Another busy day in the Med. We were trying to figure out the Berlusconi deal all day long. Is he staying on or resigning? News out of Greece continued, and after having registered all the news flashes, we still wonder, does Greece have a PM, and who is it? Spain on the other hand, didn’t get the proper attention, as both Italy and Greece stole the show. The Spanish bank, Banco de Valencia, seems in trouble. We are not surprised. May we guess, a lot of property debt, marked at peak levels? From El Pais;
Banco de Valencia has been suspended from trading on the stock exchange – a move many financial analysts believe could be the last step before a government takeover, sources close to the operation said Monday.The CNMV stock market watchdog halted trading after Banco de Valencia’s stock closed 0.87 cents a share on Friday.
Regulators are studying the possibility of intervening in Banco de Valencia, a regional financial institution that has been gutted by the collapse in Spain’s real estate and construction industries, sources close to the operation said Monday.
The move comes after the CNMV stock market watchdog suspended Banco de Valencia from trading after the bank’s stock closed at just 0.87 euros a share on Friday. (Full story)
Good piece on crowds, herd behavior and stupidity. Courtesy Gresham’s Law.
Herd opinion seems to be a chronically troublesome matter for the allocator of capital. Not only does the herd hold a deep suspicion for making money as such, but it seems that agreement is regarded as an imperative when it comes to considering the future. I might contend that the question; ‘How dare they consider that which all of us are unable/unwilling to consider?’ contains the primary sentiment behind the crowd’s contempt and condemnation… Supposing that this suspicion is true it might be considered quite important for us, as speculators, to overcome this. As ever, we think that it is contrary thought that reveals the key to prudence. Here I invite you to mull over the controversial question in the title; is the crowd capable of correctly identifying intelligence and stupidity?
Is ‘Common Sense’ Distinctly Uncommon?
A crowd thinks in images, and the image itself immediately calls up a series of other images, having no logical connection with the first. We can easily conceive this state by thinking of the fantastic succession of ideas to which we are sometimes led by calling up in our minds any fact. Our reason shows us the incoherence there is in these images, but a crowd is almost blind to this truth, and confuses with the real event what the deforming action of its imagination has superimposed thereon. A crowd scarcely distinguishes between the subjective and the objective. It accepts as real the images evoked in its mind, though they most often have only a very distant relation with the observed fact.
We downgrade European equities to underweight to reflect fears over inadequate policy response, weakening economic growth, falling margins and less constructive readings from our market timing indicators. We take more money out of financials and add more to defensives.
Four reasons to downgrade European equities
Post a double-digit rally from the lows, we take the opportunity to downgrade European equities to underweight to reflect the following four points.
#1 – Policy response not yet sufficient – We do not believe that the ongoing policy response is yet at a level where it can stabilize equity markets. QE from the ECB would be the key positive game changer for stocks in our opinion.
#2 – Economic growth deteriorating – Key economic indicators suggest that the Euro-zone economy is slowing with the prospect of additional austerity and bank deleveraging to come. We doubt the recent improvement in US newsflow is sustainable into 2012.
#3 – Corporate margins are falling – In addition to weak economic growth, corporate profits are coming under increasing pressure from deteriorating margins.
#4 – Market timing indicators now less constructive – We have seen a meaningful rise in our key market timing indicators and, although not particularly high, they are no longer in ‘buy’ territory.
Full must read report MS Downs Equities.
Both the SPX and the Stoxx 50 have been rather “boring” for the past sessions. Yes we have had a couple of big up and down moves, but the indices are trading at same levels as the 1st of November. Charts are getting compressed and dynamics are building up within the “trapped” formation. Expect some more dull trading, until we start breaching one of the trend levels. With markets once again dominated by specific politicians and whether they will keep their jobs or hand over the resignation, many will be tempted to trade the short term moves. This will make both the bulls and the bears tired, and we will get that big break out . Stay tuned.
I had promised not to talk about europe this week and I am, by and large, going to keep that prom- ise, but before we delve into a couple of other things, it wouldn’t be right to skip over the events of this past week without a few words on the latest chapter in what has, sadly, become a true Greek Tragedy.
At some point last week, Prime Minister Papandreou finally decided he’d had enough of sitting out- side the Principal’s office with a book stuffed down the back of his shorts in a forlorn attempt to lessen the pain of the next beating that was to be administered by Principal Merkel or Vice-Principal Sarkozy. At that precise moment, in a breathtaking example of; brinkmanship,Lunacy,Exasperation,All of the above
he declared he would table a vote of no confidence in his government and, at the same time, offer the Greek people the opportunity to voice their opinions on the bailout packages and continued mem- bership of the Eurozone via a national referendum.
In the pandemonium that ensued we finally got a complete understanding of just what is worrying markets as this sorry charade in Europe finally moves towards its inevitable denouement.
Intensified rumors during the last hour of Berlusconi to resign. Like we wrote yesterday, it is possible, but the power Berlusconi has aquired for the past two decades is sweet. His status can’t be compared to any of the other Eurozone ministers. Let’s see if he stand the pressure or does what is “best” for the country. Wouldn’t it be great, G Papp and Silvio resigning on the same day? Conspiracy heaven. The MIB is reversing aggressively, +5% from the lows, as Berlusconi premium slowly fades away.
Why is the 6% level so important? Well, when 10 year rates reach that level, there is is no return. Just like the other PIIGS showed earlier. After breaching the 6% level, ECB still tried to buy the bonds desperately, but it turned out just throwing good money after bad money. After the initial little pullback (support) rates shot up to much higher levles. Italian 10 year rates crossed the 6% level a while ago, ECB has desperately tried buying the bonds and lowering the yield, but as we can see today, that does not help. Italian ratyes currently trading at 6.66%, and we see what happened last time. This time is different, Italy is huge compared to the olive and port wine producers. Volare ahead.
Equity markets are facing reality in this morning session. With the Italian 10 year rate at 6.66%, the clock is ticking. As we have pointed out over the weeks, Ireland got bailed out at 7%. Italian rates should be reaching that level very shortly. The only factor keeping the rates at sub 7% is the notorious buying by the ECB. With the Greek mess “out of fashion”, Italy and (don’t forget) Spain should be the countries to focus on. Below some quick chart updates.
Further charts below.
The leaders of Greece’s two largest political parties last night decided to form a government of national unity to start implementing a €130bn bail-out plan, then take the country to elections. George Papandreou, premier, reached the deal with Antonis Samaras, leader of the opposition conservatives, during a 90-minute meeting with Carolos Papoulias, Greece’s president.http://www.ft.com/intl/cms/s/0/7c455fc4-087f-11e1-bc4d-00144feabdc0.html#axzz1czT64R5M
The Group of 20 is seeking to meet again, possibly before Christmas, with the aim of resurrecting a deal to provide an international firewall around Greece, G20 sources have told the Financial Times, saying negotiators at the Cannes summit had been close to an agreement. A source, who was party to the negotiations, told the FT that the three-part package of measures summit host France tried to broker fell apart because the German Bundesbank vetoed one element. http://www.ft.com/intl/cms/s/0/a2e083e0-089b-11e1-9fe8-00144feabdc0.html#axzz1czT64R5M
Three of Greece’s biggest banks have issued €6.4bn ($8.8bn) of government-guaranteed bonds likely to be used as security to obtain financing from central banks, a move that points to worsening market conditions amid talk of a disorderly Greek default. Alpha Bank, EFG and Piraeus on Friday issued the floating-rate notes, which analysts say will probably be used as part of a new €30bn liquidity facility created for cash-strapped Greek banks earlier this year. Under the scheme, Greek banks can issue bonds guaranteed by the government, which can then be used as collateral to receive funding from central banks. http://www.ft.com/intl/cms/s/0/a008a664-0898-11e1-9fe8-00144feabdc0.html#axzz1czT64R5M