Wednesday, November 02, 2011

The Morning Call How can a Greek bankruptcy not be in the price of stocks?

The Market


Yesterday was ugly. The indices (DJIA 11657, S&P 1218) suffered more whackage, though they closed well within their intermediate term trading ranges (10725-12919, 1101-1372). The DJIA busted the 11791 support level but held but remains above the 11548 support level as well as staying within its short term up trend (11422-12365). The S&P closed below both the 1230, 1219 support levels (though clearly it is right on 1219); it finished within its short term up trend (1210-1317).

Volume rose; breadth continued to fall. The VIX spiked again (up 16%), putting it back within the upper zone of its current trading range (not good for stocks).

GLD finished flat for the day, leaving it within its intermediate term up trend.

Bottom line: I lamented last week that stocks had moved up so rapidly that I wasn’t afforded the opportunity to put cash to work--sometimes luck is worth a lot more than skill. Clearly, I have a second chance. However, at the moment, I am concerned that the Averages took out the 11791, 1230 resistance turned support level. Of course, our time and distance discipline is operative in this instance; so there is the chance that this break will not be confirmed. If it is not (i.e. stocks bounce above 11791, 1230), that will signal the opportunity to nibble.



Yesterday’s economic data was not inspiring: weekly retail sales were mixed while the October ISM, September construction spending, the Chinese PMI were all disappointing. The one bright spot was September auto sales.

However, no one paid attention because investor focus remained on:

(1) the MF Global bankruptcy in particular the growing revelation of highly questionable/illegal maneuvers [commingling of customer funds with the firm account and the failure to disclose material inside information before a recent $325 million bond offering) by that firm. The bankruptcy itself should have little consequence to the financial markets; however, the aforementioned criminal actions are the kind that destroy investor faith in regulatory oversight, the due diligence by the bond rating agencies and the confidence that derivative trading won’t sink our entire financial system. This loss of confidence is where the risk lies to the stock market.

The macro problem created by the MF Global demise (medium):

(2) Europe: the latest development, of course, is Papandreou, the Greek premier, announcement that there would be a referendum on proposed bail out--which could completely negate any positives effects of the new plan however minimalist it may be. Further confusing this issue, mid afternoon there were statements by Greek officials that said that Papandreou was under extreme duress and that his proposed referendum was not going to happen. Then even later, the Greek premier was back in the airwaves saying ‘Oh yes it is’. This kind of internal dissention among the Greeks and well as the potential for a failed referendum to detonate the whole sovereign debt crisis bomb puts the disaster scenario back on the table.

And then there is Italy (medium):

Over night, the Greek parliament confirmed the referendum; Italian and French bond spreads widen and the EFSF pulled a bond offering citing ‘market conditions’.

Bottom line: the outlook has suddenly gone from improving clarity back to the respirator. So we are back to the questions (1) what is our financial system’s risk exposure to the EU financial system, (2) even assuming the EU government’s would allow them to go belly up in the first place, (3) how much would the disaster scenario impact the growth rate of the US economy and (4) how much of all these are in the price of stocks? I don’t pretend to know the answer’s to those questions. What I do know is that every investor on the planet has been working hard every day to get as close to those answers as they can; and stocks are mid range of their current trading range. So while I want to continue to hold lots of cash and gold, I still want to use weakness to buy attractively priced stocks.

As always Zerohedge provides us with the disaster scenario (long but a must read):