Over the last couple of weeks we have witnessed a series of conflicting reports from all over the media complex as to why equity markets are under pressure. Predictably, as soon as the markets recover a bit these same pundits come up with all sorts of reasons to cheer.  Needless to say these hysterical reports, bullish or bearish, are entirely worthless.  CNBC, with its ridiculous “fat finger” report, has proved its irrelevance as a financial news source. In fact, this embarrassing story (released with less than an 1/2 hour to go in the trading session) stinks of manipulation and seems to implicate CNBC as a pawn in a propaganda ring.

But I digress, my purpose today is to offer a little clarity to the situation. So without any further ado, let’s map the market developments and see what, if any, conclusions may be reached.

Support:

Government support is the primary reason equity markets have traded higher over the last year. That support has taken the form of, to name a few, ‘cash for clunkers’, foreclosure prevention, home buyer credits and a myriad of Fed liquidity programs.

The result of this support has been the release of government supplied economic numbers that appear promising and suggest GDP expansion (Did you pick up the sarcasm in that sentence? Sorry!).

To sum up, large quantities of Fed-provided quantitative easing and rosy economic numbers are the fuel driving markets higher.

Now Europe and the European Central Bank (ECB) have joined the fray. Supposedly close to $1trillion of liquidity will be thrown into the gaping mouth of the debt monster.

Pressure:

Abysmal – as in the size of an abyss – amounts of world debt are swallowing up prodigious amounts of liquidity.

China - China’s equity markets have for some time been a leading indicator for US markets and risk assets in general.  Recently, the Shanghai Index reached into bear market territory with a 20% decline from the highs of the year.  This is not a good omen.  Moreover, China’s economic expansion could be labeled the lynchpin of world economic growth and the recent measures by China’s central bank to tighten liquidity is, to say the least, problematic for a world drowning in debt. The recent increase in consumer prices of 2.8% in China only exacerbate the problem as it would appear inflation is accelerating.

GS – Common knowledge suggests the markets swooned because of violence in Greece. This is absolutely not the case.  We can draw a direct line to the beginning of this most recent market drop and the day Goldman Sachs faced the Senate tribunal.  Government crucifying of the financial space is heating up and will only get worse as senators fight for re election this November.  GS is the undisputed heavyweight champ of the financial space and if they fall the financials as a whole will experience painful P.E. multiple contraction.  In the last few weeks GS’s credit curve has inverted. Credit protection on GS cost more for 1 year than 5 years. If this trend persists a debt downgrade for GS could be in the offing which would in turn send financial shares tumbling.

This Just In: As I write this the “Senate Finance Committee votes on amendment to create a new ratings agency; yay’s have it 64-35, amendment agreed to…” Can you hear that? That’s the sound of a GS debt downgrade being written. The congressionally approved ratings body will likely remove the conflict of interest inherent in the current private rating agencies business model. Hence, we would not be surprised to see Moody/Fitch/S&P make a preemptive downgrade.

Financial Group (FINs) – FINs have always been a leading indicator for overall market direction. If GS drags the FINs down the rest of the market will suffer. Make no mistake, as the volume of negative news and behavior towards the FINs grows louder the equity markets will suffer.

Andrew Cuomo Investigating Whether Banks Duped Rating Agencies – Huffington Post

Senators Seek Proprietary Trading Ban for Big Banks – WSJ

Greece – I would be remiss if I didn’t include this component as part of the pressure on the markets. The proposed Trillion $ bailout seems dubious at best.  Lest we forget weeks were required to raise just $30 billion and now somehow the finance ministers got together over the weekend and $700 billion was pledged?! Now these ministers must go back to their respective countries and try to get funding. This funding request should be a tough sell. After all, the German people recently voted the ruling party out of one house after the first 40 bil Euro bailout.  In fact, rumor has it a reintroduction of the German Mark may be in the offing. How about England? They have yet to participate in any bailout and now elections have created a coalition (read: do nothing) government.

The simple fact remains that all this talk of bailouts is actually missing the real point: Greece has a solvency issue not a liquidity issue.

Conclusions/Questions:

Q: Will liquidity expansion trump debt implosion?

Q: Will excess liquidity continue to find its way into the equity markets?

Q: Will Chinese tightening and supposed European austerity plans actually drain marginal liquidity?

C: As my mom would say, “we must live the questions and the answers will reveal themselves.” So, remain vigilant, defend principal and let the markets be your guide. Don’t force your will on the market and avoid complacency at all costs.

C: No matter which is the victor, the Tidal Wave of Liquidity or the Trench of Debt, one asset class will not only survive but flourish.  The precious metals, Gold and Silver, are now advancing to new highs against all fiat currencies. I have written repeatedly over the last few years that the true inflection point for Gold and Silver will arrive when their values increase even in the face of a rising US$.  The time is now.  Please hold on to the Bar!

Tags: China, Credit, ECB, euro, Fed, financial, gold, Goldman Sachs, Greece, GS, Inflation, precious metals, silver, US$

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Yesterday, the equity markets sold off over 2% while the US$ and GOLD moved sharply higher. That’s right, you read correctly, Gold and the US$ moved up together. This action comes as no surprise to the partners of RCM. Over the last year or so, I have explained to anyone willing to listen that the real move higher in Gold prices will occur in spite of or along with an initial move higher in the US$.

One reason the US$ initially moves higher with Gold can be accredited to the carry trade unwind which artificially drives funds back into US$ investments. As an example simply look at the strength of US Treasuries yesterday. As risk is unwound money moves into the relative safely of US Treasuries. I write ‘relative safety’ because as currencies around the world continue to devalue owning US Treasuries will not protect buying power. The only true safe haven in a world intent on currency debasement will be the precious metal Gold and Silver.

I will allow Briefing.com to supply the summary of yesterday’s trading. As you will see they have done an exemplary job…

WRAPX End of Day Summary: Stocks Drop Sharply in High Volume Trade

A high-volume selling effort in response to downgrades on the sovereign debt of Greece and Portugal sent stocks to their worst percentage loss in more than two months, but drove the dollar to its best gain in four months… Early trade was rather lackluster as widespread weakness among overseas markets weighed on mood of morning participants… Data didn’t do anything to improve the mood either. The S&P/CaseShiller 20-City Composite made its first increase since 2006 with a 0.6% year-over-year increase, but that was still weaker than the 1.3% annual increase that had been expected… Consumer confidence climbed in April as the Conference Board’s Consumer Confidence Index came in at 57.9, which was not only higher than the 53.5 that had been expected, but was the best reading since August 2008…

Weakness quickly worsened when it was learned that credit analysts at Standard & Poor’s downgraded Greece’s debt to junk and cut Portugal’s debt two notches to A-. Subsequent selling pressure sent the Dow down roughly 150 points in just 30 minutes. It even pushed through its 20-day moving average for the first time since February. It was never able to recover and, as a result, finished near its session low…

The wave of selling sent volatility sharply higher. In fact, the Volatility Index made its way up more than 30% to its highest level since February…

Many market participants fled to the dollar for safety. That gave the greenback a 1.3% gain against a basket of foreign currencies. The euro was especially weak as it fell to 1.3179 against the buck. That puts it on par with its one-year low against the dollar…

Tags: Bookmark and Share Tags: case-shiller, equity markets, gold, Greece, Portugal, precious metals, silver, sovereign debt, US Treasury, US$

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Time to check in with the Greek narrative. The hysteria has quieted down as new backroom deals to avert a meltdown are reported with some regularity.  However, the attempts to sweep Greece’s problems under the proverbial rug are occasionally sidetracked by a pack of rioters, or as is the case below, by the bond vigilantes. If rates continue to creep higher for Greece no amount of posturing will suffice to avert this funding crisis…

Greek borrowing costs imperil budget plans – WSJ

WSJ reports the high interest rates Greece must pay to borrow money are threatening the county’s ambitions to cut its deficit, raising again the specter it may need external aid. Many in Europe breathed a sigh of relief last week when Greece successfully sold €5 billion ($6.85 billion) in government bonds in an auction that saw investors clamoring for the debt. The sale was seen as a key test: The country needs to borrow about €54 billion this year. But debt buyers are demanding higher premiums than officials in Athens anticipated when they planned the 2010 budget, and when they proposed to European Union authorities in January a plan to trim last year’s €30 billion budget gap by €9 billion this year. Indeed, Greece’s filings with the EU rest on assumptions implying that this year and next the country will pay an average interest rate of about 4.7% on its new debt. That figure is consistent with the rates paid on existing Greek bonds, mostly issued in better times. But in last week’s auction, Greece had to pay 6.25% for a 10-year loan—about three percentage points above what Germany pays for similar debt. 

…While the bond vigilantes are alive and well in Greece they are apparently asleep everywhere else.  As the story below describes, credit liquidity has rebounded significantly from the veritable seize up in January and February, which in turn has facilitated an equity market recovery….

Credit market springs to life – WSJ

WSJ reports companies are aggressively borrowing in the debt markets once again—a sign of renewed confidence in the world economy following recent fears that struggling European countries could have difficulty financing their budget deficits. In the U.S., bond sales by companies such as Bank of America Corp. and GMAC Financial Services are on pace to conclude their busiest week since the beginning of the year. In Europe, borrowing by companies so far in March is already more than 60% of February’s totals. “It tells us that financial liquidity is very much on the rise,” said John Lonski, chief economist at Moody’s Investors Service. “No longer do corporations suffer from a dearth of liquidity. This puts them in a better position to take advantage of opportunities that arise.” So far in 2010, U.S. corporations have issued $195.2 billion of debt, excluding government-guaranteed bonds, according to data provider Dealogic, up from $166.8 billion during the same period in 2009.

…In fact, credit investors are so desperate for product it seems anything with a yield will do, as evidenced by the story below….

Buyers scramble for California bonds – LA Times

LA Times reports robust investor demand allowed California on Thursday to increase the size of a bond offering to $2.5 billion from $2 billion. The tax-free general-obligation bonds, which will fund voter-approved infrastructure projects, attracted orders totaling $1.38 billion from individual investors Tuesday and Wednesday. With just $620 million of the original $2-billion deal left, the state took in $3.3 billion in orders from institutional investors Thursday. To fill more of those orders, Treasurer Bill Lockyer raised the deal to $2.5 billion.

Tags: bond vigilantes, California, credit markets, EU, Greece, greek

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Jim Rogers, the perennial purveyor of logic and reason, weighs in on Greece, the Euro and governements’ shameful attack on the “speculator”

BE ADVISED: The video you are about the witness may cause temporary confusion mixed with bewilderment.  It may sound like Jim is speaking a language you cannot identify; rest assured the language is English.  However, he is using an archaic form of the language not usually seen on traditional financial news networks. The linguistic root he utilizes centers around truth and clarity. The side effects are similar to those associated with the inhalation of  air infused with increased oxygen. Your vision will become acute and your understanding of the world around you more coherent, which will of course cause some dizziness. After viewing, the operation of heavy machinery is not recommended.

 To view this video, please click here.

Tags: euro, Greece, jim rogers

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Greek funding update: Deal complete, interest acceptable, funding crisis averted for now….

New Greek €5 Billion 10 Year Bond Prices At 300 Over Midswaps, 326 bps Over 2020 Bund, Comes With 6.25% Coupon 

        Greek debt chief says bids for 10-year bond at EUR14 bln – DJ

DJ reports the Greek government’s offering of 10-year bonds has attracted EUR14 billion in bids, and will close soon, the head of the country’s debt management agency said. In the wake of a new package of austerity measures announced Wednesday, the government earlier launched an offering of 10-year bonds through a group of lead managers that comprises Barclays Capital, HSBC Holdings, National Bank of Greece, Nomura and Piraeus Bank. “The bond offering is going very well, beyond expectations,” said Petros Christodoulou. The government aims to raise EUR5 billion through the offering, but it appears to be heavily oversubscribed. After launch, Greece cut price guidance on the EUR5 billion, 300 basis points over mid-swaps from 310 basis points… “The bidding so far shows that confidence has returned to the Greek bond market,” a senior government official said. “It is a very good development. Everyone is breathing easier now.”

Guest post from Bill H.. His take on the CDS market is dead on and thought provoking, enjoy…

Credit default swap lunacy!

Dubai, Greece and the rest of the PIIGS, now Britain and next the U.S.. Speculators are pushing currencies and sovereign bonds and yields higher and lower almost at will using the CDS (credit default swaps) market. These rocket scientists hedge and or speculate (even attack) currencies with these CDS products and go to sleep at night with a clear conscience. They sleep tight each night not caring what destruction they have caused real people and the real economy and take mistaken solace that if say Greece were to fail “they are hedged”.

I am going to tell you that NO ONE with any CDS product is hedged against anything! First you must understand that if sovereigns begin to default, there will be no end until the last, biggest and most egregious financial entity falls (the U.S. Treasury). These CDS products look good on the books but who can afford to lose and make the winners whole? What currency do you get paid in if you win? My point here is the “counter party risk”. The only way a CDS product could be secure and iron clad is if it were written by a Gold depository and payable in Gold which has been authenticated, assayed and audited as to purity and it actually being there for payment.

We hear that CDS spreads widen for this country or that one. We have even heard this about the U.S. from time to time. But think about how stupid it would be to “insure” against a U.S. default with ANY paper product issued by ANY issuer. When the U.S. finally goes whether it be through default or hyperinflation, the Dollar will ultimately “go away”. So what if you were right? Are you getting paid in Dollars that became worthless? Isn’t this what you were insuring against in the first place? So you win but you receive bazillions of pieces of the very same paper you were insuring against and thus YOU LOSE?

Oh I see…you insured against a U.S. default and will get paid in Euros. This makes all kinds of sense since a U.S. default certainly won’t submarine Europe. This logic works forwards, backwards or in either direction! What I am saying here is that once ANY sovereign default occurs, IT”S OVER! EVERYTHING paper goes boom and in a puff of smoke so does ALL the “supposed” value. EVERYTHING paper blows away and ONLY assets that you can touch, feel and actually USE (manufacturing, farmland, mining) will have or retain value!

THE only true hedge against ANY sovereign default is either Gold or Silver, period. Gold and Silver are real money and will accrue ALL of the “printed” monies’ value over the years. This is a difficult concept to understand but all the fiats that have ever been printed in the past and present really had no value other than “confidence” value. Each Dollar, Pound, Yen, Euro etc. that has come into existence will “spill” its value into the metals upon its demise. I can’t believe that no one has yet (other than Jim Sinclair) publicly explained the stupidity employed in the “CDS protection” scheme.

Credit default swaps are not protection, they are nuclear land mines scattered across the land that will go off in succession after the first one is tripped. OR as Mr. Sinclair says, they will print to oblivion and wipe out all paper values through hyperinflation. Either way if you have wealth tied up in metal or mining shares, you will win in the end. Have you ever wondered why there is no such animal as a credit default swap on physical Gold? Could this be because Gold cannot default? Taking a leap forward, when everything else is defaulting (including and especially CDS products), doesn’t it make sense that fear capital will seek that that cannot default? Now that’s simple logic! Regards, Bill H.

Tags: CDS, credit default swap, eur, gold, Greece, greek, PIIGS, sovereign debt, US Treasury

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The equity markets dropped on average 1.5% Monday and this morning another 1.5% decline is underway.  I mentioned, in A Review of the RCM Investment Strategy, the defensive posture we at RCM have taken. I said, “We have deployed our assets in a manner we feel most appropriate for the environment we are experiencing.”

The following news items should help illustrate what was meant when I wrote, “…the environment we are experiencing.”….

Lending falls at epic pace – WSJ

WSJ reports U.S. banks posted last year their sharpest decline in lending since 1942, suggesting that the industry’s continued slide is making it harder for the economy to recover. While top-tier banks are recovering at a faster clip, the rest of the industry is still suffering, according to a quarterly report from the FDIC. Banks fighting for survival, especially those plagued by losses on commercial real estate, are less willing to extend loans, siphoning credit from businesses and consumers. Besides registering their biggest full-year decline in total loans outstanding in 67 years, U.S. banks set a number of grim milestones. According to the FDIC, the number of U.S. banks at risk of failing hit a 16-year high at 702. More than 5% of all loans were at least three months past due, the highest level recorded in the 26 years the data have been collected. And the problems are expected to last through 2010. FDIC Chairman Sheila Bair said banks are “bumping along the bottom of the credit cycle” and that the number of bank failures in 2010 will likely eclipse the 140 recorded last year.

If “Banks fighting for survival, especially those plagued by losses on commercial real estate, are less willing to extend loans” then what do you think will happen when the following development gains steam?….

SAN FRANCISCO (MarketWatch) — Just when they thought the worst of the mortgage crisis was behind them, billions of dollars in bad loans from the debacle may be rising from the dead and creeping back on the balance sheets of the largest U.S. banks.

Big lenders including Bank of America, J.P. Morgan Chase and Wells Fargo may be forced to repurchase troubled home loans from insurers and mortgage-finance giants like Freddie Mac that had agreed to take on risks associated with those assets during the real estate boom.

The banks are setting aside more reserves to cover the potential costs of such repurchases, cutting into earnings….

Read More…

Of course, we can spend all day debating the reasons for banks’ lack of desire to lend, but the real crux of the issue remains the employment picture. The American people, due in large part to the horrible jobs market, are reigning in spending hence needing less credit….

Mass Layoffs Surge In January, Highest Since July 2009

The BLS has reported Mass Layoff Statistics for January 2010 – the result is plain ugly, and kills any hope for sustained improvement in unemployment data. Not seasonally adjusted Mass Layoff Events (defined as at least 50 persons being laid off from a single employer) surged in January to 2,860, from 2,310 in January, from a 12 month low of 1,371 in September 2009. This is the biggest monthly surge since July when the Mass Layoff Events hit a 12 month high of 3,054. In terms of actual workers, January saw 278,679 initially laid off people. The deterioration was mirrored in the much less credible seasonally adjusted data. Obviously companies were waiting for the end of the year to dump as many people as they could.

ECONX Initial Claims Report Suggests a Much Weaker Labor Sector

The initial claims data weakened for the week ending Feb. 20 as the claims figure increased from 474,000 to 496,000. The consensus expected claims to decline to 460,000. Many analysts, including us, believed that inclement weather conditions across the U.S. would prevent many workers from filing new claims. If this scenario is true, then the actual initial claims figure would be much closer to 550,000… Continuing claims rose a modest 6,000 to 4.617 mln for the week ending Feb. 13. The figure for the week ending Feb. 6 was revised up from 4.570 mln, and the consensus expected claims to remain at that previous level… The job creation data looks to be minimal. The unadjusted claims data from Feb. 6 was down by 85,842 claims while the emergency benefits figure declined 317,933 claims. The decline in original claims is mostly due to workers running out of benefits and it seems the weather made it difficult to process extended benefit applications.

Meanwhile, the health of the credit markets remains the number one issue facing the equity markets today.  You may recall my Feb. 18th post ‘Credit Markets Warning Signal, Foreign Demand for US Treasury Falls ‘ in which I outlined the very real possibility that European credit constriction was migrating across the pond. Well, the following stories add credibility to that concern…

Greek Treasuries Pancake As Bond Vigilantes Chant Death Chorus

Ah, curve pancaking – better known in bond parlance as the death rattle. The Greek 4 Year GGB just traded wider of the 15 Year at a spread of -4bps (yup, negative). This, to continue the parlance lesson, means the bond vigilantes are now pretty sure how the Greek situation will play out. Oh, and Greece, all the best with that €5 billion10 year bond issuance. The 1 Year spot his exploded from just over 200 bps on January 1, to just under 5%, a rout for all short-term GGB holders. We are anxiously awaiting RBS’ rebuttal.

Read More…  

California postpones bond sale – WSJ

California One Step Closer To Insolvency After State Cancels $2 Billion General Obligation Bond Sale

Five days ago a great white hope appeared for the great bankrupt Golden State (Baa1/A-), in the form of $2 billion in GO bonds, which were supposed to be promptly syndicated via underwriters JPMorgan and Morgan Stanley. This would have been the first bond sale for California since November: a critical milestone as the state creeps ever closer to a full-on default. Unfortunately, the creeping just turned into a casual jog after Jane Wells (@janewells) just tweeted that California has cancelled its bond sale “after legislature fails to approve cash management flexibility bill [the] Treasurer said he needed to attract investors.”And seriously, did California think it would succeed where so many other high yield issuers have recently failed?

Read More…

I will rest my case today with a request to review my post titled ‘Looming Defaults and the Effect on Currencies, US$ vs. Euro’.  In this post I describe the competitive devaluation process unfolding and the similarities between Greece and California.

Tags: bad loans, California, commercial real estate, credit markets, euro, FDIC, Greece, initial jobless claims, Treasury, unemployment, US Treasury, US$

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Euro zone gives Greece 30 days to show good on deficit – Reuters

The tsunami of Greek fear begins to ebb and like proverbial clockwork the US$ drops almost 1%, the equity markets rally over 1% and Gold runs back above the $1100 level up over 1.5%.

By now, as readers of this blog, the financial market behavior described above should come as no surprise.  I exposed the market’s playbook on Feb. 9th and directly addressed the perennial gold bears by saying, “They have not owned Gold during its nearly 300% increase over the last 10 years, but somehow, through a haze of delusional arrogance, they are sure prices have peaked.”

In the five days since that comment Gold has rallied 5%.  Coincidence? Maybe. I’ll concede, sometimes we’re simply lucky, but when understanding is acute luck becomes more pervasive and that, my friends, is called success.

For the last few months, the fear of  reduced stimulus and quantitative easing has gripped the markets. In an apparent effort to support the US$, government officials and Fed members have raised the expectations of economic growth and reduced expectations of Q.E.. I have, time and again, called this type of  jawboning nothing more than propaganda. I explained as much in my Jan. 20th post and highlighted the “need for a new round of stimulus” demand from the conference of mayors on Jan. 22nd as the beginning of a shift in the wind.

Well, today, I would like to say, the wind is a steady 10-15kts in the direction of stimulus and looks to be increasing over the coming weeks.  Evidence for this forecast below…

IMF tells bankers to rethink inflation – WSJ

WSJ reports the IMF’s top economist, Olivier Blanchard, says central bankers should consider aiming for a higher inflation rate than they do currently to lessen the chances of repeating the recent severe recession. Mr. Blanchard said the global economic downturn revealed flaws in macroeconomic policy, especially the reliance primarily on interest rates to manage economies. Although Japan had fallen into a decade-long funk despite low inflation and low interest rates, “most people convinced themselves that the Japanese didn’t know what they were doing,” Mr. Blanchard said in an interview. In a new paper with two other IMF economists, Giovanni Dell’Ariccia and Paolo Mauro, Mr. Blanchard says policy makers need to consider radically different approaches to deal with major banking crises, pandemics or terrorist attacks. In particular, the IMF paper suggests shooting for a higher-level inflation in “normal time in order to increase the room for monetary policy to react to such shocks.” Central banks may want to target 4% inflation, rather than the 2% target that most central banks now try to achieve, the IMF paper says.

Australian Finance Minister Says More Stimulus Needed

Feb. 7 (Bloomberg) — Australian Finance Minister Lindsay Tanner said the nation’s economy remains fragile and that it will require more stimulus this year.

Australia’s long-term debt, accumulated through the global financial crisis, is also a serious matter, Tanner said on Network Ten’s “Meet the Press” program.

Read More…

G-7 Vows to Keep Economic Stimulus Even as Budget Deficits Grow

Feb. 7 (Bloomberg) — Group of Seven finance ministers pledged to press ahead with economic stimulus measures even as investors intensify their focus on mounting budget deficits.

Read More…

In conclusion, I’d like to accentuate the following analysis of the Japanese experience with private sector de-leveraging. I feel these issues are at the very center of the problems facing our markets…

Richard Koo’s book about the lessons from Japan’s balance sheet recession: The crux of his analysis is that governments have no option but to stimulate aggressively all the while the private sector is de-leveraging. ANY attempt at fiscal cuts simply results in renewed recession and a further loss of confidence, thus making it even harder and more costly to sustain any subsequent recovery and hence the budget deficit ends up bigger than before.

Tags: equity markets, euro, gold, Greece, IMF, Inflation, QE, Quantitative Easing, Stimulus, US$

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Turn off the TV and forget about the newspaper. If you want to understand the equity market gyrations of the last couple of weeks simply log on to an internet service like Briefing.com and watch for updates to the sovereign debt crisis.   Today’s trading is a perfect example of this new paradigm.  The Greek tragedy has turned into a farce as constant rumors have succeeded in whipping the markets into a frenzy.

Markets opened today’s trading on a firmer note because…

Greek bailout speculation lifts euro – Reuters

Reuters reports euro rose on Tuesday on speculation that European Union nations could bail out errant member Greece, while global stocks were flat and emerging market shares climbed. Expectations about a rescue for Greece followed news that European Central Bank President Jean-Claude Trichet was leaving a meeting of central bankers in Sydney early to attend a European Union leaders’ summit. EU leaders will hold a special summit on the economy on Thursday in Brussels amid increasing worries that Greece and other so-called peripheral euro zone economies cannot handle their debts and deficits. Spreads between German 10-year bonds and Portuguese and Spanish equivalents tightened. The spread with Greek debt was steady, but wide at 365 basis points.

…Then things went into high gear when this story hit the wire:

Germany Preparing Aid Package To Greece, FTD Says — Bloomberg

…The above news hit at 11:48, but wait, at 12:41 the following news splashed the wire and markets swooned:

German govt spokesman says reports about decision on aid for Greece are “unfounded” – Reuters

…But cooler heads prevailed and by 2:43 the market regained its footing as…

Germany considering loan guarantees for Greece, other troubled Euro partners, source says – WSJ

My purpose for the play by play of today’s equity action is to illustrate the lunacy of attempting to build an investment strategy based on short-term market swings.

After a couple of weeks of a strong US$ brought on by the Greek situation, I am inundated with comments from would-be experts that the rally in Gold is over.  These same experts, who are convinced they can spot the top in Gold prices, have been unable to spot the best bull market of the last decade. They have not owned Gold during its nearly 300% increase over the last 10 years, but somehow, through a haze of delusional arrogance, they are sure prices have peaked.  

When will Gold prices peak? Don’t know for sure. Trying to pick a price is a fool’s errand.  But I will tell you this: When Gold is, say, $3000/oz and I’m inundated with comments that prices are headed for $6000/oz I’ll be selling.

The following comments exemplify the actual long term trends we believe require scrutiny during the building of an investment strategy.  Yes, sovereign debt woes are a problem, but so are the debt woes of US states.  Running from the Euro into the US$ appears short-sighted and, to us, resembles the hapless effort of running from the deck into the galley of the Titanic. The only real safety (in a world where governments are playing the dangerous game of competitive devaluation and stimulus leapfrog) is the safety of Gold. Please hold onto the bar….    

In a nutshell, toxic assets have basically been swept under the rug in the hopes that we will outgrow the problem. Leverage ratios across every level of society are still reaching unprecedented levels as the public sector sacrifices the sanctity of its balance sheet in its quest to stabilize the dubious financial position of the household and banking sectors in many parts of the world.

Whatever bad assets have been resolved have almost entirely been placed on the books of governments and central banks, which now have their own particular set of risks, as we have witnessed very recently in places like Dubai, Mexico, and Greece, not to mention at the state and local government level in the United States. We simply have not seen a reduction in the percentage of properties with mortgages that are “under water”, hence the FDIC has identified 7% of banking sector assets ($850 billion) that are in “trouble”, so how can it possibly be that the financial system is anywhere close to some stable equilibrium? – David Rosenberg

Tags: EU, euro, FDIC, gold, Greece, investment strategy, sovereign debt, US$

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After a week of credit market histrionics, Monday morning ushers in a moment of calm…

Greek spreads ease; Portugal under pressure – WSJ

WSJ reports European sovereign CDS spreads were generally tighter Monday, with the cost of insuring Greek and Spanish debt against default falling, although Portugal remained volatile with spreads widening. According to CMA DataVision, Greece’s five-year sovereign credit-default swap spreads—a key measure of credit risk—moved back below 4.00 percentage points in early trading Monday to be quoted at 3.97 percentage points. That’s around 0.1 percentage point tighter than Friday’s close of 4.07 percentage points. That means the annual cost of insuring €10 million ($13.7 million) of Greek government debt against default for five years had fallen €10,000 to €397,000. The pressure on Spain also eased slightly, with the country’s CDS spreads tightening around 0.05 percentage point to 1.61 percentage point, according to CMA. Portugal, however, bucked the trend with the cost of insuring the country’s debt against default for five years rising to 2.34 percentage points, against a close Friday of 2.27 percentage points, according to CMA.

However, this calm is most likely the eye, as opposed to the end, of the hurricane. Speculation runs rampant as to the cause of the Greek tragedy…

 Two Hedge Funds One Bank? Is There A Concerted Effort To “Destroy” Greece?

In the pre-math of the Greek collapse, conspiracy theories are swirling about who keeps blowing Greek CDS spreads wider. The answer, so far completely unconfirmed, is that a large US investment bank (we “wonder” just which US investment bank dominates the sovereign CDS market), and two major hedge funds are behind the CDS “attacks” on Greece, Portugal and Spain. According to Jean Quatremer, and his Coulisses de Bruxelles, UE blog, the plan involves blowing spreads to record levels, and is prompted by the hedge funds’ anger at not having been allocated substantial amount of the recent €8 billion GGB issue, in order to lock in profits from their CDS long exposure. Being thus unhedged with a short bias, their alternative is to continue buying protection else risking to mark losses on their extensive CDS short risk exposure. Read more…

While the previous story sounds plausible and is certainly entertaining, a more pressing and definitive issue plagues Greece….

ZeroHedge: The latest escalation in the Greek crisis comes courtesy of Greek daily Banking News which notes that the latest nail in the Greek coffin comes from formerly major Greek players, Deutsche Bank and Unicredit, which over the past 2-3 weeks have ceased accepting Greek collateral and have pulled out of the Greek repo market altogether….

…Yet even as Greece is concerned about collateral eligibility with the ECB in 2011, the sad truth about its precarious and increasingly non-existent collateral exposure will come much earlier than that. Gradually, the country is becoming financially isolated: if the repo market collapses it is certainly game over as no semi-developed country can continue to exist without this core pillar of the shadow economy. In the meantime the vultures keep on circling.

Tags: CDS, credit markets, Greece

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The equity and commodity markets get rocked as Sovereign debt woes resurface.

The burning question: Will the dramatic widening of credit spreads in Sovereign debt, beginning to resemble the CDS collapse of 2008 in the private sector, lead to a revisit of a 2008 type credit crisis and all the fallout associated with it?…

Greece, Portugal woes intensify – WSJ The Wall Street Journal reports the cost of insuring the debt of euro-zone members with large budget deficits against default rose Thursday, dashing hopes that the European Commission’s qualified endorsement of Greece’s budget plan would calm investor fears. Greece, Portugal and Spain were in focus, with their five-year sovereign credit default spreads moving sharply wider. Greece’s five-year sovereign credit default swap spreads were recently at 4.14%, compared with Wednesday’s closing level of 3.97%, according to to CMA DataVision. Portugal’s five-year sovereign CDS spreads were at 2.09 basis points—their widest level ever—after closing Wednesday at 1.96%. Spain’s sovereign CDS spreads widened to 0.12 percentage point to 1.64%. The moves followed news Wednesday that the European Commission had put Greece under more pressure to cut its deficit; that the Portuguese government sold only EUR 300 million of treasury bills at an auction, compared with an indicative offer of EUR 500 millon; and that the Spanish government had raised its budget deficit forecasts for 2010 through 2012. Spanish and Portuguese stock markets fell sharply for the second consecutive day, with banks leading decliners on sovereign debt worries.

…The jury is still out on the above question but market participants are voting today.  As usual, voting like this is detrimental to long term investment decision making.  I would suggest all take a step back relax and reassess after the smoke of today’s battlefield clears. In the meantime, tomorrow’s employment report may shed some light on the absurdity or validity of  today’s flight into the US$. I stress the word, may, because government released employment numbers are notoriously manipulated.  For those who wish to debate this manipulation issue and wish to cast aspersions about conspiracy theorists please view the following story…

Explaining The Government’s 1.8 Million Job Overestimation In Pictures

Last October the BLS announced it would revise historical payrolls lower by 824,000 on February 5 (this Friday’s NFP release). While this number will not impact the actual January NFP report (a loss of nearly one million jobs in a month would probably even take out the persistent SPY algo that has been hugging the bid for the past 10 months), it will be prorated across all months in the 2008-2009 reporting period. The reason for this adjustment has to do with a huge glitch in the birth-death model, which is exactly the same problem that the rating agencies faced when housing prices plummeted: the birth/death model assumes, in the long-run, jobs are created, not destroyed. Any period of excess volatility in the stock market therefore translates into major prior downward revisions to already disclosed payrolls. And while we know what the current revision will be, the scarier prospect is that the next historical adjustment, due out in early 2011, will be even larger, at least 990,000. This means that the government has overrepresented running payroll data by over 1.8 million jobs over the past 20 months. Read More…

Today, world equity markets suffer, the “risk” trade is reduced and scared investors run into treasuries and the US$.  Meanwhile, the underlying fundamentals of the US$ continue to deteriorate….

Zerohedge: It’s Official: Congress Passes Debt Ceiling 231-195; All Republicans, 20 Democrats Vote Against Raise.  Congress Democrats have just signed off on the US hitting 100% debt/GDP.  About 140% if one adds GSE liabilities which also should be on the budget.

Initial Claims 480K vs 455K consensus, prior revised to 472K from 470K

Continuing Claims rise to 4.602 mln from 4.600 mln

NY Fed’s Dudley says “nothing is on automatic pilot” when asked about ending MBS purchases in March, according to AP – Reuters (The expected end of Q.E. in March has been a major factor in the strong US$ theory since Dec.. Now we see, at the 1st sign of trouble, S&P500 down 3%+ today, the Fed begins to backtrack – surprise, surprise.)

Tags: CDS, commodities, credit markets, credit spreads, employment report, equity markets, Fed, Greece, initial jobless claims, sovereign debt

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