There are often true
experts posting on trader boards. Here
is a post by "Prudent1" on a trader discussion board I frequent…I don’t know if
Prudent 1 is an expert, but his post is very interesting and thorough He wrote:.
“The
expectations going into the June 28-29 EU summit were extremely low. There was
a sense up until late in the evening on the 28th that the entire summit could
collapse in acrimony. Up until the evening of the 28th the Italian and Spanish
heads of state were essentially playing a game of blackmail, threatening to
scuttle the entire summit unless short-term measures were enacted to lower
their nations' borrowing costs through collectively financed purchases of their
nations' sovereign bonds.
Thus, in this context, the fact that EU leaders agreed on anything is being experienced as a major relief by global financial markets participants.
However, when one examines the details of the agreement - and especially the lack of details thereof - there is little to get excited about. First, there was absolutely nothing new in this agreement that should have surprised anybody given that everything agreed to had already been publicly pre-approved by Germany. Second, the steps approved at the EU summit had been universally perceived as insufficient by market participants prior to the meeting.
Far from serving as a source of optimism, everything about this agreement merely serves to highlight the fact that a major economic crisis in Europe is virtually inevitable.
It must
clearly rank as one of the most non-committal "agreements" in the
history of international summitry. Let's review the key points:
1. The most important aspect of the agreement was opening the "possibility" of the ESM (European Stability Mechanism) providing bailout funds directly to banks rather than through loans to sovereigns (which would then recapitalize the banks). The advantage of this is that the resulting debt will not appear directly on the balance sheet of the home countries of the banks being bailed out. However:
A) Direct ECB financing of the banks is a mere "possibility" that is being conditioned on a whole slew of prerequisites. ..B) The ESM has an upward limit of $500B of funds that it could eventually deploy. These funds are purely theoretical at this point because they have not even been raised yet. For the sake of argument, let us suppose that the funds are raised successfully by the ESM. Let us also assume that the currently projected $100B is used for Spain's bank bail-out. Ireland, Greece, Portugal and banks from other European countries will also want bailout funds for their own banks. (Ireland's Prime Minister has been loudly saying that they want in and the text of the agreement suggests that this request will be granted). Thus, realistically AT LEAST $200B of the $500B will be devoted to bank recapitalization. That leaves a theoretical $300B to purchase sovereign debt. That is peanuts; it does not constitute a credible vehicle to control the sovereign debt crisis. Most analysts agree that a minimum of 2 trillion euros would be needed to constitute a credible sovereign bond backstop….
1. The most important aspect of the agreement was opening the "possibility" of the ESM (European Stability Mechanism) providing bailout funds directly to banks rather than through loans to sovereigns (which would then recapitalize the banks). The advantage of this is that the resulting debt will not appear directly on the balance sheet of the home countries of the banks being bailed out. However:
A) Direct ECB financing of the banks is a mere "possibility" that is being conditioned on a whole slew of prerequisites. ..B) The ESM has an upward limit of $500B of funds that it could eventually deploy. These funds are purely theoretical at this point because they have not even been raised yet. For the sake of argument, let us suppose that the funds are raised successfully by the ESM. Let us also assume that the currently projected $100B is used for Spain's bank bail-out. Ireland, Greece, Portugal and banks from other European countries will also want bailout funds for their own banks. (Ireland's Prime Minister has been loudly saying that they want in and the text of the agreement suggests that this request will be granted). Thus, realistically AT LEAST $200B of the $500B will be devoted to bank recapitalization. That leaves a theoretical $300B to purchase sovereign debt. That is peanuts; it does not constitute a credible vehicle to control the sovereign debt crisis. Most analysts agree that a minimum of 2 trillion euros would be needed to constitute a credible sovereign bond backstop….
CONCLUSION
In sum, the
summit produced an "agreement," and an agreement is better than a
collapsed summit. But there are no real solutions here.The most important thing to keep in mind is that the Spanish and Italian economies are in the midst of a serious collapse in investment and consumption and this collapse will not be halted by this agreement. The consequence of the economic collapse is that neither Italy nor Spain will be able to meet any of the conditions that are required to receive funding. This brings us back to square one. Unless something is done to halt the collapse of the Spanish and Italian economies these agreements are utterly futile.
Thus, within a matter of days or weeks, global financial markets should resume their downward descent. I reaffirm my target of 950-1,020 for the S&P 500.”
MARKET
Friday, the S&P 500 was UP
a stunning 2.5% to 1362. The VIX fell 13%
to 17.08.
Breadth has been improving
since 1 June when the S&P made its low of 1278. Breadth is the number of stocks advancing vs.
declining in any given day. I track it
as %-advancing, but many track the spread between advancers and decliners or
even a ratio. It is clear that there has
been a stealth recovery ongoing. Thursday
was down, but the breadth was positive (significantly more advancers than
decliners). In other words many stocks
are advancing, but they are not the ones in the index. Frankly, this is an indication that the
correction may be over.
Friday, volume on the NYSE
was 33% above its average over the last month so there was some conviction in
today’s move, too. Even so, the NTSM analysis
did not switch to a buy today so I am still leery that this may be a fake out.
If there is a buy signal, I
would probably not go “all in” as I normally do. I think there is a lot of risk now so I’d be
inclined to keep a smaller percentage invested in stocks. Only time will tell…
NTSM
The NTSM analysis is HOLD
again Friday, but indicators improved significantly.
MY INVESTED POSITION
I remain out of the market…
I reduced my stock holdings
to 30% (0% in stock in the 401k) at S&P 1358 after the SELL signal on 9 May
2012. (See the page “How to Use the NTSM System” – the link is on the right
side of this page). I cut my stock
position to 15% on 17 May in order to maintain a 10% gain in a
trading/longer-term position I had in the QQQ.
