I have an account with one of the well know WS names. The guy I work with calls this morning. He says:
The guy is right. I’m scared to step up and so are a lot of others. So I say back to him, “I’ll think about it.” I did, my thoughts:
The recommendation is to position for a year-end rally. That’s what’s supposed to happen. It happens every year. But all I see is uncertainty.
What’s the Best Case for the EU as far as the markets are concerned? The answer is that a deal in excess of $3 trillion is coming. This is what the market is currently looking for:
That’s the Best Case? To me that is a disaster. If all this were to happen it would result in a near immediate downgrade of both France and Germany. The “guarantees” of the SPV guarantors would be devalued in a month.
If this is the way the world is going to go, it is a road fraught with risk. The EU would look like the USA with Fannie and Freddie. Trillions of dollars of debt and guarantees would be "off balance sheet". The losses would be born by Germany and France.
I think there is a very real risk that a “positive” outcome in the EU will lead, in short order, to a broad based credit crunch in Europe. The solution to that problem will be for the ECB to print money and the Federal Reserve will have to (again) come to the rescue with a multi-trillion increase in dollar swap lines to the EU Central Banks.
The "Big Bailout" is a very slippery slope in my opinion. That is an outcome that I would rather ‘sell on the news’ than ‘buy on the rumor’.
The Worst Case (as far as the market is concerned) is that the deep thinkers in the EU actually start listening to the voters in France and Germany. The result is that the “Grand Plan” to save the Euro experiment is a dud.
An outcome under this scenario is a deal that is woefully inadequate to the task. A popgun approach. Any “successful” plan must put the German taxpayers at risk. A plan that falls short of today’s very high expectations would be seen through by the markets in just a few hours.
On the USA side of things, there seems to be a disconnect between the real economy and equities. Over the next six weeks we have a few hurdles to cross:
It’s just a joke to think we are out of the woods with energy prices. Look at this chart of the real cost of crude for much of the country. This chart is telling me that $105 oil is the bottom of the range. It’s also telling me we are headed back up, not down, as Mr. Bernanke keeps telling us. (I discount NYMEX crude pricing as a measure of anything).
There's a credit crunch that’s sneaking its way through the US debt markets. The latest evidence is in Jumbo Prime loans. See Zero Hedge for details (link). It’s creeping into critical areas of finance. Consider these words and charts from UBS:
There is no good news coming from China over the next few months. Period. Depending on how the currency issue with the USA is resolved, it could get ugly.
We shall see what the markets will bring. There is too much cash on the sidelines and cash has been made trash by Bernanke. My broker friend may be right that the broad tape has to move higher. But I don’t trust it. I’ll keep the money in the wallet for a bit longer.