Risk off, Risk On

Posted by Ray on May 10, 2010 under Main | Be the First to Comment

As I watch the pre-market activity and commentary from the airheads on CNBC it just boggles the mind. Last week these same people said the world is coming to an end, which meant buy to me, but today the “market is soaring.” Investors must get confused when they watch this porno for the mind as they flip-flop every day. Cramer says do not buy until Dow 9,000, but tonight he will say I told you to buy on Friday! He did not, he was a bear, which is why I thought I should buy. This market is bipolar and, to me, and the commentary you hear is insane. I am bearish on the market, but like individual companies.

We went from market crashing last week to the market is the place to be, today at least. I think this is a strong bounce rally before it declines more, I would not commit new money today or yet unless you are renting this market. The only reason we are getting a bounce today is because of a $1T bailout of Europe, ouch! I do not believe this is a real bounce and volume will be pitifully light, as all up days are, and this market is really just responding to short-term oversold conditions. This will be a good time to de-risk ones portfolio, IMHO.

The problem in Europe is not resolved, anyone who thinks it is needs to check their meds, as the funding package is merely treating the symptoms of the crisis not the source of the problem. Essentially, the bad behavior of the PIIGS is being rewarded, but they should be punished, and all the ECB is doing is taking the risk off of the speculators, rewarding their behavior as well, and giving that risk to the central bank. On top of that, the number should be shocking to the markets, $1T is a very large number and above where most people saw it. Not to mention, a good chunk of that is coming from the IMF, a.k.a. the U.S. which is the top funder of the IMF.

The U.S. is broke and borrows all of our capital, like most countries nowadays, so we are simply bailing out debt by issuing more debt. Who does that make sense? It does not. This bailout will not fix the problem long-term and merely kicks the can down the road for a little while. It will blow up at some point and now the bond vigilantes will look at other countries, i.e. the UK, U.S. or Japan, IMHO. They should have left the situation alone and let the PIIGS default to introduce a mechanism to kick them out of the EMU, but no, we are going down the bailout route, again! Not only that, but they are spreading the risk around to other countries now, unreal.

But the fundamentals of the U.S. economy are strong, say the bulls, which is why the market will scream today. Well, I will say things are much better, but not enough to justify the markets run-up and not strong enough to send the market up whatever percent today, this is a technical rally based on some, IMHO, troubling news. I look at the NFP figures from Friday, which I called a fraud and I stand by that comment since 188K were “made up estimates” from the BLS. When one subtracts out the 188K birth/death model figures, which NO commenter on the TV is talking about, except Rick Santelli, we have a figure of +102K. That is a great number right? Not really. Consider this, if we back out the 188K make believe BLS numbers, remember the birth/death model is responsible for the BLS revising unemployment up by 800K in February. We have a baseline number of 102K. If we subtract out government jobs, which are most temporary as well, think Census, we are down to about +48K. You could subtract out temporary hiring as well, but they are jobs, just not permanent, IMHO. No matter how one looks at it, except for CNBC, the ADP figure was accurate and the employment report was less robust than most think, but hey, let’s not let the facts get in the way of buy, buy, buy.

Overall, I fail to see how many classify this as a strong recovery after we spent trillions and 2 years later we are still at 10% unemployment and we have an anemic recovery at best. I am not saying things are not getting better, rather I am saying we have stabilized for really bad to just less bad. I believe a double dip is coming and this market is so not priced for a double dip. If we add in the Europe craziness the market is much less attractive, IMHO. The $1T, which should scare you in the U.S. as you are on the hook for a large portion of that because we are the top funders of the IMF, is a huge number and underscores how bad of shape the EU is really in. We have merely are fighting a debt crisis with more debt, sure there are austerity measures, but they are not going to fix the problem and the Greeks are apparently great at hiding assets.

Yet again, we are socializing the profits of speculators which were lambasted in the European media via the governments over the weekend, unreal. Instead of bailing out the PIIGS they should have instituted an ejection mechanism instead, that would save the Euro, but now they kicked the can down the road and are making other countries issue debt to fix the debt crisis, no sovereign country has cash on hand so they borrow it, see the problem? Austerity measures or not, it is a problem that will be with us for a long time. This is a reflexive rally built on a news event which was actually bad news. How does one support its currency by issuing a slush fund for bailouts? You can only defend a currency through higher rates or taxation, that really is not the case here as Greece will still have debt-to-GDP ratio of 150% by 2014, or there about.

This rally is somewhat justified, but I would be extremely careful with buying into this. Tonight Cramer will revise his call from Friday and Kudlow will continue with his “V” shaped recovery nonsense, but the problems are still there lurking in the background waiting to reappear. Buy gold because this is not over and what the EU did was inflationary, when that inflation will hit, I do not know, but it will in the EU and in the U.S. The other issue is, where will the vigilantes go next? The UK, U.S., Japan or will they stay in the EU? At the end of the day it was probably best to let the PIIGS default so the market can clear the bad debt, but let’s not have the market solve the problem, let’s tinker with it so another bomb can blow up somewhere else.

Oh, let’s not forget one of our GSE’s, which are “sound,” requested another $10B from the government. Yup, a sure sign of how strong things are.

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Only $600B to go

Posted by Ray on May 2, 2010 under Main | Read the First Comment

Greece received its bailout today, pending an approval from some EU members which should prove interesting. Do European politicians care about reelection as much as U.S. politicians? If that is the case I suspect the longer term bailout is in question.  Even in Greece itself the bailout is not widely accepted, who would figure that the unions would be opposed to higher retirement ages and lower payments. The current system is kind of insane, 14 annual payments, there are only 12 months, even in Greece, and the minimum retirement age was 53, new proposed retirement age is 67, welcome to the real world.

The primary issue, as I see it, is that we are curing debt with more debt. The EU member countries will have to pay for this bailout through higher debt to GDP ratios and higher taxes. This is why in Germany the bailout is unpopular, as it should be. At the end of the day all they are doing is saving France and other Greek debt holders, they should not be rewarded for speculation, but that is what is happening. As David Rosenberg said, we should all be opposed to bailouts, the madness must end. By allowing failed states or companies to survive when the free market decided otherwise has never worked long-term.

On top of the ridiculous bailout of Greece we now have to worry about the other PIIGS. Are they going to get bailed out? If so the EU and IMF will need another few hundred billion Euro’s. I suspect that Spain and Portugal spreads will widen tonight and tomorrow as the Greek issue is temporarily resolved, but their issues are now at the forefront of concerned world citizens. Bailing out these countries will be a huge mistake as it condones bad behavior. Let them fail or implement an ejection mechanism to the EUM Constitution.

I am sure the markets will be positive tomorrow as the crisis was “averted” and the good times are here again. Although I believe Friday’s selloff was unrelated to the Greek tragedy, but in reality the markets are facing a very overbought situation. Whether you want to believe this or not is your choice, but the markets are not supposed to go up every day or week. In fact, the past 2 months have been very, very abnormal to say the least, but the bulls will disagree, of course, citing some preposterous data point or use a forward looking P/E, which is just dumb I might add. But those of us living in reality know that conditions are not that good and the underlying economic data really does not support a parabolic move in the markets.

However, those in reality will look at the Greek tragedy and say, how can you fix one countries debt load by increasing another countries debt load? It just does not work and eventually we will see defaults. When that will be? I do not know, but soon I am sure. I am also confident that the Greece issue will spread first to Spain and Portugal, then to Italy and finally to France, since no one can bailout all those countries. Where it goes from there, I do not know, but I do know that it will eventually travel around the world as debt crisis usually do. This is why gold is going to go parabolic in the very near future… Got Gold?

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