Posts Tagged 'euo'

The Perfectly Written FOMC Statement For Stock Pickers

The concerns supporting a bear view on U.S. indices issues prior to yesterday’s FOMC press release were clear:

1)      “I’m negative on the market because the economy is not recovering.”

2)      “The Fed is killing us by keeping interest rates so low.  Savings accounts are a negative carry, hurting the household.”

3)      “The QE’s were a disaster and did nothing but we’ll take another serving.”

4)      “The banks can’t make money with a flat yield curve.”

5)      “Inflation is an issue.”

6)      “Europe and China will take us down.”

In my view, the FOMC press release was perfectly turned out for everyone except for those misguided souls staying too long at the bond party.  To paraphrase the statement:  the economy is recovering but we’re going to keep rates low until the end of 2014.  Instead of driving the markets lower, investors should do a hosanna, take a breath and start picking stocks – not any stocks, but those more dependent on the U.S. economy.   The rising tide lifting all stocks is ebbing making this a great environment for stock picking.

 

By not hinting at a QE3 while paying homage to an improving economy and labor market – I trust the Fed’s mark-to-market much more so than their forecasts –  a large part of the bear case for US equities was served a debilitating blow.  After a short period of adjustment the market will continue its assent.  Yes, markets do rise as the Fed tightens as long as monetary policy remains fairly accommodative.  But all is not lost as to the Fed and monetary policy.  As with a recovering addict in rehab who has been mainlining heroin courtesy of a benevolent pusher, the Fed will not force us to go cold turkey so I look for a modest bridge to higher rates upon the expiration of Operation Twist in June.

The focus of naysayers will now increase on the purported impact a slowing global economy may have upon the U.S.  and, ultimately, our equities.  What has resonated so loudly is silence on the fact that the U.S.  still has largest economy in the world and that while not entirely self-sustainable, we can drive decent growth given that our reliance on the EU and China as markets for our goods is small relative to our internal consumption.

Banks, already on the upswing from improving credit, upward trending existing home sales, and being the beneficiaries of distressed European banks’ need to sell non-distressed assets at distressed prices, will soon be able to make money on a steepening yield curve.  This environment should be panacea for U.S. banks providing they remain disciplined in feeding out their inventory of homes to an improving market.

Inflationary pressures caused by a weaker dollar will abate, not that the Fed ever saw them as anything more than transitory, pressuring gold but helping the consumer as will higher yielding bank accounts but pity the fool who doesn’t see major principal loss in much small moves in yield.

I continue to like the market primarily because I anticipate upside in this reporting season relative to expectations, laboring under the belief that businesses and individuals are stronger.  I like the USD long versus the Euro short.  I hate the Aussie dollar and added to my short; China is a drag on their export and minerals economy and they have extremely high rates that have to come down.  I am long domestically focused equities.  Technology continues to play an important part in my portfolio, the issue with SNDK specific to their business model (I bought today).  I am opportunistically shorting steel, copper and coal on a trading basis.

Go U-S-A.  U-S-A.  U-S-A.

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The market of the last two days reminds me of my grandfather, Phil.  He was a surly guy and had his voice been disassociated from his body, one would have envisioned a much more stout individual than he actually was. Gravity had taken its toll as he advanced into his 90’s, shrinking his frame to little more than five feet two on his tallest days.  The often inverse correlation of age to patience took its toll and his gruff and demanding personality continued to overshadow a diminutive frame, expanding to a size that would better fit someone sporting the physique of Ray Lewis or Vitali Klitcshko.  Phil was never indecisive in his demands but increasingly, he never wanted what he asked for.   The following true story provides an example and a parallel to today’s market.

“I’ll take the sirloin,” he grumbled.

“Of course, sir.  How would you like it prepared?”

“Medium” he groused in response.

The kitchen turned it out perfectly medium but his rote response, his knee jerk reaction, was to send it back.

“This is raw,” he said, misconstruing pink for red.  “It needs more fire.  I don’t want to see any pink.  I want it well-done,” he barked, clearly contradicting his original order although he didn’t see it that way.

The waiter did as he was told and again delivered the steak perfectly prepared to order; well-done, not charred.  My grandfather’s rebuke was even more harsh.

“This is burnt,” he said, chastising the defenseless waiter.

And so it went.  I left significant compensatory damages behind, padding my grandfather’s meager tips, hoping to assuage my embarrassment and to maintain my good standing with the service establishment in New York City.

The moral: .   While you can hardly compare ordering a steak to positioning a portfolio but if Phil had not pre-judged the result, determined to return the slab of meat even if it came out perfectly cooked, perhaps he would have been able to profit from a good result.

Paris Hilton, Europe and China, Energy – Natural Gas: the new HK and CHK, AAPL

The ratings agencies continue to be as effective as Paris Hilton at a spelling bee as seen by Moody’s latest action of putting some banks under review.   The real troubled period for the U.S. banks has, for the most part passed, so near as I can tell the ratings agencies are pressing their shorts.  To paraphrase the anti-motto of the UFT: “Those that analyze, analyze and those that can’t, work for the ratings agencies.”  Throughout my career, I never recall anyone resigning from a fund or investment bank to go on to the greener passages of the ratings agencies.  “I’ve finally made it; my dreams have come true.  I’ve landed this incredible position at S&P.  Sure I will have to get a night job to make up for the lower pay and have to adjust to working in a cubicle the size of a bathroom stall – it’s not easy balancing my family pictures on a roll of toilet paper – but I have my nights free and significantly less pressure since there is no penalty for being late or wrong.”  As a comedian feels about a significantly overweight individual with a very bad toupee, we should all be indebted to the ratings agencies for providing us with such easy fodder.

 

China continues to be a primary concern for me. I noted yesterday the downside of China’s check in the mail commitment to assist in the European bailout as a sign that things are worse for China’s economy than the market has believed.  I postulated the Chinese are seeing more than passing weakness in their economy as a derivative of the weakness in Europe, their largest trading partner.  And today we see the rationale for China’s magnanimous and proactive statement of financial support.  Foreign investment in China is declining and is at the lowest level since 2009, the bottom of the last recession.  Earlier in the week, the city of Wuhu terminated their policy of providing subsidies to home buyers at the behest of the central government, signaling to me that they are more concerned with a property bubble and inflation than they are with a slowing economy, recognizing what Greenspan failed to see.  China bulls remain steadfast in their conviction of a soft landing, the strategy underlying this belief is that the communists will deploy their massive (but fading) foreign reserves in support of Ferrari driving real estate developers, overextended municipal governments (40% of revenues from property sales and subsequent deals to develop), shadow financiers and the occasional overextended homeowner.  Now add in profligate European sovereigns and we have the first “born again” communist country.  Somehow, I believe this will not be the case, given their very long term view; they will let these folks all suffer their sins to a large extent and not be as generous as a Greek politician who has had way too many shots of ouzo.

 

However, with Europe estimated to account for approximately 18% of their trade, look for  increasing comments professing support.  In fact, China may decide to tender for the EU rather than picking off their assets piecemeal.

 

Greece will ultimately default even though the troika may put them on an allowance rather than providing a lump sum.  The installment plan buys the troika more time to put together a plan to ring fence the other over extended sovereigns.   A Grecian default, not to be confused with allowing the gray to grow out from your scalp, would result in a knee jerk reaction lower in the markets and then a move higher as the credit markets realize that the EU is finally ready to enforce fiscal discipline.   This would actually cause a major rally in the Euro but for now I am staying short, having rebuilt the position over the last week on the belief that all the good news was out and as crowded as the short trade was, the long trade was now the more popular investment.

 

I’m still in the camp of consolidation with somewhat higher equity exposure in lower beta, value stocks and short positions in commodities such as coal, steel and copper.    Perhaps we get a reaction move lower but with the massive liquidity in global markets and more due on 2/29 from the new and kinder “ECB”, bonds are the riskier asset and stocks more attractive.

 

And  one more thing, Apple.  I get that the stock action has accounted for a large percentage of the underlying averages but two things: the story is far from over and the market can move independently from the shares of AAPL.

 

Natural gas.  Looks like the lows may have been put in.  At the end of the day, we’re capitalists and the energy industry in this country is still one of the best managed sectors we have.  While the glut is not over, and hopefully the government recognizes the wisdom of incenting greater usage of natural gas as a replacement for crude, the shut ins are encouraging.  Of course, while the warm weather has increased “inventory” levels of natural gas and coal, these will be depleted at some point and are arguably reflected in the price of the equities to a large extent.  We have two CEO’s in energy that actually do what they say they will do: Floyd Wilson and Aubrey McClendon.  Floyd has been a major creator of wealth as he built and sold, to the benefit of shareholders, 3 companies. He is now in the process of doing it again with Halcon Resources (HK, a ticker in the Hall of Fame for its association with Petrohawk, has had its jersey unretired).  He makes no bones about it: I will build it and exit.  The $550 million he brought to the party underscores his commitment.  As to CHK, admittedly the debt levels, not so onerous in a different environment, are squarely in Aubrey’s sights and he has surprised the Street yet again by targeting higher levels of asset sales and further pay down of debt.  Underlying this, and somewhat unnoticed, is the transformation of a company too dependent upon natural gas (they have also announced they will shut in some gas)  to one with a stronger focus on liquids.  This is what will also drive the new HK – a focus on liquids as opposed to Petrohawk’s dry gas model.  Top CEOs understand and respond to changing market dynamics.

 

Disclosure: I am long HK, CHK, EUO and short AAPL puts.

The Market: New Year’s Resolutions Are Made To Be Broken; More Positive On US Equities

The Market: New Year’s Resolutions Are Made To Be Broken

 

I sat back and marveled at the action in the global markets on Tuesday, wondering if these non-human entities had all of a sudden turned human making New Year’s resolutions to ignore underlying fundamentals and rally 2% a day. But guess what, markets don’t drunkenly warble Auld Lang Syne in symbolic banishment of times gone.  There is no Lord of the Calendar presiding over the indices, ripping the pages of 2011 from the binding, erasing the memory of an ailing global economy, resetting expectations to a level of attainability where economic indicators such as Eurozone PMI indicating a contracting economy are now a positive indicator.  In fact, the only symbolic symmetry I can find is in the economic hangover rattling the brains of money managers finance ministers and newly crowned technocrats the world over.

 

So as January rolls around we are still faced with the same positives and negatives, each release of data driving the markets, each tick of the currency market correlated to the price of commodities and equities.  But here’s THE but: I am more attracted to US equities than I was in 2011.  That is my resolution for the New Year BUT unlike those who resolve to lose significant weight in 2012, my complete transformation won’t happen in one day although it should endure past the next buffet – I mean, rally.

 

Yesterday’s Unicredit rights offering was not a positive sign for the markets.  The 27 investment banks underwriting the offering reportedly accounted for three-quarters of demand for the $9.8 billion offering, a high price to pay for a call option on future fees and one which toxifies (literary alert: new word) their balance sheets in the name of fees and, no doubt, in response to arm twisting by the ECB.  Shareholders were diluted to near zero and the deal was underwater from the first tick.   Can’t imagine there is much appetite for these types of deals going forward as it will swell “bad” assets at the banks involved, somewhat ironically I might add.

 

I still believe that we will see nationalization or partial nationalization of some banks.  The reason is simple: as with Unicredit, their problem loans and refinancing needs exceed their market caps.  Additionally, compliance with Basil standards has led to these banks pulling in credit lines, the most immediate response, which has stifled credit and slowed economic growth.  This, of course, is why the ECB has initiated their lending program.  I surmise that Draghi has had conversations with the banks taking advantage of this lending facility to participate in the new issue market.

 

Next week is critical as Italy and Spain come to market seeking capital from charitable buyers.  European debt is actually not a bad play if you can hold it longer term because it is extremely unlikely that either country will default.  However, I’m not playing and believe the price they have to pay to fund themselves will be extraordinarily high and for Italy this is only the beginning of their refunding.

 

All of this comes down to the fact that there is still no plan to “cure” the credit crisis in Europe, absent austerity measures that will likely not be enforced or enacted to the necessary magnitude and will only be effective in continuing to drive the EU economy into recession.  It is a lose-lose situation.  The loan facility has removed fears of a Lehman type moment but that is not nearly enough.  We still need to see the heavy artillery from the EU in the form of stimulus.  For example, Italy has had one of the slowest growing economies over the last 20 years of all OECD nations.  They can’t cut their way to growth.  I look at the banks continuing to park funds overnight with the ECB at record levels as insider trading: they know their market better than sell-side analysts or pundits and if they are willing to take such an imbalance in rates of return in exchange for the safety of the ECB, the problems are as bad as I imagine them to be.

 

But China will save us all!  No they won’t; they will look out for themselves and prey on the markets as they always have.  They see commodity prices declining so they will not enter the markets and be the support mechanism until they are down to their last copper penny.   China is on the bad end of two phenomenon:  its property bubble bursting and its primary end market’s  – the Eurozone – declining economy. Their trade surplus declined from $180 billion in 2010 to $160 billion 2011, numbers that any other nation would be happy with but not the Chinese.  This is positive for the US but may be a short lived victory as they dropped the value of the yuan this morning, a reversal of prior policy and a move that will undoubtedly flame already tense relations with the US.  This is a strong indication that the Chinese are very, and justifiably, concerned about their economy markedly slowing despite the recent PMI release.  This slowing will, of course, hit the global economy but especially Australia which is why I am short the Aussie dollar, albeit small for now.  Additionally, the property market in Australia is in horrendous shape and significantly hurting their banks and populous.  They have to lower rates, further pressuring the currency.

 

Now here is the good news as I see it and it resides squarely with the U.S. market and as a devout patriot, I couldn’t be happier.  The US treasury and stock markets are the global default markets of choice. Despite 2011 4Q negative pre-announcements hitting a high previously seen during two prior recessions in 2001 and 2008, the economic data is getting better.   Today’s jobless claims number continues to trend downward, which I believe is a function of a smaller sampling and companies having already cut through muscle so perhaps not an indication of a vastly improving employment picture but positive nonetheless.   Corporate earnings lag the improvement in the economy as companies ultimately respond by hiring more workers.  However, I do see earnings estimates continuing to decline, particularly multinationals from the combination of weaker export markets and a stronger USD.  Analysts are too optimistic in their S&P estimates for 2012.

 

So I remain relatively lightly position in equities, short the Euro against the dollar and short the AUD.  The U.S. equity markets will continue to react to the worsening situation in the EU and have a tough time rising near term.  However, asset allocation to equities, which I expected to see last year and perhaps we did to an extent, will ultimately drive equities higher so I don’t mind increasing my exposure opportunistically.

 

My preference is in defensive, domestically focused companies including healthcare, specifically managed care, nat gas, well-positioned retail, MLPs, utilities, US telecom and strong brands such as SBUX.  Some of my specific holdings are: CHK (CEO continues to pay down debt and restructure production toward liquids from nat gas as he said he would), WLP (inexpensive, buying back significant stock, defensive), NS (7.5% yld, insider buying), QCOM (market leader), GM (cheap but not in love with name), KO (yield, defensive but currency issues), EUO, short FXA.  Would not mind being short LNKD, GRPN, NFLX and ZNGA. This earnings season will be marked by currency adjustments and caution about Europe so I will mostly stay away from those companies playing in those areas.

 

Meanwhile, with some stability returning to the political scene in the US and Romney moving to the forefront, any sense of his emerging victorious in November will finally motivate US companies to spend the massive cash hoard on their balance sheet.  This is not an immediate event, however.

 

So there you have it. Nothing much has changed, the focus required to write 20”12” instead of 2011 really the only thing new.  I get the hang of that relatively quickly, usually after writing about 5 checks and filling out a few forms.  The markets however, have not changed their ways at all, renouncing their resolutions after a mere two days.

 

In sum, I am more positively disposed to the markets and have slightly increased exposure but want to get a better glimpse of the earnings season and the critical refunding periods for European debt before getting longer.

Europe: The Lehman Moment Is Fast Approaching

I was bearish before; I’m even more bearish now. European sovereigns are evidencing a lack of confidence in their own bailout plan and the Lehman moment is fast approaching.  Have to be crazy to have much, if any exposure, to this market.  We will hit new lows.  How’s that for dire?

Building the bailout fund is incredibly similar to building a book on an IPO or secondary, something I have done hundreds of times. I can tell a bad deal from a mile away. This deal is bad.  With a hot deal, everyone wants in regardless of their fundamental view.  Funds will even play in an “okay” deal if they are confident the syndicate bid will support the selling pressure.  Sometimes, a fund is even willing to take a small  hit in the interest in maintaining a good dialogue with the Lead Managers.  But no one willingly goes into any deal if they expect to lose substantial funds.  Insiders – in this case, the EU countries with the most to lose if the deal falls apart – often add to their holdings on the offering, justifying it as a capital infusion or a necessary sacrifice.  If the UK were convinced the current plan to stave off European default would solve the crisis and substantial principal wasn’t at risk, they would gladly contribute rather than being labeled the “bad guy” by sitting out the deal.   The UK, however, recognizes that this transaction will break syndicate bid before the shares are delivered and that they have to keep their powder dry for when contagion hits their shores in a much bigger way.  Once it becomes clear to a book running manager that the deal is being given the cold shoulder by the conventional buyer, they then approach others, such as sovereign wealth funds.  In this case, that would be China but they have said no as well.

Coming up 50 billion short on a 200 billion euro book is a huge miss.   Unlike a lot of IPO’s and secondaries, the EU bailout can’t be downsized to get it to the market in an effective manner.  And by the way, a lot of downsized deals often fail because the market regards them as troubled.

Ultimately, the markets shun the underwriters with poor performance by getting their borrows lined up even before pricing.  Given the track record of the EU and IMF, the UK and US have already decided the ESFS is a short.

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France, Italy – Slow and Angry; EU Ratification Will Fail; US Stocks.

First some good news, the ratings agencies have finally cast themselves as the most consistent market indicator with an inverse correlation of 1.00  as downgrade events are now reflected in market moves higher.   Enough said.

Monti has not been in office long enough to change a roll of toilet tissue yet already had to call for a confidence vote.  This does not bode well for the future.

My view has not changed.  Achieving ratification of the EU treaty will be akin to asking turkeys to vote for Thanksgiving.  And even if the 24 non-French, non-German, non-UK governments do approve this union with a gun to their heads, compliance with their provisions will be tough to come by.  Monti made that clear today in a veiled threat to the Germans

“To help European construction evolve in a way that unites, not divides, we cannot afford that the crisis in the euro zone brings us … the risk of conflicts between the virtuous North and an allegedly vicious South.”

In other words, “don’t even think about asking us to do anything that we don’t want to do such as collect taxes.  Culturally, we don’t do that kind of thing.”

We saw some minor protests in the Italian parliament regarding the austerity measures, with the largest Italian labor union protesting more loudly on the cobblestone streets.  Put into perspective, these protests are targeted at austerity measures being implemented by the Italian government.  Can you imagine the anger when the Germans try to pull in spending?  The Greeks rioted in the streets against fiscal prudence and cost G-Pap his job before the treaty was a twinkle in Merkozy’s eyes.  I’m going to wait until Solution #6 makes the rounds at the next summit.

But I finally understand the lack of speed which the French operate.  In fact, yesterday’s legal accomplishments, the conviction of Carlos the Jackal for blowing up part of Paris and the conviction of Jacques Chirac for raping Paris, only took 30 and 20 years, respectively.  Translated into sovereign debt issues, that should give French banks enough time for the terms of the CDS they wrote on sovereign debt to expire.  Brilliant strategy.

Germany has made it clear they won’t pay up, the US will not contribute to the IMF to bail out Europe and China will use their foreign reserves to buy Europe – not European debt – but rather Europe.  I have asked many what they see as the solution to this crisis and no one has come forward with a solution prior to Europe’s Lehman moment. That’s what it took in the US, and we only have a 2 party system.

French banks will be nationalized as will others throughout the EU.  But that is only part of the solution. Ultimately, the other twin, Mario Draghi, will have to print money and buy more bonds.  The decline in the Euro is far from over – this is only a momentary respite.

Of course, none of this bodes well for US equities.  While Europe represents only 15-20% of our end market, the contagion casts a much bigger shadow.  S&P estimates will have to come down as the dollar strengthens, resetting valuations.  Europe will cascade into recession and China’s economy will continue to contract, further hurting global growth and the US recovery which has been tracking nicely.

The E&C sector and commodities have to continue to weaken as global growth slows.  I like domestic stories that are not dependent on a burgeoning economy for earnings growth.  Managed care remains a favorite and these companies continue to raise their earnings outlook as MLR improves with fewer doctor and hospital visits. WLP at 8.3X EPS with a massive buyback (20% of shares on top of 5% retired earlier this year) still looks cheap.  If employment ever picks up, this will add to growth. Sequestration provides a better result for them than the elusive budget deal. Health care overall looks attractive. MDRX, a company that provides technology solutions to doctor practices and hospitals, supported by a $30 billion incentive boost from the government to put all patients on electronic records, is inexpensive and it is an attractive acquisition candidate for a company such as ORCL that is on record as saying it wants to increase its presence in this business.  I took a small position in CSC, a stock that has been justifiably destroyed, while I do more work on it.  Meantime I get a 3% yield which appears safe.   And of course, there is QCOM, unique in its fundamentals in the tech space.

RIMM – the only question on this company is which will last longer – my phone or the company. Right now its neck and neck.  I used to love my Blackberry but now the service and my 18 month old phone, perform as well as Michelle Bachman at a debate.

As to Bachman, she has to stop using Tammy Faye Baker’s make-up person to be taken as a “serious presidential candidate” (her words).

Europe Falls Short Again: What’s Next for Commodities and Stocks

“I could not have been more clear, I specifically asked for a bazooka and all I got was this little long range pea shooter,” said Mr. Market, clearly dejected.

Europe has done it again, taken the markets to the brink of despair, then sweet talked investors off the edge.  Frau Merkel has proven herself to be as alluring as the mythological Greek Sirens, her sweet songs of a stronger European Union with tighter budgetary controls enticing enough to convince unsuspecting traders to increase their risk.  But like a pimply faced teenager stuck at first base, they too will feel unsatisfied and longing for more.

At least they got smart about one thing, or so they believe, extending the deadline for the seminal announcement until March.  After the last two short window lead ins, they realized it takes months, or more, to craft a plan rather than a fortnight.  They will still come up short as each country realizes what Britain did which is they have no interest in being governed by the same country they had major problems with, well actually not exactly problems, more like out and out war.  However, even if reasonable  minds say that was then and this is now, the cultural divide between each country will prey upon this agreement.  But even if it does pass – it has not been officially ratified – and the countries needing approval from their broader government secures their assent, the very core of the agreement is flawed.  Let me see if I get this right: a country fails to either establish or enforce a budget in line with the requirements of the EU so the EU will then assess heavy sanctions upon the profligate nation.  Yup, that will work.

Candidly, as to my kids, I was not much of a disciplinarian. “If you do that again…,” I would say, both they and I knowing they would do it again and I would say that again.  Thankfully they turned out great.  Not so with Greece.  Without moral hazard, countries will continue to do what is in their politicians’ best interests.  Greece lied their way into the EU and the EU is responding with bailout after bailout.  I still believe allowing them to fail would be the best result.

This is the fifth bite of the apple for Europe and they continue to come up short, lagging a step behind.  Still no ring-fence, still no plan to save the banks, still nothing of substance; just words.  They are behind in everything, even video games.  The Mario Brothers went out of style a long time ago and the Italian version – Monti and Draghi – are not showing themselves to be Super Marios at all.  Draghi can get there if he opens the purse strings with a massive liquidity push, buying even more bonds than the ECB has in the past,  but despite two easings, he is still prone to alligator arms like the clients I used to wine and dine from my perch at Lehman;  his hands don’t reach the bottom of his pockets.   And with the most recent cut in rates being the result of a divided vote, it may get tougher for him to cut further given the European single mandate.  However, as the global economy slows and the USD strengthens, inflationary pressures will ease providing cover more rate cuts.

The banks still need $153 billion in new capital which I don’t see how they can raise without nationalizing some of the banks. But Santander does have a solution: they will just lower the risk level on their assets. Yup, that worked for Lehman.  So much for paying heed to the EU.  And should there ever be  a default and the CDS insurance kicks in, the global financial system will see a bigger meltdown than a forty-year old Japanese reactor.

The AAA ratings in Europe will be a relic of the past, no question as they are in virtually everyone’s mind, the only unknown is whether this will mark a near term bottom.  These ratings agencies continue to be an embarrassment, always multiple steps  behind.  Rumor has it that S&P management is urging their employees to contribute to the Herman Cain campaign for President.

Meanwhile, China continues to be slowing and I believe there is little they can do, or want to do, about the real estate bubble popping.  This bodes poorly for commodities.  With construction slowing, China has enough stockpiles of needed commodities to wait for a further decline in prices.  This is what they have always done when able and this is what makes them great traders.  They are like a private company, not worried about quarter to quarter earnings, taking a long-term view.  They were Warren Buffett before Warren Buffett became Warren Buffett, buying when others are fearful.  But with their primary end market, Europe,  going into a recession, possibly depression, the Chinese are limited in terms of what they can do to drive growth.  They would rather look for defaults and then step in and buy Greece or maybe even Hungary – its time to move on now that Taiwan seems under control.  India, though, not so much. The slowing in their economy, while not a complete surprise, is not welcome nonetheless.

This slowing will also hurt crude.  If Iran were not in the mix, we would already be trading in the 80’s to low 90’s.  Inventory figures have not been very good.

Euro short/ dollar long continues to be my favorite position.  As to stocks: I remain very light in exposure and tilted toward defensive.  Commodities look cheap but they always look cheap on the way to the bottom. I can be patient.  There has been too much beta chasing recently, in stocks such as X, that has to unwind.

The strengthening of the dollar will be as much a result of the strengthening US economy as well as the crumbling European economy.

So where can I go wrong?  The only way out of this is for massive stimulus by the ECB.   IMF rescues haven’t necessarily helped in the past. I am again inserting these charts I borrowed from JP Morgan:

IMF

The Icarus Market: High Fliers Beware

Daedalus would have made one helluva portfolio manager during these troubled times.

He was a man of moderation, caution and ingenuity.  It takes all three to succeed, or at least not lose, in this environment.  King Minos had imprisoned Daedalus and his son, Icarus, in the Labyrinth as retribution for a number of heroic acts.  With escape routes by land and sea impregnable, Daedalus used his ingenuity to fashion a set of wings for he and Icarus out of wax and feathers.  Before taking flight he cautioned his son to not fly too high lest the sun would melt the wax nor should he fly too low for the sea would dampen the feathers. Moderation, mid-level altitude, was the best course for escape and survival.

As the myth goes, Icarus had quickly mastered the use of his new wings.  He would soar and dive, soar and dive, each time extending the upper and lower levels of his flight path.  Alarmed, Daedalus repeated his warnings but the words were lost in the vacuum of the skies. Having in his mind successfully tested the boundaries of flight, Icarus decided that soaring into the skies was much more exhilarating than maintaining a steady path.  He flew higher and higher, unaware that the sun was beginning to take its toll.  The wax melted, the feathers floated down and Icarus crashed into the sea.  As he was drowning, he could be heard to say: “Damn, if I had only gotten out just before the top. Next time…”

This is an Icarus Market.  The rallies, the feelings of euphoria, suck people in and they ignore the risks, as their focus turns to the exhilaration of higher highs, a new trading range, much like Icarus extending upward his flight path.  They focus on the positives, not the negatives.  Like Daedalus, I am suggesting a moderate path, not net short and not all in long.  While I believe that the risk may be to the upside, there are too many unresolved, potentially devastating issues for me to throw caution to the wind.  My exposure remains light.  I like defensive stocks or stocks not dependent on the economy.  WLP (despite issues from the Super Committee), QCOM, value plays – my Ahmadinejad stocks as I like to call them because they are so hated (small positions in RIMM, HPQ which I shaved a bit and CSC), short EURO -long USD and of course, yield equities.  Coal continues to act like garbage and steel had no basis for rallying.

Near as we can tell Europe has not meaningfully progressed toward a workable solution to the crisis, announcing a less than suitable framework for resolution.  What was missing from the Merkozy plan was a ring-fence  for Spain and Italy, the two major trouble spots, and funding.  From the recent headlines, they are no further along to increasing the ESFS than they were then, with France still looking to the ECB in order to preserve their AAA rating, while Germany wants no part of bailing out the Icarus like French banks that assumed much too much risk. France’s AAA is gone – the S&P fat finger flub reminding me of newspapers that have already written the obituary of dying celebrities in advance of them taking their last breath.

And Europe’s recession will spill into the US, directly, and indirectly, through China.  US multinational earnings will of course be hit by recession in Europe so look for the S&P estimates to decline. China’s major end market will also suffer, continuing to pressure their exports.  And, while on China, is anyone still hanging onto the laughable hope that this bastion of self-interested opportunism is going to bail out the EU?  They won’t even do the easy stuff such as sanction Iran.  They have their own issues to contend with.

Before moving onto actual data, here’s where I am.  I fly to the underbelly of Daedalus.  As I weigh the pros and cons, I am encouraged by the US economy while expecting some moderation of corporate enthusiasm as seen in the recent reporting period.  I do not believe that we can use historical measures for determining that the market is compellingly cheap since we are in a low growth environment.  European troubles concern me the most and I would rather wait for a legitimate solution to be announced than get in front of it. Thus I don’t see significant downside to the market because each day the bar gets set lower and the bad becomes the not so bad.  If I had told you a year ago that Spanish and Italian bond yields would be just below and above 7%, respectively, you would have ventured a target on the S&P of 1000.  But the market has shown a tremendous capacity for resetting its threshold for bad news. So we will wallow in this extended trading range and likely not revisit the lows.  In fact, more money can actually flow into the US equity markets as it exits Europe but I fear that is a wish and not reality.  I would potentially turn more positive if I thought that more European Prime Ministers were poised to resign; each of the last two was worth a decent market rally.  There are 15 more PM’s in the Euro that are candidates with relative value S&P points of 5 to 15.  And even though there are no working monarchies, if say a King Juan Carlos abdicated, I would be willing to throw in a mid-afternoon rally for that – what the heck.

And the IMF will not be the answer even if they toss more chips into the pot.  I offer these charts from JP Morgan’s strategist, Michael Cembalest, showing that promises by the IMF have not yielded a great result in the past.

IMF

And while I’m in a plagiaristic mood, here is a chart from my friend David De Luca that I had sent out last week along with some commentary.  It shows the fear in equity markets. If you are one of those who believe the credit markets are leading indicators of the direction of equity markets then its time to head for the hills.  Within the past week almost $45 billion was taken out of the banking system and placed at the Fed, matching the move last seen in September 2008.  Surpassing the $108 billion peak post-Lehman, $125 billion is now being held at the Fed representing funds for loans that won’t be loaned anytime soon.  As the chart below indicates, this size withdrawal usually leads to a steep decline in the equity markets but that has not occurred yet as I do not believe today’s decline in the futures has anything to do with this. My point is that a whole lot of bad news is being obscured by other bad news or worse, bad news that is perceived as good news such as when a major corporation (read: country) loses its CEO (read: Prime Minister) without any replacement.

Repo


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