Friday, February 5, 2010

Three Little PIIGS

I want to put the PIIGS into perspective. Right now, they are the excuse for the collapse in the global stock markets. I think the reaction is a little overblown, to say the least.

Here are the GDP Numbers for the current culprits. I compare them to the GDP of States with similar GDP numbers (IMF Database for 2006) -

Spain $1,439 billion GDP, less than California
Greece $314 billion GDP, comparable to Washington
Portugal $223 billion GDP, comparable to Missouri

Combined, these three economies are not much bigger than California. So ask yourself, would the US bail out California or risk it splitting off from the Union and having the US Dollar crash? There is no way that Europe does not bail out these countries. They have too much to lose.

The markets are forcing the leaders of the Euro to blink. The rest of Europe will end up eating all of the crappy debt from these countries and be forced to buy the bonds off of the balance sheets of European Banks like Barclays. The looting of the Taxpayer continues. No doubt Bill Gross is trying to figure out how he can get in on this action…

Did you see how the Fed is already talking about extending the Mortgage Purchase program? There will either be another round of Mortgage purchases to prop up bond prices, to keep Interest Rates low, thus propping up Real Estate prices, or there will be a new program to refinance Commercial Mortgages. Or both (most likely).

They simply cannot allow Real Estate prices to fall. That will explode the balance sheets of banks and lead to another full blown panic – better to steal $1 trillion from our kids, than to permanently unemploy and bankrupt their parents.

So I am looking for the markets to price in another round of monetization – some similar to what just occurred in Dubai and some on par with the massive Mortgage Purchase programs of the NY Fed.

Once the European stuff clears up, I would expect the Euro to recover and another round of the Dollar Carry Trade to commence. It will probably be a violent re-leveraging even, so you had better be on your toes over the next few weeks if you went to heavy cash like I did.

Thursday, February 4, 2010

The Correction Continues

There hasn’t been much to add the last few weeks. Support broke, stops were triggered on trading positions and we wait.

Is the Bull Market over in the US? Probably not, but a topping process has most likely begun
Is the US Market correcting? Yes
Is the Bull Market over in Emerging Markets? I think so
Is the Bull Market over in Commodities? Take a look at Gold and the Euro

I watched Obama speak to Senate Democrats yesterday and at the end of his speech, there was a Q & A. The first question was asked by RINO turncoat Arlen Specter. He asked Obama what he was going to do to force China to devalue its currency and stop cheating as a trading partner.

Obama was caught off guard and had his usual answer that flows along the lines of – I know that China is building the cars that we buy and we can’t compete with their cheap labor, but we took a bunch of taxpayer money and invested it into a plant making LED bulbs…

Specter knows that the key to his reelection is to get jobs created. He also knows that the only way to do so is to make the Dollar cheaper, thus making it more competitive to hire US Workers. The other way is to cut taxes on US Manufacturers, but that won’t fly with Obama.

Obama knows that he is supported by the corporations that make fortunes exporting US Jobs to China and the banks that make a fortune recycling the money back from China (China builds up a surplus of Dollars, buys US Treasuries with the money, this drive Interest Rates down and allows consumers to have cheap credit). So you aren’t going to see Obama come out and say anything meaningful about devaluing the Dollar or unpegging the Yuan, until he is forced to do so by the voters.

I think Specter’s question yesterday was meaningful, because he is fighting for his political life. He knows that the key issue to his reelection is to look like a man who is most concerned about getting jobs back to Pennsylvania.

In the mean time, Pennsylvania’s capital of Harrisburg is so in debt, that it is considering filing for Chapter 9 bankruptcy (think Vallejo). Any of you own any Pennsylvania Muni Bonds? This potential default is causing fear, but I have not yet seen it hit the Muni Bond ETFs.

PIIGS are getting slaughtered
The credit markets are in panic mode over the sovereign debts of Portugal, Spain and Greece. These countries have too much debt and no way to monetize it, because they gave up their own currencies for the Euro. Germany is getting rich off of the Euro and does not want these countries to default. Greece will see a series of nationwide strikes over the next few weeks. Unemployment in Spain is 20%. How long until you see real revolutions in these countries?

This is putting major pressure on the Euro, because you can’t have a real reserve currency when it looks like the Union supporting it will be split up in the near future. Now we all know that the solution to all of this will be another round of money printing by the Central Bankers to kick the can down the road, but all that will do is continue to inflate the massive credit bubble that will be the final disastrous bubble to pop.

The Euro (FXE) is crashing. The 50-day is about to cross the 200-day. That is the definition of a Bear Market. All rallies into declining moving averages will be shorted. The inverse of the euro is the US Dollar (Symbol UUP). FXE is too far below the 50-day to be shorting here.

The falling Euro is crushing the Dollar Carry Trade. That means that risky assets like Commodities and Emerging Markets are getting smoked.

Take a look at Gold (GLD) – 105 is the line of death. Is it just me, or does that look like an inverse Cup and Handle on GLD? Silver looks like it has put in a major top and Copper is crashing (JJC)! Copper crashing takes down many commodity leaders like – FCX, PCU, BUCY

PIIGS Charts
Here are the charts of Portugal and Spain. They are in crash mode. See how they both marginally overshot old highs to suck in money, just before rolling over in early January? Classic Wall Street in action…

At some point, the correction will have run its course. The most likely level for institutions to put up a fight is the 1,020 – 1,040 area on SPX. I will be looking for a bottoming process and a Follow Through Day. If those happen to occur in the 1,020 – 1,040 range then so much the better.