Remember geopolitical risks? Investors have once again started thinking of those green shoots and normality, especially since Greece is fixed. With vol trading at rather depressed levels while the markets have enjoyed quite a bull ride, with declining volumes, it is appropriate reconsidering what could be around the corner. Forget about the calm summer coming up, and be prepared for the five storms that will mark the summer of 2012. From GEAB No63 below.
In its January 2012 issue, LEAP/E2020 signalled the current year as that of the world geopolitical swing. The first quarter 2012 has, to a large extent, started to establish that an era was in fact coming to an end with, in particular, the Russian and Chinese decisions to block any Western attempt at interference in Syria (1); their stated desire, associated with India (2) especially, to ignore or circumvent the oil embargo fixed by the United States and the EU (3) against Iran; the increasing tensions in relations between the United States and Israel (4); the acceleration of the policy of diversification out of the US Dollar led by China (5) and the BRICS (but also by Japan and Euroland (6)); the premise of change in Euroland’s political strategy at the time of the French electoral campaign (7); and the intensification of actions and statements fuelling the rising strength of trans-bloc commercial wars (8). In March 2012, we are far from March 2011 and the “hustling” of the UN by the USA/UK/France trio to attack Libya. March 2011 was still the unipolar world of after 1989. March 2012 is already the post-crisis multipolar world hesitating between confrontations and partnerships.
Hussman on the current awful time to invest. From Hussman Funds.
Last week, the estimated return/risk profile of the S&P 500 fell to the worst 2.5% of all observations in history on our measures. This is not a runaway bull market. Rather, it is a market that again stands near the highs of an extended but volatile trading range. I am convinced that the breakdown of the market from this range has been deferred only through repeated and extraordinary central bank actions.
Importantly, the market is again characterized by an extreme set of conditions that we’ve previously associated with a “Who’s Who of Awful Times to Invest.” The rare instances we’ve seen this syndrome historically are reviewed in that previous weekly comment. They include the 1972-73 and 1987 market peaks, and several instances since 1998. The more recent instances of this syndrome are shown by the blue bands on the chart below. Each of the separate instances in the 1998-2000 period were followed in short order by intermediate market declines of between 10-18%, and of course, ultimately by a plunge of more than 50% in 2000-2002. Likewise, the 2007 instance was followed in short order by a correction of nearly 10%, and a few months later by a plunge of more than 50% in 2007-2009. The more recent instances in 2010 and 2011 have also been followed by substantial market selloffs in each case, though with a longer lag in 2011 (due to ongoing QE2 operations). Aggressive monetary policy did not prevent the ultimate declines, though massive central bank interventions have undoubtedly helped to short-circuit the more violent follow-through that occurred in 1973-1974, 1987, 2000-2002, and 2007-2009, at least to-date.
Clearly the correlation has worked on the way up. With the Eur falling over the past days, maybe we could expect a time lag in the SPX chart to take place, or have the Algos been re programmed?
The amount of unpaid debt on loans linked to packages of European commercial mortgages that thrived until the 2007-08 financial crisis could hit a record of €10bn by the end of the year, Standard & http://ftalphaville.ft.com/thecut/2012/03/02/906961/sp-warns-on-european-mortgage-backed-loans/
The Netherlands has been forced into a new round of budget cuts that could fracture its coalition government, after forecasts suggested the country’s budget deficit would hit 4.5 per cent in 2013, well above the 3 per cent limit set by the eurozone fiscal pact. http://ftalphaville.ft.com/thecut/2012/03/02/906711/dutch-forced-to-make-further-budget-cuts/
Fresh data suggest China is moderating its appetite for investing in US securities, a trend that could mean lower flows of cheap capital from Beijing and a possible rise in borrowing costs across the American economy, http://ftalphaville.ft.com/thecut/2012/03/02/906851/beijing-could-be-rapidly-diversifying-from-usts/
India’s government auctioned a 5 per cent stake in state-run Oil and Natural Gas Corporation on Thursday raising about $2.45bn, but only after a period of confusion in which the sale appeared to be under-subscribed, http://ftalphaville.ft.com/thecut/2012/03/02/906831/delhi-sells-ongc-stake-despite-glitches/
Another must read “Hmmm” report, courtesy Grant Williams.
One way or another, we are no more than weeks away from the first de- fault in the history of the Euro.
Yes, I know the Greeks have promised to give the Troika what they want in the way of cuts and expanded austerity. Yes I know we have been promised that we will have a ‘solution’ by last week February 15 Monday, but let’s get real for a second here, shall we?
The situation breaks down like this:
The Greeks have been told that, in order to receive the €130 billion €145 billion bailout they so desperately need, they must agree to sweeping new cuts and promise to implement them.
Not implement them. Promise to implement them.
It will be a long weekend. …Guest Post by Macro Story.
Good Morning. As we head into a three day weekend (US bond and equity markets are closed on Monday) were the fate of Greece as a member of the EU may possibly be decided I wanted to offer a less technical, more macro Morning Brief today.
But first a few technical points and securities to watch on option expiration day. This is a long post by the way but there is a lot going on this weekend in Europe.
That feisty AUD/USD currency pair is back at it again turning what looked like a bearish reversal into possibly another head fake. As of this post it stands only 50 pips from prior highs of 1.0845.
HYG (high yield debt) was weak yet again on Friday and putting in another lower low. This excellent market timer topped on January 26 in a rather bearish high volume double top pattern. Watch HYG to see if it continues to underperform equity. Also watch HYG relative to LQD (investment grade debt). HYG has been underperforming LQD as investor risk aversion has been growing.
Dow Transports topped on February 3 and has been putting in a series of lower highs and lower lows. Thursday the transports did outperform the dow for a change but from a technical perspective it was a simple inside day after selling off 2% on Wednesday.
EMD (mid cap futures) took out another resistance level on Thursday. The next resistance level comes in at approximately 990. EMD is still about 3% below the July highs versus the SPX which is slightly above.
This gigantic flood of extremely inexpensive high-powered money does have a major impact, not in the real economy, but in the liquid investment markets.
Free money sets a very low hurdle for a short-term investment and as long as the transaction has decent liquidity, why not do the trade. As a result, almost every equity, commodity, and credit market is moving higher.
High beta currencies are moving higher as well, as risk is clearly on the front foot. This positive mood began at the start of October, a bit more than a week after Bernanke announced the start of ‘Operation Twist,’ a subtle way to improve the profits of the banks and increase the risk of the Fed without expanding its balance sheet.