Base case scenario is still intact. Don’t get fooled by the market giving opportunity of buying cheap stocks. As we have argued for the past weeks, the big top is in according to us. Although we are reaching some support levels shortly, the big moves will be on the downside going forward. There is simply too many signals we watch telling us the top is in. This fisrt phase down will attract bargain hunters, that have been buying the dips as a strategy. They will probably get some moves up, which will be the last phase, where the last momo is “sucked” into the long trade. From then on, we can start the big correction down, which will lead us much lower. Some charts update below, click for better view.
SPX has broken the big wedge. After breaching 100 day moving average, we expect the index to fall further. Our first target on this move down is around 1200/1220, and after that target is reached we expect the big move down.
Nasdaq, which has been the underperformer, gave us signs of this rally fading weeks ago. As we have been writing, the market can’t go higher with a positive sentiment, where Nasdaq leads us higher. After the recent Bubble IPO’s we feel even more confident, this market will start the accelaration phase down soon.
Despite the market getting sold, the VIX is still trading way too cheap according to us. Yes, the skew is relatively steep, but we argue, that Vix might start reflecting more realistic risk, after QE2 ends, as this has only contributed to market mispricing risk for a long time.
Full vol report to understand the broken vol, Artemis Capital Management LLC vol
For more in depth market top reading, see our post from a couple of days ago, http://www.thetrader.se/2011/06/01/the-top/
And for those Dow 20k imminent momos, we present you this post from two days ago, http://www.thetrader.se/2011/06/04/divina-comedia-dow-20k/
Some insight from El Erian, co manager of the world’s greatest bond funds at PIMCO, on the Greek situation.
Very few of us like to be confronted with unpleasant choices. If we are, we will tend to delay a decision. And if forced to make one, we will likely opt for the choice that, in our minds at least, seems less disruptive upfront — even if we know it is likely to involve discomfort down the road.
This simple human analogy is critical in understanding why Europe’s increasingly ugly debt crisis refuses to go away. It sheds light on the choices made up to now; and it speaks to why an increasingly incoherent policy response will likely end up in tears for Greece and potentially other European economies and institutions.
Let us wind the clock back to just over a year ago when Europe first bailed out Greece, a country no longer able to pay its bills. Together with two monetary institutions — the European Central Bank and the International Monetary Fund — European politicians faced unpleasant choices and had to respond. But rather than decisively addressing the problem, they essentially opted to kick the can down the road.
There were, and still are two main reasons for Greece’s predicament: The country borrowed way too much; and it failed to grow its economy on a sustained basis. This lethal combination was amplified by weak public administration.
Yet the rescue of Greece involved making new loans to the country and was asking for a very ambitious fiscal adjustment effort. Neither the size of the debt nor growth reinvigoration were properly addressed.
I suspect this choice was not driven by a strong conviction that the approach would work. Rather, decision makers feared the complexity of the alternative which involved opting for a pre-emptive, and hopefully orderly debt restructuring, and placing much greater emphasis on structural reforms.
A year later, Greece is still in the financial intensive care unit, and needs renewed urgent attention by the “troika” of doctors — from the European Commission, ECB and the IMF.
Regrettably, the country’s condition is even more serious now, with every single one of its vitals worse than projected by these same doctors a year ago.
Greece On/Off bail outs getting ridiculous. Below is a Guide for Greece for Dummies, with attached Schedule of important events coming up. From Stratfor;
Officials from the International Monetary Fund (IMF), European Central Bank (ECB) and EU Commission concluded talks with Greek officials June 3, with Athens tentatively agreeing to accelerate the planned privatization of state assets and to enact more austerity measures. These moves could allow a second bailout of Greece to move forward, but reluctance toward several required steps — including resistance from private investors on restructuring Greek debt and domestic Greek opposition to the privatization scheme — could jeopardize additional aid.
The problem for Papandreou is therefore not just greater social unrest, which protests over the weekend seemed to foreshadow, but also the loss of control of his party. PASOK members could use the social unrest as a reason to back off from supporting the prime minister, even though the real reason behind the rejection of privatization plan is loss of political patronage over important economic levers of the Greek state.
Significant upcoming dates in the eurozone debt crisis:
- June 7: The Greek debt agency will set the amount of six-month treasury bills to be auctioned June 14.
- June 8: Tentative date when the troika report might be announced, according to a spokesman for German Chancellor Angela Merkel.
- June 9: Greece will announce its first quarter 2011 provisional gross domestic product estimate.
- June 10: Deadline in Spain for an agreement between unions, business leaders and government on reforming collective bargaining. Labor reform is seen as central to resolving the Spanish economic crisis and particularly its high unemployment.
- June 14: Potential date of a eurozone finance ministers meeting, according to media reports. Spain will also auction off 12-and 18-month treasury bills of yet unknown volume.
- June 15: Major public and private sector unions have called for a general strike in Greece. The Portuguese debt agency will also offer between 500 million and 750 million euros in three-month treasury bills in the first auction since the June 5 election.
- June 20: Eurozone finance ministers meeting, as well as the Econfin meeting (a meeting of EU finance ministers) in Luxembourg. The main topic of discussion will likely be a new Greek bailout.
- June 24: Summit of EU heads of government in Brussels. The meeting was originally meant to tackle the expansion of EFSF and the setting up of the European Stability Mechanism bailout facility. However, those issues could be postponed yet again due to the need to finalize the second Greek bailout.
- June-August: The German Constitutional Court is supposed to give a ruling sometime this summer on the constitutionality of the aid package for Greece and the EFSF bailout mechanism. If either is seen as unconstitutional — an unlikely event — it could create even greater instability.
Some thoughts on Too big to Fail, by Nomi Prins.
This morning, amidst news of Moodys cutting Greece’s debt rating to Caa1, I came across a phrase I wish I’d thought of first, reading through a friend’s morning commentary. The phrase? “Too Stupid to Stop”.
According to Bill Blain, Senior Director at Newedge in London, and self-professed Euro skeptic, “‘Too Stupid to Stop’ is based on politicians behaving as rational maximisers of their electoral objectives.” He was referring to the real reason behind all the bank-demanded bailout loans for austerity measures throughout Europe.
In the United States, that mantra can be extended to include appointed officials, like Treasury Secretary, Tim Geithner (still not admitting our record debt increase came directly from the $4 trillion worth of Treasury issuance and other forms of assistance extended to our banking system since late 2008, as we endure his stomach-churning ‘show-begging’ to the GOP for a debt cap raise) and Fed Chairman, Ben Bernanke (ditto). It also, of course, applies to congress people whose political survival depends on corporate and bank contributions and financial support, the ones that believe the Dodd-Frank bill changes anything.
Rather than considering how governments have systematically done, and continue to do, the wrong (as in immoral, unfair, and uneconomically sound) thing by trying to preserve banks, any politicians possessing the ability to think independently (an oxymoron, I know) should be asking themselves instead, how clever they could be about closing them down. Take a cue from Iceland.
The Greek Drama explained. Greece used to be a great Empire, unified against the enemy. The last year’s situation, that nobody seems in control of, resembles a “war with each other”. From Kathimerini;
Well, we can’t be too bullish about the economy and the market, so we present you the below, to read after you read the previous article. Bullish or bearish, we present you both arguments, so you just have to pick yourselves. From Soc Gen;
Slowdown driving yields lower, but double dip clearly not priced in. 10-year Treasury yields are back below 3.0%, as those – like us – who had a small bearish bias into the end of QE2 continue to be frustrated. There is little doubt that increased EMU have supported some flight-to-quality flows into Treasuries. The Greek 5-year CDS has widened by some 500bp over the past 2.5 months (a 50% increase). However, the prominent driver remains the economy, which has delivered sharp negative surprises over the past three months. The consistent and large positive US economic surprises at the turn of the year have reversed sharply. If anything, despite the help from EMU jitters and other signs of reversed exuberance (e.g. Chinese equity market at a 4-month low) 10-year Treasuries have struggled to keep pace with the poor data (Graph 1).
The Fed told us at the 27 April FOMC that the Q1 slowdown was transitory. Well, the transition has grown a bit long, with Q2 showing little bounce so far from the soft 1.8% growth seen in H1. Admittedly, we have seen more transitory negative forces at play; in particular the Japanese disaster has disrupted the global supply chain. Let’s make no mistake, however, the market has priced the slowdown as being a temporary phenomenon. Graph 1 suggests that yields might have fallen much more otherwise. Equally, the S&P has erased just 15% of the gains made in the eight months to late April. Global markets are clearly not pricing a double dip just yet. In a double-dip scenario, QE3 would be on the table, which would feed the Treasury rally. Our economists certainly are in the ‘transitory slowdown’ camp and are looking for a bounce in Q3. Sentiment should start to improve by mid-June, when the first manufacturing reports for this month are due. This improvement in sentiment would coincide with the end of QE2 by late June, adding pressure on Treasuries. In the meantime the pain trade is for Treasury prices to crawl higher as the TYU1 closes the gap to 124-02 (see technical analysis section). There is little data to turn sentiment in the coming week, once the NFP report is out of the way. The 3-, 10- and 30-year Notes need to be digested though. Note that the PBoC may deliver another rate hike ahead of the June 6 holiday as it fights inflation (our economists predict a hike this month), and this could add to global growth concerns.
FP; Zero Hedge
Tech stocks are apparently cheapest in a decade. Everybody bullish and loading up on stocks like HP, Google, Amazon etc. HP is down nine days in a row, the longest losing streak since 1980….We have argued for the market to have reached a major top. Tech companies should lead us higher, not lower like now. Technical picture is showing us a major top is in place. Many other indicators such as credit, sentiment indicators etc are all telling us caution ahead. With NYSE leverage at highs, we expect a further fall in equities, will trigger redemptions, and then all these cheap stocks, will become even cheaper. 1300 is the important level in SPX. If we manage to trade below the level for some days, we expect the next leg down sooner than later. Bloomberg reports on cheap Tech;
The five-week drop in U.S. stocks has driven technology company valuations to the lowest level in more than a decade, making them too cheap to pass up for some of the nation’s biggest money managers.
The largest group in the benchmark gauge for American equities lost 7 percent, or about $190 billion in value, since the market peaked on Feb. 18, falling more than any industry outside financials. Computer stocks trade for 9.3 times reported earnings before interest, taxes, depreciation and amortization, 1.3 times the index’s multiple, data compiled by Bloomberg show. The ratio is the smallest since at least 1998.
While signs of a slowing recovery and the initial public offering of LinkedIn Corp. have spurred concern the industry has entered a speculative bubble, the numbers show something different. Profits will rise 35 percent faster than the Standard & Poor’s 500 Index in 2011, and executives are boosting computer and software spending, data from Bank of America Corp. and Bloomberg show.
“We see the best supply-demand trend in technology,” said Michael Sansoterra, a money manager at RidgeWorth Capital Management in Atlanta, which oversees $48.5 billion including Broadcom Corp. (BRCM) and Google Inc. (GOOG) shares. “You can measure it pretty much every way you want and it looks attractive.”
For all those that don’t read Spanish newspapers, here is what the Head of the Spanish Central Bank said during the weekend. Thetrader has written extensively on the subject, and we actually agree with Mr Molina, although we feel he is little too optimistic. Looks like Spain might kick off again, with Greece not having solved it’s bail out, yet….
“The correction in prices has still to run its course,” the head of the central bank’s research department, José Luis Malo de Molina, said at a seminar on the property sector.
According to official figures, house prices have fallen an average 15.4 percent in nominal terms since the first quarter of 2008 and 20 percent after taking into account the impact of inflation.
Malo de Molina predicted prices would fall a total of 30 percent in real terms before they start to bottom out at the end of next year or the beginning of 2013.
Greece bail out on, off game continues. Some figures of who holds Greek debt, from Bloomberg;
German lenders were the biggest
foreign owners of Greek government bonds with $22.7 billion in
holdings last year, making them a likely negotiation partner in
burden-sharing deals for the country, data from the Bank for
International Settlements showed.
French banks, which led the group of Greek creditors with
overall claims amounting to $56.7 billion, trailed their German
peers on sovereign debt with $15 billion, according to the June
report from the Basel, Switzerland-based BIS. The overall figure
for French banks was inflated by $39.6 billion in lending to
companies and households, mainly because of Credit Agricole SA’s
Greek unit, Emporiki Bank SA. German lenders have no major units
in the country.
At the end of 2010, Greek government bonds held by banks in
countries reporting to the BIS totaled $54.2 billion, of which
96 percent was owned by European lenders. Germany and France,
which accounted for 69 percent, may be asked to weigh in when
the European Union goes ahead with plans to win Greece creditors
to roll over their debt in a “Vienna-style” program.
“Implementing an approach similar to the Vienna Initiative
would demonstrate private sector involvement has been
explored,” Justin Knight, a European rates strategist at UBS AG
in London, wrote in a note last week. This may make voters
“more amenable to the idea that public sector funds need to be
deployed going forward,” he said.
But let’s not forget a small detail by Citi. What does the law say with regards to Greek debt?
Legal Characteristics of Greek Government bonds
After the question of whether or not a restructuring will occur and when, the next most important question for most investors is whether or not it can be done in such a way as to not trigger CDS. Lee Buchheit3 has indentified several aspects of Greek debt that are relevant. In particular, the large amount of domestic debt without features such as cross defaults and negative pledges should facilitate a number of restructuring options.
There are €327bn of outstanding Greek government bond debt, of which €9.8bn are treasury bills. Of the total, less than 2% is in dollars, yen, Swiss francs or other foreign currency. From a legal standpoint, the most striking feature is that 90% of the total bonds are governed by Greek law with the majority of the remainder under English law. Figure 2 illustrates that a large portion of the international debt is only due after 2016. These factors have significant implications for Greece’s options if they decide to go down the restructuring route.
Greek law bonds have no Collective Action Clauses (CACs) which mean that voluntary restructurings require 100% of investors to accept the new terms in order to avoid triggering a default, an almost impossible hurdle. Greek sovereign bonds issued under English law prior to 2004 have CACs which permit 66% of bondholders consent to modify terms that would bind all holders. Post 2004 75% of bondholders consent is required but the scope of potential revisions is broader. The situation is similar for negative pledges which are only found in English law debt. The clause requires Greece equally and ratably to secure each of the bond issues if ever it creates a security interest over its revenues, properties or assets to secure any external indebtedness. This is normally applied to foreign currency borrowings and only really makes sense prior to Greece joining the Euro. Therefore, negative pledges in euros only really apply to bonds issued after 2004, a relatively small percentage. Equally, cross-acceleration, cross-default and moratorium event of default clauses only apply to international debt denominated in currencies other than euros. Therefore bondholder remedies such as acceleration are only relevant to a very small percentage of debt issued before 2004. Given that the percentage of bonds with difficult clauses is relatively small, Greece could presumably offer some form of tender, additional collateral or waiver for them. This opens up a number of possibilities. For example, it would be able to collateralize a future Euro-denominated issue of securities in a European version of Brady bonds. Or alternatively, obtain a partial guarantee of the new instruments from a creditworthy party as the Seychelles did recently.
Bail out on, off still intact…..
Thetrader has been arguing for TEPCO to enter bankruptcy ever since the Fukushima accident occurred. The company simply doesn’t have the possibility to repay all the claims, despite the beautiful Power Point presentations on their homepage. The tragic accident has been totally mismanaged by the company. It seems people are waking up. Bloomberg reports;
Tokyo Electric Power Co. shares fell the most on record after the head of Japan’s biggest stock exchange said the utility should follow the same route as Japan Airlines Co. in 2010 and file for bankruptcy protection.
The owner of the crippled Fukushima Dai-Ichi nuclear plant plunged as much as 28 percent to 206 yen, the most since at least September 1974, and was the biggest decliner on the MSCI Asia Pacific Index. The cost of protecting the debt of the utility known as Tepco traded at a record 1,150 basis points today, Royal Bank of Scotland Group Plc prices show.
Tokyo Stock Exchange President Atsushi Saito said the utility needs to be restructured, according to the Asahi newspaper. His comments echo those of Shigeaki Koga — an official in the Ministry of International Trade and Industry, which oversees the nuclear power industry. Koga said in a 14- page memo on May 11 that Tepco is unable to pay compensation for the nuclear disaster alone and a company that can’t meet its financial obligations should file for protection.
“There’s so much uncertainty surrounding what will happen with the utility that it’s impossible to analyze,” said Naoteru Teraoka, general manager at Tokyo-based Chuo Mitsui Asset Management Co., which oversees about $28 billion. “The stock moves whenever anybody opens their mouth. Bottom line: this is a bad story.”