Archive for October, 2011
The financial market is now enthusiastic about the deal the leaders of European Union reached in overnight summit. The Dow shot almost 4% up today. I, however, wonder how the (today) optimistic investors will react when the actually read the agreement and find out that it was a very vague proclamation solving nothing. I bet they will be panicking once again. European leaders didn’t solve the crisis, they just kicked the can more down the road. The nearest danger of spreading the debt from Greece to other countries was just moved further in time. It may not spread directly now, but it will spread thru the private banking back to other states, but at this time the crisis will be deeper and stronger because other, until then, uninvolved and healthy countries will be sucked into the problem.
The Greek debt write-off is not sufficient to solve its crisis. By 2020 the Greek debt is supposed to drop down from current 160% of GDP to 120% of GDP. But that doesn’t solve anything. Other European countries, such as Italy, Portugal, Ireland and Spain, whose debt is at 120% of GDP or around also asked for help from European funds. Other issue may be that the same write off of the Greek debt is simultaneous with recapitalization of private European banks. At the first look, this may look as a brilliant strategy, but this is nothing more than just pushing the debt from Greece to private banks. But those banks won’t be able to bear such burden of the write-offs and they start bankrupting (Lehman Brothers effect). To prevent this each individual country will provide guarantee for those banks and bail them out (obviously using taxpayers’ money). Thus this debt will exist, but at this time still healthy countries will be sucked into it.
That will return the crisis back and stronger in a half-year or a year period (mid or second half of 2012). However, Europe will be weaker at that point and less capable to fight the crisis.
I wonder if anybody read what was the outcome of the overnight EU summit. As many experts expected, the EU leaders came out with empty phrases and proclamations and no details. The report of the meeting is just three pages long.
Generally, EU talked banks and lenders into writing off 50% of the Greek debt, which with 40% of current face value of the bonds, this 50% write-off is actually a great deal for the bond holders.
The rescue fund shall be increased by 1.4 trillion euros (increase from 8% – 9%), how? Nobody knows yet. The French president is supposed to be convincing Chinese to invest into the fund, but more real looks printing more money. In secret, obviously, since EU doesn’t allow it based on their monetary policy.
Well, we are approaching to the resistance at 1275 zone. Although this rally is impressive and should be respected (and I missed it, because I didn’t believe in it) the question is: Is it sustainable? The answer is NO.
Thus, from short term, this was a great rally, but still within a bear market and I am keeping my market status in correction.
In the morning I thought that there would be no such a fool investor who would be willing to put his money into European debt and here we go! China claimed that they would step in and buy European bonds. Thus I do not know who is a bigger fool here. Or maybe China needs to get rid of some dollars, who knows, but definitely this is comic or tragicomic. I really wonder what Chinese investors or the country itself gets by buying bonds or putting their money into a fund bailing out European countries which will go bankrupt. Am I missing something?
The leaders of EU are debating how to bankrupt Greece effectively and without a sudden shock. They are proposing that banks should write off 60% of Greek debt, but bankers are willing to accept only 40%. But will this write off solve Greek problem?
Partially. It would definitely help Greece to balance their budget, but it doesn’t solve it. Greece will still be lacking money to finance their mandatory expenses and with bankruptcy who will be willing to lend them more money? So even with writing off its current debt, the country will still struggle to get money to finance its bureaucracy, social expenses, healthcare, etc. (what a socialism in there!).
This morning I checked the premarket data to see what is driving or will be driving the market in the morning. And I found an article on CNN Stocks: Optimistic about Europe … for now.
So investors are optimistic this morning about Europe leaders who are going to meet today and later on they should announce a “comprehensive plan”.
Strong words. Really.
European government heads will be meeting Wednesday, after pledging to unveil a comprehensive plan to tackle the region’s debt crisis.
An official announcement isn’t expected until later in the day.
“We all expect the plan is going to happen. The question is — is it really going to be big enough to make a dent?” said Mark Lamkin, founder and president of Lamkin Wealth Management in Louisville, KY
What do you think this plan would be about? What are those optimistic investors expecting? Are they that naive to think that the leaders meet and suddenly the debt disappear?
All they come up with is providing guarantees to irresponsible banks who were buying bad bonds (and possibly knowing it) and now they ask the Governments for bailout, but who will be those paying? You guess it, the tax payers.
And I cannot belief that there are some investors out there who believe in this and are optimistic about it.
Many investors may be celebrating and cheering up the market’s performance these days. The economic data are good looking, Eurozone is close to a debt solution, the market is rising, all is good! Buy, buy, buy…
You may be hearing that or something similar today. But is everything really that bright as it looks?
Check the chart below and answer yourself a question, “Will you be willing to be buying when the market is approaching to 200 day SMA and a major resistance level nearby?”
The last rally was definitely impressive, but it was happening without any corrections on the way. The Eurozone is noway close to a solution and they still may be facing a major issues ahead. The Euro leaders are just kicking the can down the street (mainly waiting for their banks be ready for Greek bankruptcy) and Europe is still in a big trouble although now it may appear that we are going out of the forest. Not even close to it.
We are also facing to a huge overhead supply:
All those people who bought stocks at those levels in the green oval are eager to start selling when they break even to recover their loses. Considering similarities in the market movements and cycles it moves within, we may be turning down to correct this rally.
And that will create a new lower high. A great opportunity to short the market, since we still are in a bearish correction.
Check the similarities between 2008 and today (the upper chart is 2011, the lower is 2008):
In 2007 – 2008 the market had a nice strong rally, which at the end of December 2007 corrected sharply down. Then we went through a side way consolidation and rallied back up to 200 day SMA. Same as today. But then the market collapsed again. Well later on it crashed totally and I think we will not go that far down as in 2008, but we still may see the sharp correction down (see blue line). Note even similar over shots thru the supports on both charts (circled).
Of course, anything is possible in the market and it may act totally different today, but considering the overhead supply waiting for the chance to get out, unsolved European debt crisis, not so good US data, slowing down in China (plus their fraudulent accounting), I think we are still heading down.
My previous timing wasn’t that correct and I took a few losses in shorting SPY, but now I am waiting for the market to reverse into correction to buy puts on SPY once again. This correcting leg will be crucial, because it may be a beginning of the new bull trend if we create a higher low pivot this time.
Last week I didn’t have time for updating my web site. There are only two facts:
1) The market was rising again, this time on earnings
2) I am no longer strongly convinced that the market will go down.
That means I will stay aside a bit in regards to trading SPY. We may go up to re-test 200 day SMA. This may be a beginning of a new bullish trend. But everything may be the right opposite. We do not have sure signal on which way the market wants to go.
Recently, it was literally knocking on the resistance level at $122.7 level and on Friday it broke thru. The law of technical analysis says that as many times the trend re-test the resistance or support as likely it will break it. We tested this level of resistance two times. The market hold at the highs amid bad news from Europe and the US economy. Now it finally broke up amid good news from retailers. But will this hold or is it just a bull trap? We will see in upcoming weeks if the market continues up, or turns down and retest its lows.
Source CNN Money
A broad rally lost steam during the final minutes of trading, but stocks still ended sharply higher Wednesday as investors welcomed the latest plan to recapitalize European banks.
“We’re continuing to see a shift in investor sentiment,” said Art Hogan, managing director at Lazard Capital Markets. “Last week, it seemed like the sky was falling and there was no end in sight. Now, there’s a perception that Europe will come up with a TARP-like backstop for European banks.”
European Commission president Jose Manuel Barroso said Wednesday that policymakers need to act immediately to resolve the long-running crisis. Barroso also said that banks that do not satisfy capital requirements should be barred from paying out dividends and bonuses.
“We still don’t have a concrete plan, but it seems like officials have more of a sense of urgency and are talking about credible solutions, which is exactly what the market needs,” said Hogan.
Stocks have been climbing since the start of the month as hopes for a solution to Europe’s debt crisis continue to grow.
Wednesday’s advance was the sixth out of the last seven days for the S&P 500 and Nasdaq, and fifth for the Dow. The three major indexes are up between 8% and 11% since Oct. 3, when stocks hit their lowest levels in more than a year.
Every development overseas is getting investors’ front-and-center attention. More than 80% of the experts surveyed by CNNMoney agree that debt problems overseas are the most challenging hurdle for the market.