Will They Help?

Quick post – just saw this article on BBC that relates to my post “Unease” from June ‘11.

Greece prime minister makes plea for German support

Greek Prime Minister George Papandreou has delivered an impassioned plea to German business leaders to help his country out of its current debt crisis.

Mr Papandreou said German funding would not be an investment in past failures, but in future successes.

He also hailed Greece's "superhuman" efforts to cut its debt levels.

The prime minister is in Germany for talks with German Chancellor Angela Merkel to discuss his country's progress in cutting its budget deficit.

http://www.bbc.co.uk/news/business-15072025

Will they help? My initial thoughts in June ‘11 was a resounding “NO!”. This will be fun to follow, and I believe this will be a key factor in the markets. My thought process is that the conclusion of the German government (which by the way, is more conservative than the US government) will be similar to what the US government did with Lehman: if they help Greece, they’ll have to help the other countries in trouble, e.g. Italy, Ireland, Spain. In two words: Moral Hazard.

On the other hand, do recall what happened to the markets after Lehman failed.

What do you think? Do people learn from history (especially history from only 3 years ago)?

Don’t Call The Bottom

It’s been a while since I’ve written a post just about trading and where I feel the stock markets are heading. Well, actually I almost always write about it indirectly, like my previous post on June 17 on the “Unease” in the market that was a prelude to the market drop. But I digress.

A lot of people around me have seen the market drastically drop in 2 weeks and subsequently have begun to believe that the market is a “buying opportunity”. This has caused me to become concerned enough to write a post about it. Simply because the market has dropped significantly does not mean it won’t drop more. Certainly that statement goes both ways, but I would like to pose a question – what will drive the market back up? QE3? “Better” than expected economic news? Economic unity in the Europe? “Low” valuations as pundits claim? Yes, all these things might trigger a short term rally, but the downside is all there and I can’t think of many positive things that could surprise on the upside. The market follows the path of least resistance, and it’s clear to me that the path of least resistance is downwards. There’s not a whole lot right now that could drive this market upwards other than short-term swings in the market.

The major problem for me in terms of seeing a clear bottom right now is the lack of conviction in the market. Today I read an associated press article titled:

“AP survey: No recession but weakness will endure—Economists doubt another recession within 12 months but see weakness into 2012”

http://finance.yahoo.com/news/AP-survey-No-recession-but-apf-523688622.html?x=0&sec=topStories&pos=8&asset=&ccode=

Just what kind of prediction is that? Shoot, I'm pretty sure I don’t need a PhD to make that kind of prediction.

I decided to not go too fancy with this drawing; not even drawing support and resistance, ascending triangles or things like that. The point is that the upward swing has been broken, rather violently as witnessed by the previous few weeks’ market action.

What, then you ask, will signal the bottom? When the “market” has conviction. A sign of the top is when everyone is bullish, the bears have been beaten down and are back in their caves. A sign of the bottom is when everyone is bearish, the bulls are screaming and driven up the trees. In recent memory - March 2009 was when everyone thought the world was going to end. Before this summer everyone thought the recession was over.

Point is, until everyone is bearish, I wouldn’t call this the bottom. Or at least not until an European Union country defaults and gets the boot.

Technorati Tags: bear case,euro,market outlook,global macro

Unease

A shift in the market sentiment has awaken me from my “long” slumber. What a year it has been since I last wrote. It’s been really fun comparing what I wrote to what happened. Certainly the low interest rates and government support have kept this market going despite all the troubles in the world!

This is my simple recollection of events in my head (work has made recent events a bit of a blur, so do forgive me if this is a bit oversimplified and ignorant):

Mid ‘10: “Greece is failing, maybe Spain next, whatever”—market stalls a little, then moves up, gold continues its climb, treasury yields fall back down

Late ‘10: “Earnings looks good, we might have ourselves here a recovery! Oh looks like Europe is getting itself together for a bailout”— market continues to climb, gold continues to climb, USD falls, EUR strengthens

Early ‘11: “Oh man, look at Japan. Down with the reinsurers! Gosh I’m scared! Well..shouldn’t be the end of the world”—market dives for a bit, then continues to climb (dead cat bounce), while oil prices shoot up

Mid ‘11: “Greece is still failing? Spain might follow? Didn’t they take care of it? What’s happening with the US government? Can they balance the budget? What about China? I hear they’re having some problems…”—market begins to hesitate

Which brings us to the present after 4 bullet points. We’re at a state of flux in the economy and the markets. Lots of things are going on in the market. The biggest news these days are always about the perpetual downgrades of Greece, the debt crisis in Europe, the impending crisis in the US and China. The optimists of a year ago seem to have fled the scene.

Reuters has an article that describes this threat to stability:

“European governments are keen to avoid a "hard default" as that could threaten banks throughout the euro zone and further afield.

They are therefore discussing a "soft landing" in the form of a debt extension or voluntary rollover by creditors, but some of the proposals have been criticized as default by another name.

Countries most vulnerable to contagion include Portugal, Ireland and Spain, analysts say, with Italy, Belgium and even France as well European companies possibly affected as well…The big contrast with the Lehman Brothers collapse is that this crisis has been building for a long time. Some analysts say world leaders will not allow it to spiral out of control.” (1)

Now I don’t know who these analysts are, but yes these world leaders can and will let Greece fail. Why? Politics, greed, and power. Would Italians step in and want to put up money when their country’s budget is in deficit? Same goes for the Irish, Spanish, Portuguese, etc. Would the wealthy Germans use up some of their coffers to pay for the Greeks’ mistakes? If they save Greece, will they have to also save the Irish, Spanish, Portuguese, and Italians?

If the U.S. Government wouldn’t even step in to save Lehman Brothers, the homegrown investment bank, why would these guys save Greece? Call me cynical (which I am), but these guys (Europe ex-Greece) won’t think it’s a big enough threat to their countries, until they see it in front of them!

Wish it wasn’t the case, but history does repeat itself.

Source:
(1) Reuters article:
http://www.reuters.com/article/2011/06/16/us-greece-crisis-quickguide-idUSTRE75F7CL20110616