late rally was a bit of a mixed blessing. Had they closed on the lows, the probable course of the market might be a touch clearer. A close at the lows would have suggested an “oversold reflex rally” for Monday extending half-way into Tuesday’s session. The rally would then fail followed by a sharp and severe selloff. The late rally took  that specificity off the table. We’ll have to review the napkins for clues to the amended course.

Somewhat ironically, the Monday selloff erased a chunk of the Friday “rescue” rally and possibly returned the averages to the general area they had been in before that rally. Did that set the stage for the one day or two day rally mentioned above? The napkins suggest that’s a possibility.

Cocktail Napkin Charting – As just stated, the action of the last four trading days presents a few challenges. One scenario suggests that the rescue rally runs out of steam today or tomorrow. It then could reverse sharply to the downside, retesting or penetrating Friday’s intra-day lows.

A second scenario suggests that the rally hangs on, consolidating as it again tests the 1105/1110 area. There are also a variety of chart patterns that may be forming. The S&P looks to have a budding head and shoulders showing up on the napkins. Robert McHugh sees a potentially ominous wedge topping formation in the S&P. For today, the napkins suggest resistance in the S&P sits at 1083/1088 and then 1094/1099. Support looks like 1058/1063.

Consensus – German authorities meet today so some market moving headline is to be expected. Some government data delayed by snow. Text of Bernanke speech will be released even though his appearance was canceled. Looks like a very tricky day in probably thin markets. Stay very, very nimble.

Trivia Corner

Answer - George's average speed for the trip was: 37 1/2 m.p.h.
Today’s Question - The noted developer, Ed Garr was trying to hire house painters and hedge trimmers. He was told that 4 painters and 3 trimmers would cost $370 per day. He could get 3 painters and 4 trimmers for $330 per day. How much does each get for 1 days work?

And the ever inspiring history lesson.

On this day in 1933, a young man left the offices of the Postal Telegraph Cable Company in New York City. He was sent to deliver a message.

Big deal, you say, a telegraph messenger delivers a telegram....and 1933 at that. Well you do have a point. But recall this was the Depression. People were depressed. They didn't have a lot of money to send telegrams even if they wanted to. Now today there are lots of very high priced people giving very high priced seminars to business types advising how to make business grow.

One of the key insights is to keep your business "customer driven." Even though folks at the Postal Telegraph had never had the benefit of such savvy seminars, they all were intrigued by the request of one customer. He asked if thedelivery boy could possible sing the telegram to the recipient. "Sing?" they said.

"Yeah, sing!" he said. He noted folks seemed down enough and could use the pleasant surprise of having the message sung.

So either on a lark or being "customer driven", the Postal Telegraph folks sent the delivery boy out to sing the message. For the next 25 years "Singing Telegrams" were a key part of telegraphy.

The markets got several messages yesterday but none was a singing telegram.