Monday, March 8, 2010

Morning Update/ Market Thread 3/8

Good Morning,

It’s a Monday, so what direction are markets moving? Yes, up, but only slightly so far. Below is a 60 minute chart of the DOW on the left, and a 5 minute chart of the S&P on the right:

Both the dollar and bonds are down, oil and gold are up.

There are no economic reports today and it is light on reports most of the week. Consumer Sentiment is released on Friday.

Below is a good article on Greece’s hidden debt problem. Think they are the only country with that problem? Think again, and America is no exception. What went on to hide the debt and how American companies helped to hide it is simply disgusting, embarrassing, shameful, and far more importantly, dangerous:
Greece's hidden debt soaring

The Greek debt tragedy currently unfolding -- the country's on-balance-sheet debt is 13 times its gross domestic product -- may be just the tip of the iceberg.

More troubling, according to a report out last week, is the off-balance-sheet debt owed by the country, and its fellow, over-indebted nations Portugal, Italy, Ireland and Spain, the so-called PIIGS, representing the five-nation acronym.

The off-balance-sheet debt, where countries guarantee the debt of private developments, many of which had gone bust, could multiply the problem many times -- putting further pressure on the euro, the report said.

Gordon Long, founder of a private venture-capital fund, said in an investor note that there is more than $600 trillion in notational value in the global derivative market, with $437 trillion of it tied to interest rate swaps.

"Any credit event could trigger a cascading event," Long wrote in the report. "It does not have to be default; it could be a downgrade in swap contracts that would do the trick for a collateral call. Something is going to cause it to topple, whether it's a situation in Dubai, Greece or New Jersey."

With this as a backdrop, is it any wonder that the US dollar has been on a strong run since last November against the euro and the British pound? Also, gold versus the euro has risen 16 percent in the same time frame.

Major investors also have a record number of future bets that the euro will depreciate against the dollar over the short term.

"The next 12 months could be very dramatic for the Eurozone," said Robert Chapman, publisher of "The International Forecaster."

" I am seeing many sovereign defaults for the PIIGS as well as in Eastern Europe and the former Soviet satellite countries running into 2011," Chapman added.

International finance-industry estimates have Dubai's sovereign debt load, thanks to the off-balance-sheet debt, exploding to nearly four times its originally reported $80 billion, as other government-backed projects have gone bad after Dubai World's default in late November.

If the off-balance-sheet debt continues to come due, expect the euro to continue to fall in value and the US dollar to gain power. That will, in turn, hurt US companies looking to export goods.

How Greece's off-balance-sheet problem grew is a tragedy in itself. For example:

* In 2005, Greece wanted to develop a Mediterranean beachfront location for tourists but didn't want to float infrastructure bonds to pay for the development because its debt load was over the ceiling threshold set by the EU. So it brought in a Wall Street bank, like Goldman Sachs, which suggested it establish a Special Purpose Vehicle.

* This SPV in essence allowed the public development company to finance the infrastructure project with the Greek government guaranteeing the debt. The project moved forward with no impact on Greece's credit rating -- until the housing economy went south and the developer declared bankruptcy. Greece now has to add the debt to its balance sheet.

So when this scenario is played out a thousand times across the Eurozone, the bond ratings of the sovereign countries are lowered, thereby increasing their borrowing costs and eventually leading to a possible default.
This is how the Greek debt has grown 12 times over the initial numbers it had on the books with the European Union. Iceland and Dubai are the test studies for how the Europeans may deal with the idea of socializing private debt through public funding.

Dubai World's default, which had government backing, put the world on notice that sovereign credit-worthiness was a concern.

And just yesterday, Icelanders overwhelmingly voted "no" in a referendum on a $5.3 billion deal to compensate Britain and the Netherlands for deposits lost in a collapsed Icelandic bank. With daily riots in Greece over government tax policy changes, this may end poorly.

PIIG(ing) out

Portugal, Italy, Ireland Greece and Spain are among the European nations suffering under large sovereign debt loads.

* Countries took Wall St.’s advice and backed private construction debt for infrastructure projects.

* After project contractors go bankrupt the debt burden falls to the guarantor, which is the country.

*Country’s ability to borrow is constrained by higher loan costs due to increased debt limits.

This shifting of massive undisclosed risk onto sovereign states is nothing but a crime against humanity, plain and simple. The people responsible are no better than gangsters, in fact are worse as they are creating far more damage to others. They are pushers of debt, and again, their damage is far more widespread and destructive than pushers of drugs.

Of course the European Union has provisions against bailing out countries. Was that all show to build confidence in the new Euro? Of course it was. Will the central bankers who created it step in to keep their money machine in tact? Of course they will:

March 8 (Bloomberg) -- European leaders are in talks to establish a lender of last resort and limits on credit-default swaps to bolster the euro area and prevent a repeat of the Greek financial crisis.

Plans for what may become the European Monetary Fund and a German-French push to curb “speculators” using derivatives to bet against Greece’s debt are to be ready by June, officials in Berlin and Brussels said today.

German Finance Minister Wolfgang Schaeuble “believes we must learn from the crisis,” his spokesman Michael Offer told reporters in Berlin. Greece is “the trigger” for efforts to avoid similar crises in the future, he said.

German Chancellor Angela Merkel and her fellow European leaders are shifting from rhetoric in support of Greece to regulation as they seek to defend the euro and rally behind coordinated measures in the wake of the global financial crisis.

“Speculators and the markets should know that solidarity means something and that, if there’s a problem, we are there,” French President Nicolas Sarkozy said in Paris yesterday after talks with Greek Prime Minister George Papandreou. “The sooner we say that and the more firmly we say that, the more rapidly we settle the problem.”

More and more socialization built upon the back of debt for the profit of a few. Hey, the people of Iceland did the right thing, congratulations! Tell the central bankers to pound sand!

CNN ran a good interview of Jim Chanos talking about China and what is going on over there in real estate. Worth a listen:

Jim Chanos on China:

Let’s talk about the markets.

Unfortunately, I see a lot of people jumping the bull market gun. The RUT and the NASDAQ made new highs but yet the DOW, the S&P, the Transports, and the NDX have not. Yes, it possibly changes the outlook if they go onto new highs, BUT, what is happening with some making it and others not making it at the same time is called a divergence! This is exactly the type of divergence that occurs at or near major tops. A healthy market makes new highs together, and they do it on volume.

This market reached EXTREME internal readings on Friday, and I am therefore issuing a warning to anyone who is long the market to be very protective. Here are just a few of the indications – the put/call ratio is at a place normally seen at tops, the VIX dove showing great complacency, the McClelland Oscillator is in extreme high readings normally associated with tops, the Advance/ Decline line is at extreme readings normally associated with tops, and finally, the number of 52 week highs on the NYSE reached 458 on Friday, an extreme reserved only for major tops. For comparison, the top in ’07 had 383 new highs, the top in January of this year had 316.

We are close. The valuations are extreme, you have been warned. So, is this now such a “managed” economy that the markets can’t lose more than 10%? Is this a “new era?” An era where the vast majority of the market is owned by semi-government entangled entities who own so much of the market that there can be no serious sellers? Because that is what I am hearing, but I can assure you that a one way miracle market has NOT been created. Valuations do matter, the debt pushers' math does not work and their debt backed games are going to unravel.

I’m just sitting back and watching history unfold. Only a fool would go long into the above statistics.

Once again, I must share a passage of my book about the fifth bubble stage according to Hyman Minsky:
Stage Five – Market Reversal/Insider Profit Taking:
Some wise voices will stand up and say that the bubble can no longer continue. They argue that long run fundamentals, the ratios and measurements, defy sound economic practices. In the bubble, these arguments disappear within one over-riding fact – the price is still rising. The voices of the wise are ignored by the greedy who justify the now insane prices with the euphoric claim that the world has fundamentally changed and this new world means higher prices. Then along comes the cruelest lie of them all, “There will most likely be a ‘soft’ landing!”

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