Mohammed El-Erian of PIMCO joined his voice to the chorus today by saying that "leaders should get their act together." Geez Mohammed. Haven't they done enough? They've imposed a welfare state, borrowed trillions of dollars that can't be paid, imposed regulations and laws that make business formation and expansion next to impossible, enacted labor laws that make it unattractive to expand or maintain employment. What more can they do, Mohammed?
At some point, folks like El-Erian need to recognize that employers make hiring decisions and that, absent a reason to hire anyone, they won't hire anyone. Employers have been give a host of good reasons not to hire anyone and they are acting accordingly, both in Europe and in the US. Hopefully, the "leaders will not get their act together."
Maybe, we should give all political leader 364 days of paid vacation annually. They can meet ceremoniously one day every four years. Then much less damage would be done and markets could function without their interference.
This idea that the world can be led by political hacks that have spent their formative years learning how to memorize a set of meaningless platitudes that can provide a path to an electoral victory is a joke. The world doesn't need political leaders "to get their act together." What they need is for the political leaders to get out of the way and let free markets work.
Only free markets can deliver economic growth. Western political leaders have done everything in their power to wage war on the free market. They win. The economy loses.
What in the world does El-Erian think they (political leaders) can do, if not more of the same?
El-Erian praised all the bailouts of the 2008-09 period, praised the stimulus package. He's been a consistent cheerleader for big government and high deficits. Now, I suppose he wants more of the same since it's worked so well so far.
Monday, June 4, 2012
Muppets Beware.
There were two possible signals that a bottom of some kind is close. Keep in mind, searching for top and bottom is the most expensive hobby. However some signs are hard to miss. First, CNBC ran special program (http://video.cnbc.com/gallery/?video=3000093787) “Markets in turmoil” where Cramer tries to scare the hell out of retail. If you have seen this man in action and have compared his recommendation for the last five years, you should know to do just the opposite of what he says. Secondly, GS comes with potential for return of bear market. ( http://www.bloomberg.com/news/2012-06-04/goldman-sachs-sees-potential-for-s-p-500-bear-market-on-europe.html) I know GS loves the Muppets and have the welfare of all Muppets in its heart. Therefore, Muppets, beware. Most likely they want to buy your stocks cheap when they know that QE is around the corner.
I am still not bullish and would have liked the 200 DMA taken back at the least. But a huge red day closed in tiny little green can be considered as a bullish reversal. More so when everything is so much oversold on a daily basis. The markets will be driven by wild reumour and I do hope (not a good strategy) that something comes out of Europe which will give some boost to the market.
Euro reversed in a big way and with it Crude and copper. I still think we are following last year’s model but that is based on the assumption that further QE will not come before August 1. If Bernanke comes with the money on June 20, as GS expects, then the situation changes altogether. We should be ready for such an eventuality because this is an election year. Technically speaking there is a positive divergence in the price action and RSI.
So for now I will go with my earlier theory of a bounce and continuation of sell thereafter. Come to think of it, we are exactly at the same place in SPX where we were on Jan. 3rd. So all the noise and bull rage of the last few months were for nothing? Why do we chase the markets on a 5 minute chart?
Anyway, US $ actually lost for the last 3 trading days.
Do you see a pattern here? A correction of US$ coupled with a bounce in equities, crude and other risk assets would correct the extreme oversold conditions for now.
Egan-Jones poked in the feel good bubble with a late in the day downgrade of UK. But there is G7 meeting tomorrow and the market will catch anything that is catchable to get a bounce. As I have said many times, at this point of time, a bounce is a sell. We wait for clear direction and save our capital.
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Saturday, June 2, 2012
Better Be Lucky Than Smart.
We are standing at a very interesting fork on the road. Which way will it go and which road shall we take. This is important because we want to be where the puck will be next. At the same time we are aware of the danger of front running. The mind keeps telling that we are missing the last great opportunity. The meltdown is here and if we do not join, the train will leave without us. Our job is to rationally analyze all the arguments and see which one has better odds. Wining is not guaranteed. Never. That is why it is said that “better be lucky than smart”.
Back to the markets. Few days back I wrote that 1283 will be a good support area and ( http://bbfinance.blogspot.ca/2012/05/same-boring-stuff.html ) unless we see the range broken either way, it is better to sit in cash. Luckily, there is no penalty for sitting on cash, at least not yet. But now that 200DMA has been broken, will it open the floodgate to lower price? Lets us see the both sides of the argument.
Yes we will see much lower price:
· 200 DMA has been broken and the selling momentum is strong.
· Europe is getting worse and there is no sign of any intervention from ECB.
· Economy is stalling here in USA.
· Unemployment remains a major problem in USA.
· China is heading towards a hard landing.
· Commodity sector is in bear market territory.
No, we will see a bounce:
· The sentiment is too bearish.
· Commodities and Euro is over sold.
· This is an election year and election year price movement patterns are different.
· Greece is not going to leave Euro-zone because everyone knows that a Grexit will be the disaster which will make Lehman look like a trailer.
· The Fed will intervene. Bad news is good news.
These are some which I could come up with and I am sure there are many more on both sides. Given all that information, what is the verdict?
As you know, I am a believer of cycles. They come in various forms, short term, intermediate term, long term. The intermediate term cycle does not bottom till Mid-July but very short term cycle is bottoming just about now. When I combine the cycle analysis with the technical analysis I get the following picture:
· The next level of support is around 1260 and below that 1200.
· It is not going to be one straight line down.
· I expect to see a bounce starting next week but it will be just a bounce. Max. upside target remains 1360-1380.
· Selling is not over yet.
· There will be QE3 or 4 whatever you call it. But Bernanke has only two possible dates to announce, June 20 or August 1. I think it will start from August 1.
This is the road map I have in mind but the market is the boss. If it keeps going down next Monday or Tuesday, I would not fight with it. But if you have been in cash, like I have been writing all these days, you will have enough fire power to get in at excellent prices. I think we are not at the end game stage yet and we will see one more upswing before everything starts to unravel. If 1283/1285 level holds on Monday, I may do a bit of bottom fishing but that is for traders who can get in and out quickly. Absolutely not for investors. Investors better wait for good trends to develop. Do not underestimate the powers of the CBs and I think we will again see concerted efforts by all the central bankers to re-inflate the balloon.
I would like to share a chart from Bespoke. It is a kind of analog and I do not have much faith in analog. So take this with a pinch of salt.
I personally think we are following the old script of 2010 and 2011 with minor variations. Let us see how the story unfolds this year. Patience is the key.
Hope you are enjoying the weekend. Thanks for reading http://bbfinance.blogspot.com/ . Please forward / re-tweet / post it on your wall and invite others to join. (Twitter @ BBFinanceblog)(Stocktwits: Worldoffinance)
Au Revior and All That
My stay in Paris comes to an end tomorrow morning -- all in all, nine days. So what's doing in modern France? How's the welfare state going? It's going great for rich people and entrenched bureaucrats -- they never had it so good. The rich and politically connected in France have the life style reminiscent of Louis the IVth. Their so-called "socialism" is essentially a giant cage for everyone else to live in.
Their are no jobs for young college educated, unless their parents are members of the elite. Opportunity is so bad for young people here that is not uncommon for youth to live with their parents until almost middle age. There are no Steve Jobs or Bill Gates or any of that. The best entrepreneurs here are street hustlers and con artists. The government doesn't seem to restrict their activity like they restrict the activities of ordinary legal businesses.
The newly elected President thinks you can create growth by raising marginal tax rates to 75 percent and protecting entrenched bureaucracies whose main role is to snuff out any hints of entrepreneurship. Good luck with that. This place is a throwback to the Middle Ages. But, when you ask a Frenchman, what's so great about France, the conversation inevitably drifts back a couple of hundred years to Napoleon or Voltaire or some such luminary.
This place is like the rest of Europe, frozen in time, with no future. Sooner or later this society will be swept into obscurity by its massive social obligations which, like every other European country, it cannot afford. Unfortunately for France and it's fellow Europeans, creditors are beginning to get wise. But, like Italy and Greece, it's a great place to visit. Lots of sights to see and its getting cheaper by the day.
Their are no jobs for young college educated, unless their parents are members of the elite. Opportunity is so bad for young people here that is not uncommon for youth to live with their parents until almost middle age. There are no Steve Jobs or Bill Gates or any of that. The best entrepreneurs here are street hustlers and con artists. The government doesn't seem to restrict their activity like they restrict the activities of ordinary legal businesses.
The newly elected President thinks you can create growth by raising marginal tax rates to 75 percent and protecting entrenched bureaucracies whose main role is to snuff out any hints of entrepreneurship. Good luck with that. This place is a throwback to the Middle Ages. But, when you ask a Frenchman, what's so great about France, the conversation inevitably drifts back a couple of hundred years to Napoleon or Voltaire or some such luminary.
This place is like the rest of Europe, frozen in time, with no future. Sooner or later this society will be swept into obscurity by its massive social obligations which, like every other European country, it cannot afford. Unfortunately for France and it's fellow Europeans, creditors are beginning to get wise. But, like Italy and Greece, it's a great place to visit. Lots of sights to see and its getting cheaper by the day.
Friday, June 1, 2012
Don't Break Out the Champagne
The jobs release this morning confirms that the US economy has no real pep. This is bad news for anyone looking for a job or hoping to keep the job they have. I guess waging political war on capitalism isn't such a great economic policy after all.
Where are the economists? Why are they pretending that current economic policy makes any sense?
Obama spends a lot of time thinking about Europe these days. Schadenfreude I presume.
Surprise, surprise, Spain is beginning to be the next big story. Just wait. Italy and France will have their time in the sun. If you want jobs, then you have to make it attractive for business to hire people. Why is that so tough to see? If you wanted more apples would you put a $ 5 tax on every apple produced?
I'm beginning to think the world might be better off without economists. Economists come up with tortured explanations to support things like minimum wages, health care mandates, higher taxes, and oppressive regulation. Do they really think this will create jobs?
The stock market is getting cheaper, although nothing fundamental has really changed in the last two years. At some point the stock market may become a real buy again, even though the news background is depressing. The march toward disaster in Europe continues its predictable path and the US political war on the economy is reaping its harvest.
Where are the economists? Why are they pretending that current economic policy makes any sense?
Obama spends a lot of time thinking about Europe these days. Schadenfreude I presume.
Surprise, surprise, Spain is beginning to be the next big story. Just wait. Italy and France will have their time in the sun. If you want jobs, then you have to make it attractive for business to hire people. Why is that so tough to see? If you wanted more apples would you put a $ 5 tax on every apple produced?
I'm beginning to think the world might be better off without economists. Economists come up with tortured explanations to support things like minimum wages, health care mandates, higher taxes, and oppressive regulation. Do they really think this will create jobs?
The stock market is getting cheaper, although nothing fundamental has really changed in the last two years. At some point the stock market may become a real buy again, even though the news background is depressing. The march toward disaster in Europe continues its predictable path and the US political war on the economy is reaping its harvest.
Economist's Haiku for Europe
A lovely letter to the Economist says it all.
Sir:
Leaving the euro zone is no option for Greece (“Fiddling while Athens burns”, May 19th). The new drachma would be valueless, as there would be no demand for it. A country that finds it difficult to run its fiscal affairs cannot manage a national currency. The restored drachma would stay in circulation only if the Greeks were denied access to foreign exchange, preventing the informal use of the euro. That would require draconian exchange controls of the type put in place by Germany after the first world war, which ensured the circulation of the depreciating mark during a period of hyperinflation.
What can Europe do for Greece? It can provide it with a stable monetary unit: the euro. What can Europe not do for Greece? Well, it cannot give it a sound fiscal system. The Greeks have to achieve that themselves if they wish to remain a sovereign country.
Ernst Juerg Weber
Associate professor of economics
University of Western Australia
Perth
Good news from Europe
This morning's Wall Street Journal article on renewed bank competition in Europe is one little bright spot. Apparently, large healthy international banks are competing for deposits in Greece, Spain and Italy.
Here's the answer. My favorite solution for Europe is sovereign default and keep the common currency. (Actually, that's my second favorite. Free market reforms tomorrow, start growing like China on Monday and pay back the debt is my real favorite, but we can only dream so much.)
The natural rejoinder is, what about the banks? Since the local banks have all loaded up on sovereign debt, then the banks will all go under, and won't that be a disaster?
My response has been to remind people of the difference between existing banks and a functional banking system. Countries need a functional banking system. They do not need all of the existing banks to continue, nor do they need all of the existing bank's creditors not to lose a cent.
Europe offers a particularly good playground here, because it's supposedly an open market. Greece is about the size of metropolitan Chicago. It can function well as Chicago does, with banking dominated by local branches of diversified international banks. If the local banks fail, that does not mean Greece will not have a banking system. Just transfer the assets and deposits of failed banks to HSBC, put up a new sign on the front window, and open for business.
And this news adds important facts to my scenario. Those large banks are already operating in Greece, Spain, and Italy and ready to take over.
Of course I am guilty of a bit of wishful thinking here. The article also shows how local banks are fighting back to keep their deposits. And it can't be long before local governments intervene to "save our banks from destructive international competition." In fact, the localization of bank regulation is one of the sadder parts of this whole mess. Had Europe really gone for a europe-wide banking system in the first place, that system would be in a lot less mess now.
Side note: The US discussion is all full of "the financial crisis proves we need more regulation." Europe's banks woes are entirely the product of regulation. What's failing is sovereign debt, debts of the governments that regulate things, not mortgage backed securities put together by greedy wall street bankers. The banks are full of sovereign debt because their regulators told them to do it, not because sneaky financial engineers got them to do it. Here is the fully regulated system on display for us.
Banks from Northern Europe are offering...the safety of having your money parked in large, well-capitalized institutions based outside Europe's danger zone. The campaigns aren't subtle: HSBC Holdings PLC promotes its "safety and security" in Greece...
In Italy, consumer group Altroconsumo has been offering advisory services to jittery depositors since December. As a precautionary measure, the group is recommending that customers consider moving their deposits from domestic Italian banks to foreign banks that operate in Italy...
In Greece, HSBC's local unit is trumpeting "the safety and security of the bank with the greatest capitalization in Europe." The bank, with 16 branches scattered around Greece, is offering depositors 3.5% interest if they lock up their money for at least six month...
Foreign banks are offering competitive prices and the allure of safety. Barclays recently launched its new "depositos solvencia" Spanish savings productWhy is this good news, you may ask? It's just feeding the run away from local banks, which have invested heavily in now-tanking local economies and loaded up on sovereign debt.
Here's the answer. My favorite solution for Europe is sovereign default and keep the common currency. (Actually, that's my second favorite. Free market reforms tomorrow, start growing like China on Monday and pay back the debt is my real favorite, but we can only dream so much.)
The natural rejoinder is, what about the banks? Since the local banks have all loaded up on sovereign debt, then the banks will all go under, and won't that be a disaster?
My response has been to remind people of the difference between existing banks and a functional banking system. Countries need a functional banking system. They do not need all of the existing banks to continue, nor do they need all of the existing bank's creditors not to lose a cent.
Europe offers a particularly good playground here, because it's supposedly an open market. Greece is about the size of metropolitan Chicago. It can function well as Chicago does, with banking dominated by local branches of diversified international banks. If the local banks fail, that does not mean Greece will not have a banking system. Just transfer the assets and deposits of failed banks to HSBC, put up a new sign on the front window, and open for business.
And this news adds important facts to my scenario. Those large banks are already operating in Greece, Spain, and Italy and ready to take over.
Of course I am guilty of a bit of wishful thinking here. The article also shows how local banks are fighting back to keep their deposits. And it can't be long before local governments intervene to "save our banks from destructive international competition." In fact, the localization of bank regulation is one of the sadder parts of this whole mess. Had Europe really gone for a europe-wide banking system in the first place, that system would be in a lot less mess now.
Side note: The US discussion is all full of "the financial crisis proves we need more regulation." Europe's banks woes are entirely the product of regulation. What's failing is sovereign debt, debts of the governments that regulate things, not mortgage backed securities put together by greedy wall street bankers. The banks are full of sovereign debt because their regulators told them to do it, not because sneaky financial engineers got them to do it. Here is the fully regulated system on display for us.
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