While the G-8 leaders are schmoozing with President Obama during their slumber party at Camp David, and while the parallel NATO summit and its protests and rallies are wreaking havoc on the streets in Chicago, Europe is re-descending into rumor hell—where good rumors, as we found out last summer and fall, are head fakes that cause huge rallies in the markets, and where bad rumors, though passionately denied by all sides, turn out to be true.
The latest was that the European Central Bank and European Commission were preparing contingency plans for Greece’s exit from the Eurozone. Actually, it wasn’t even a rumor. EU Trade Commissioner Karel De Gucht declared it during an interview: “A year and a half ago, there may have been the danger of a domino effect,” he said, “but today there are, both within the European Central Bank and the European Commission, services that are working on emergency scenarios in case Greece doesn't make it.”
A momentous statement. The first time ever that an EU official admitted the existence of contingency plans—though everyone had long assumed that they existed. Clearly, Europe’s political power brokers, disparate as they are, have gotten tired of bending to Greece’s wily political elite and their threats. Read.... The Greek Extortion Racket in its Final Spasm.
Alas, within hours, the very European Commission where De Gucht serves as the Trade Commissioner stabbed him in the back: “We completely deny that we are working on any such emergency plans,” said a spokesperson for the Commission. “We are concentrating all our efforts on supporting Greece and keeping it in the Eurozone. That is the scenario we are working on.”
Indeed. And then there was the rumor about printing money. Not the kind that the Fed, the ECB, and other central banks are printing, but real money. De La Rue, a British company that prints currency for 150 countries, among other business activities, has apparently been asked some time ago to prepare contingency plans for printing Greek drachma notes, according to unconfirmed rumors that just surfaced. People who got wind of it earlier have driven up the stock (DLAR.L) 11% since mid-April—possibly a confirmation.
Greece’s return to the drachma can’t be done overnight. It would be a complex and costly transition that would require time. The day Greece switches to the drachma, it will have to have huge quantities of drachma notes on hand; and preparations are apparently underway to print them. The Bank of Greece has its own printing outfit that has been printing euros ever since it stopped printing drachmas. It would pick up much of the volume, but any demand beyond its capacity would have to be farmed out to other printers. Hence De La Rue.
Banks have already been preparing for the drachma. Turns out, some banks never actually removed their drachma capabilities, perhaps because they lacked confidence in Greece’s ability to keep the euro, or perhaps because they—the banks, not the Greeks—were simply too lazy. And they’d be able to switch from one moment to the next. But it would still be a complicated mess laced with capital controls and all the banking nightmares associated with them. It would be fraught with risks, legal issues, and uncertainties.
A return to the drachma—and its rapid devaluation—would, however, do wonders for Greece's tourism industry, the second largest industry after shipping. In 2011, the number of international visitors actually rose by 9.5% from the prior year, and they spent 9.3% more. The industry is hugely important to Greece: it provides 18.4% of the country’s jobs and makes up 16.5% of the economy.
But now reservations for the summer have collapsed by a stunning 50%! "Political instability," explains Georgios Drakopoulos Director General of the Association of Greek Tourism Enterprises (SETE). And bad publicity, strikes, demonstrations, and images of Athens on fire—the only things foreign media showed, Drakopoulos lamented, though in the rest of Greece, “the conditions are the exact opposite.” And once those issues disappear from the media, a devalued drachma would turn Greece into an irresistible and highly affordable paradise for tourists of all types, including waves of budget tourists—all of whom would bring in hard currency.
“The Greeks are still debt slaves, and will be until they tell Brussels to take a hike,” said David Stockman, Director of the Office of Management and Budget under President Reagan. With similarly pungent flourishes, he talked of a “paralyzed” Fed that is in its “final days,” hostage of Wall Street “robots” trading in markets that are “artificially medicated.” For his awesome interview, read.... The Emperor is Naked: David Stockman.
Some look at today's FaceBook IPO flop, the ongoing market rout, and the situation in Europe with disenchantment and disappointment. We, on the other hand, view it with hope: because more than anything, the events of the past few days show that the truth is getting out - the truth that capital markets simply can not exist under the authoritarian rule of central planners, the truth that the stock market is a casino in which the best one can hope for a quick flip, and finally the truth that our entire socio-economic regime, whose existence has been predicated by borrowing from the uncreated wealth of the future, and where accumulated debt could be wiped out at the flip of a switch if things go wrong in the process obliterating the welfare of billions (of less than 1%ers), is one big lie.
We believe that hope is what SocGen's Dylan Grice is what he has in mind when he penned the following conclusion to his most recent piece: La Grande Illusion.
Since the crisis broke in 2008, the Fed and BoE have printed enough money to buy over 60% of the issuance of their respective government securities since. It makes you wonder. What would bond yields in the US and the UK look like without these purchases? Probably like those in the eurozone periphery. Indeed, maybe the euro debacle could have been completely avoided if the ECB had been headed up by a Ben von Bernanke, or a Mervyn Le Roi. Maybe that’s why so many of my friends agree with Atlantic magazine, which praised Ben Bernanke for ‘masterfully navigating’ the financial crisis and avoiding another depression.
Maybe all the Anglo-Saxon central banks have done is create the illusion that our sovereigns are more solvent than they are, and that our budget constraints are really a safe distance away.
But I don’t think they are. And I think the truth gets out eventually. The Enrons, the Allied Capitals, the Bernie Madoffs … they all get their comeuppance. Indeed, it’s what’s happening today in the eurozone. The accounting shenanigans eurozone governments resorted to in order to meet the entry criteria have been found out. Or at least, current CDS prices correlate well with countries’ cumulative deficit manipulations in the run-up to monetary union, as estimated by Paul van den Noord and Vincent Koen at the OECD. You can’t escape your budget constraint with financial gimmickry. You can just make it look like you have for a while.
Because if there is at least one thing the central planners of the status quo do not have control over, it is just that: hope.
Just when we though that nobody would take advantage of the cover provided by the epic flame out of the FaceBomb IPO and the ongoing market crash, here comes Spain. Because there is nothing quite like a little Friday night action following a market drubbing and an "IPO for the people" shock in which to sneak the news that, oops, sorry, we were lying about all that austerity. Because while it came as a surprise to the market back in December when Spain announced it would post a 2011 budget deficit of 8.5% instead of the previously promised 6%, the market will hardly be impressed that Spain actually overspent by another €4.2 billion, to a brand new total of €95.5 billion of 8.9% of GDP. So Monday now has two things to look forward to: the Spanish bond margin hike on one hand courtesy of LCH.Clearnet earlier, and the fact that despite spending even more than expected, GDP growth has disappointed and the country is now officially in a double dip. Hardly what the country with the record wide CDS needs right now.
From Reuters:
Spain was forced to revise its 2011 budget deficit upwards on Friday, after three of the country's regions restated their own figures, exposing the struggle the autonomous communities have had curbing spending even ahead of deeper cuts this year.
Spain said its 2011 public deficit now came in at 8.9 percent of gross domestic product, up from the 8.5 percent initially stated. The country had already widely overshot its deficit target of 6 percent for last year.
The country's treasury department, which disclosed the new figure late on Friday, said Spain was sticking by its 2012 budget deficit target of 5.3 percent of GDP, despite the setback with last year's numbers.
The move came after three of Spain's 17 regions - Madrid, Valencia together with Castilla and Leon - earlier revealed in their budget plans for this year that their own 2011 budget deficits were higher than initially stated.
The central region of Madrid said it finished 2011 with a deficit of 2.2 of gross domestic product, rather than the 1.13 percent it had initially released. Valencia's budget deficit came in at 4.5 percent at the end of 2011, instead of 3.78 percent.
Castilla and Leon's deficit was also slightly higher than previously stated.
The three regions are among the most important in Spain - Madrid is the second largest by GDP, and Valencia the fourth.
Though the autonomous communities have already struggled to rein in spending, deeper cuts now loom, after the central government on Thursday approved their plans to cut spending by 13 billion euros ($16.54 billion) and increase revenue by 5 billion euros.
Of the 17 highly-devolved regions, only Asturias, in the north-west of Spain, had its budget rejected, meaning it will have to present a new one for approval.
The communities' commitment to savings this year will be crucial for Spain to get its overall budget on track.
Fitch said on Friday the government's approval of the regions' budget plans was positive, adding that the willingness of autonomous regions to pass structural reform had increased, but warned there was still a risk they could yet miss 2012 targets.
"We ... expect the central government to put considerable pressure on the regions to cooperate," the rating agency said. "Nevertheless, in the current economic context we consider that there is a risk that potential reforms might have a limited impact on 2012 accounts."
In other words, more rating agencies, downgrades, which as we explained a month ago means that if all rating agencies have Spain at BBB+ or below, the ECB will demand another 5% collateral for bonds posted as repo. Add that to the toxic spiral of LCH bond margin hikes, and things start to look rather bleak.
But saving the best for last:
The change comes as Spain is racing to restore confidence in its banks
and reassure investors spooked by euro zone fears that it can meet
ambitious spending targets.
In an interview with Louis James, John Hathaway discusses the US's economic outlook and why he's delighted by the current bearish sentiment toward gold.
Louis James: Ladies and gentleman, thanks for tuning in. We're at the Casey Research Recovery Reality Check Summit. We're talking with John Hathaway, one of the more successful fund investors – institutional investors – in our precious metals field near and dear to my heart. John, can you give us a quick version of what you talked about here, for those who didn't make it to the conference?
John Hathaway: Sure, yes. I think we're at the end of a correction that resulted from the peak last summer. It was overcooked, kind of hyperventilated hysteria over the debt-ceiling talks, the rating downgrade of the US sovereign debt, and I think basically the stocks and the metal had been working off that boiled down to what we now have is a simmer. I think we are at a position where there's not a lot of downside, and I would not be surprised by revisiting the previous highs of $1,900 and maybe even new highs over $2,000 this year.
What will do that is basically – so much of the narrative has been quantitative easing. When Bernanke announced on the 29th of February that they were done with quantitative easing (and if you believe that I've got a bridge to sell you, but for the time being let's assume that there won't be any), I was very impressed that gold did not go to a new low. It printed somewhere below $1,600 at the end of the year, made a couple-of-day swoon, but it didn't go to a new low. And then when the Fed minutes came out it also did not go to a new low, it kind of reiterated what Bernanke said. So the narrative may be changing. I'm not ruling out quantitative easing as a possibility, but there are things out there that gold might be looking at that the CNBC mentality hasn't figured out.
Remember that gold rose for many years before we even heard of quantitative easing; it was in a steady uptrend. So what could those things be? What would take gold – what would be the new headlines that might take gold to higher highs? To me, the biggest thing is that the Federal Reserve has purchased something like 61% of all new Treasury debt in the last year; and if they aren't going to continue that, then what's going to happen to rates?
Louis: Right.
John: The Chinese – who had been big supporters because they were rigging their currency – have not been generating foreign exchange to anything like the extent they were, so their participation rate in Treasury auctions has gone way down. If you look up the TIC numbers, foreign buying of Treasuries has dropped precipitously, so you have the two biggest pillars of support for keeping rates low in question here, and let's see what happens on June 30th. If you don't have a political buyer, either the Chinese and foreign buyers who are manipulating currency, and the Fed because they said they aren't going to do it, what are rates going to do?
If you are going to get a risk-free return inflation-adjusted today that's not politically motivated, it's got to be somewhere around 4-5% on the short end of the curve. Every hundred basis points adds a huge amount to the budget deficit, so to me we're in a real trap here, where it's going to be a game of chicken as to whether the Fed can really live up to what Bernanke said on the 29th.
Louis: Isn't that really the bottom line? They can't allow that interest rate to rise with the debt outstanding –
John: It seems very difficult. The recovery, the alleged recovery that we had, is very… I'll grant that things are better than they were a year ago or two years ago, but you'd have to call it feeble at best and maybe not sustainable. That's one thing that I think could affect the gold market.
The second thing, and I think it's very important too, is that inflation is rising. Even though the economy is soft, the number I look at – and I know we're going to have John Williams speak at lunch, and we know he has a very good take on it – is the MIT Inflation Index, because that's real-time pricing of billions of products. You can get to that website just by googling "MIT Inflation Project"; and that does not include services. Most of the services I take are inflating at more than 5%; they are closer to 10%. But goods that could be measured in real time are rising at 5%, so that's also going to be a factor. That means if rates stay where they are, the Feds are just going to be that much more behind the curve.
So those are two things; and the third thing is that there's $1.5 trillion of liquidity in the system that should the recovery – and I'm not a macro forecaster, but let's say the recovery does sustain itself – you've got $1.5 trillion of free reserves that could just turn into money supply. Then you really would have a potentially hyperinflationary scenario, and the Fed would be completely powerless to do anything about it. So I think that's bullish for gold – gold is not backward looking, it basically looks forward. I can go on and on. You've got the European unresolved sovereign debt crisis in Europe.
Louis: Let me jump in with a question about this, then. You've stood out really from the crowd in that most people agree on the general prognosis for gold. Most people are sort of near-term bearish, you know, the ones –
John: It makes me so happy.
Louis: [Laughs] But, you know, once a bear sentiment sets in, it seems to almost have its own momentum.
John: Yes.
Louis: You're the only who's saying "I think we're near the bottom." Most people are saying, "Sell in May and go away" –
John: Yes, I heard a couple of things from this session that just made me want to jump up and buy –
Louis: I understand the contrarian reason for that, but can you tell our audience a couple of reasons why you think we might be near the bottom or why you're ready to buy now and not waiting to see how this summer turns out?
John: Sure. Well, first of all, I'm not a trader. I mean, I'm long, and last summer I thought, "Gee, this is really a little spooky, we're not at a sustainable level," but there wasn't a whole lot I could do about it. And here we are and we have some cash, we have some inflows, so we are able to put money to work. And what is it that makes me think we're there? Sentiment numbers are extremely negative, historically, when they've gotten to these levels. By the way, I put out a quarterly newsletter now that has a lot of this data, which can be found on our website.
Louis: Go ahead and give us the website.
John: It's the Tocqueville Asset Management website, and it should be fairly easy to find. So sentiment is at levels that have been associated with big rallies. Traders' commitments, net longs, net spec longs are way, way down there. I look at that a lot just as a way to see where the market is positioned. The guys who can create some volatility are not there, and so if gold starts moving, they won't want to miss it, and so they'll come in. And then, we've looked at some technical stuff. I'm not a technician but most of what I see from a technical perspective is extremely constructive. So I put those things together.
Sentiment is rock bottom. COMEX traders' commitments are very, very constructive, and technical things that we look at are very constructive. So I would say all of those things, plus hearing these guys say that they are not going to step in – that's more anecdotal, but that to me is just very, very positive. So I – frankly I don't stake my reputation the way that Dennis Gartman does on making trading calls, but just as an experienced observer of this market for some number of years now, I think we're ready to make a move higher.
Louis: Okay, well, thank you very much. Word to the wise.
Forget that S&P 500 e-mini futures plunged to four-month lows at 1290; or Treasury yields crashed back to their record lows; or Gold and Silver's surge today; or WTI's plummet to almost a $90 handle; or Citi joining Morgan Stanley in the red year-to-date; or credit markets continuing into the red for the year; or IG9 10Y soaring further to 160bps - widest in 6 months; or VIX closing above 25% for the first time in 5 months (and decompressing to Europe's pain). Today was all about one thing - the disaster that was/is/and will be Facebook - between late openings, overwhelmed systems, a dump to the syndicate bid and almost 600mm shares traded with the syndicate just soaking it all up at $38.00 early and into the close. Is it any wonder that every other social media stock plunged and how do they expect to ever get another internet IPO off again (at anything but a massive discount). No matter what correlation trick was tried to juice markets today - for the tenth day-in-a-row markets saw a BTFD turn into a STFR. Not a pretty end to the ugliest week in six month for the S&P 500 as it nears its 200DMA into the close.
Facebook...
and (h/t Dennis Dick) for the following visual of the HFT tractor beam in FB...
And the massive dominance of the syndicate bid (as who else could it have been) is clear in this chart of the volume profile for today...with Facebook's VWAP perfectly at $40 by the close...
Morgan Stanley = Zuckerpunched
FB needs to be Re-IPOed as the entire float is now held by MS again
Utilities, Energy, and Materials are all now down YTD with Industrials close...
Gold had quite a week...
and longer-term stocks are catching up to risk-assets (proxied here by CONTEXT)...
And corporate bonds (dark red below) are now starting to get hit by the selling in the indices...
A quick run down of the day's events from Bloomberg TV:
Finally, this is what happens, Larry, when due to lack of real demand, you sell the second largest IPO in history to 25% retail, which has absolutely no idea how to trade a $100+ billion company and preserve the illusion of the ponz.
The social bubble may be on the verge of popping, but that doesn't mean that various soon to be extinct offshots can't provide cheap bang for the taxpayer buck. Such as this particular offer which we are fairly certain the Chairman, with Willem Buiter whispering in his ear, is taking a long, hard look at...
Unless Greece chooses to leave the Euro area, which JPMorgan doubts will happen, the rest of the region will have to push Greece out. The mechanism for this will be the ECB excluding the Greek central bank from Target2, the regional payments and settlement system. Although this might look like a technical decision about monetary plumbing, the ECB will elevate this to Euro area Heads of State.
There is understandably a lot of interest in the mechanics of how a possible Greek exit from the Euro would play out in relation to the ECB. Reports of significant deposit withdrawal from Greek banks also direct attention toward the support for Greek banks coming from the Greek Central Bank and the Eurosystem. And yesterday’s announcement by the ECB of restricted access to regular repo Eurosystem financing for a number of Greek banks adds some more complication. Though we would not place a lot of emphasis on what the ECB announced yesterday as a signal of broader attitudes toward Greece, understanding the mechanics matters more broadly.
The view from the asset side…
Let’s start by considering the asset side of the Greek Central Bank’s Balance sheet (This is the less interesting part of the story, in our view).
If the Greek central bank makes loans to Greek banks under standard ECB repo terms, the credit risk on such loans is (under current law) shared across the Eurosystem. Regular repo operations against “extended collateral” see the credit risk transferred to the Greek central bank. And if the Greek central bank makes loans under ELA, the credit risk stays with the Greek central bank.
In the event that Greece were to leave the Euro area, any possible losses on ELA loans to banks and repos against extended collateral accrue to the Greek central bank. What would happen to any losses on regular repo operations in the context of euro exit is much more hazy. Greece may claim legal grounds that any losses should be shared. But since EMU exit would be a material breach of existing legal treaties, it is tough to argue that existing legal provisions would necessarily carry much weight. There would probably have to be some negotiation over any losses that accrue down the line.
The ECB’s decision yesterday to limit the access of Greek banks to regular repo financing, forcing more use of ELA, reflects the fact that the banks and the Greek authorities are still haggling over the terms on which they are recapitalised. The ECB’s position is that until the capital goes in, the banks are not fully solvent, hence lending to them goes via ELA, not regular repos. On the one hand, this puts pressure on the Greeks to stop haggling on the recap terms. On the other hand, some may argue that it demonstrates that the ECB is keen to limit the system’s exposure to Greece as a whole, pushing the loans to ELA where necessary, where Greece has no legal comeback at all for losses. We think the first of these is more important.
The view from the liability side….
If we now think about the liability side of the Greek central bank balance sheet: the story gets more interesting. The Greek central bank creates euros when it grants loans to Greek banks via either repos or ELA. In the first instance, these show up as reserve holdings by the Greek banks at the central bank when the euros are credited to their account. But with euros leaving the Greek banking system, Greek banks lose reserves as transactions are settled through the payments system. As Greek bank’s reserves fall, this is replaced by a liability to the Target2 payments system for the Greek central bank. The Greek central bank’s liability to the rest of the Eurosystem via Target2 is currently near €130bn. As we move toward the Greek election next month, that is likely to climb given deposit flight. But we expect the ECB will do all within its power to keep the Greek banking system afloat until the election, even if some of the loans to Greek banks are redirected via ELA. The terms of ELA can be stretched so that Greek banks do not run out of collateral, while banks can issue bonds to themselves backed by a government guarantee to create more collateral.
How Greece could get cut off from Target2
But a much more challenging question is what happens after the election. Let’s imagine Syriza is able to form a government, declares a debt moratorium, and antagonizes the rest of the region by rejecting the Troika programme in its entirety. Even with no further disbursements of official loans, the region’s loans to Greece via the target 2 system will be continuing to grow. Loans from the Greek central bank to Greek banks would be almost completely forced into ELA.
The ECB can “shut off” the Target2 loans if it exercises its veto over ELA loans (requiring a two-thirds majority on the Governing Council), and if the Greek central bank respects that veto. But the Greek central bank would likely be faced with the need to impose very restrictive controls on Euro deposits to limit outflows if ELA loans to Greek banks cannot be made. If the Greek central bank is faced with the prospect of imposing capital controls, a collapse of the Greek banking system, or defying the ECB’s veto on ELA loans, what route would it take? If it chose the latter, the only way for the ECB to “shut off” the Target2 loans would be to prevent Greek access to the payments system itself, refusing to accept payments of euros to and from Greek banks. At that point, Greek created euros are no longer euros. That decision would not be made by the ECB alone, but would likely be deferred to European Heads of State.
The current market correction should not come as a surprise to any one. There has been consistent and substantial evidence that the rally that began last October was unsustainable. We discussed the coming correction beginning in March (see here, here,here and here ). The question now is becoming whether the current correction is over or is there more to come?
It always fascinates me to watch the media during market rallies as the bullish sentiment takes hold. There is never a word of caution offered to investors that the risks of investing are rising and some caution should be taken. It is "always" a time to buy and never a time to sell. However, this is absolutely contrary to the basic premise of investing which is to "buy low and sell high." Therefore, as investors, we are left on our own to determine when it is "...a time to reap and a time to sow." Whether you are a trader, or a long term investor, the idea of portfolio management is the same. A portfolio, like a garden, will prosper only when it is cared for by weeding (selling losers), watering (making consistent contributions) and pruning (taking profits). A well-tended garden will produce bountiful harvests while an untended garden will eventually succumb to the weeds.
Bob Farrell's rule #9 is: "When all experts and forecasts agree — something else is going to happen." This statement encapsulates the basic tenant of being a contrarian investor. As Sam Stovall, the S&P investment strategist, puts it: "If everybody's optimistic, who is left to buy? If everybody's pessimistic, who's left to sell?"
Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is the darkest. However, being a seller in exuberant markets or a buyer in major rout is very tough, if not impossible, for almost every investor as the emotions of "greed" and "fear" overtake logical buy and sell decision making.
In order to measure the "greed" and "fear" syndrome I have taken the most common measures of investor sentiment including the volatility index, new highs versus new lows, two different polls on bullish versus bearish sentiment and the rate of change of the S&P 500 index and using weekly data combined them into a single "risk ratio." The reason I used weekly data rather than daily data was to smooth out the day to day volatility of the markets to focus on trend changes in the market. The risk ratio functions as an oscillator with it rising as investors become more bullish and vice versa. What is important to notice is that the sentiment ratio generally starts turning down before the market actually peaks. This ratio has been a key driver of recent commentary warning about the coming correction.
If we lay out the "risk ratio" in bands we can more clearly see what actions need to be taken after various points during the oscillation cycle. With the oscillator in the upper band and turning down it has clearly been a sign to reduce overall portfolio risk. While the market is clearly oversold on a short term basis, and very overdue for a bounce, the risk ratio dictates that the bounce should be sold into as the longer term correction is most likely not completed as of yet. Generally, the best buying opportunities have occurred when the risk ratio has gone from "bullish alert" or "extreme bullish" to the opposite extreme. Most importantly, it is critical to note that the buying opportunity does not come until there is a turn up in the ratio from the previous decline.
The current down turn in the risk ratio signifies that the current correction is still in progress and will likely continue for at least several more weeks. However, as I stated above, the market is currently extremely oversold on a short term basis and will likely have a very strong counter trend rally to work off the daily oversold condition. The current market is acting very similarly to what we saw in 2011 as a potential debt ceiling debate and Eurocrisis loom. This opens the door to further weakness in the weeks to come.
The one aspect that can not currently be accounted for, which could quickly reverse this analysis, is the introduction of additional stimulative programs by the Fed. While I currently have little doubt that we will see further easing programs - I do not think that they will come about until we see further economic weakness and a more substantial market decline which would give the Fed the "permission" it needs to take action.
Reiteration Of What To Do Now
As we discussed in yesterday's article "Confirmed Sell Signal Approaches" we stated: "We will want to sell into any reversal that takes us back to previous support levels that have now turned into resistance. Currently, those levels will be 1350, 1360 and 1375ish. Do not get hung up on specific numbers - these are general areas where you want to start raising cash. If the markets are able to rally above those levels we will update our commentary at that time.
The recommended course of actions are:
Liquidate weak and underperforming positions as the market approaches the 1350 and 1360 levels.
Rebalance winning positions by taking profits and resizing positions back to original weights at the 1350 and 1360 levels respectively.
Look for rotation into precious metals as a "safe haven" investment which is currently very oversold.
Short duration fixed income is still an alternative as rates will likely remain under pressure from the rotation out of stocks.
Be careful with dividend yielding stocks — while they will likely hold up during a correction they are already overbought in many cases.
Our call to buy bonds over the past month has played out well. They are currently overbought and extended. Hold current positions but be selective on new additions at this time. Wait for a move in interest rates to 2.2% on the 10-year treasury before aggressively adding more.
Hold cash for a buying opportunity when the next "buy" signal becomes apparent."
Remember, it is the psychology of market participants that ultimately drive prices higher and lower as they respond to the external stimuli of the economic, fundamental or political landscape. This is the value of the "risk ratio" indicator in measuring those "fear" and "greed" factors.
The most important asset destroyed by reversion processes is "time." It is the one commodity that you have a very limited supply of and no ability to replace. By using tools to measure, analyze and understand the environment that we face today, and will continue to face in the future, can help us make better decisions in both our planning and investment process. The management of the many inherent investment risks is critical to long term survival. For individuals it is important to recognize that the "return of capital" is always far more important that the "return on capital"
Nothing could be more appropriate than topping a week of surreal newsflow than what just happened with the EURUSD, which soared by 80 pips on absolutely non news, in what can be attributed to either some algo going apeshit and lifting every offer, a fat finger, or just the tried and true Bank of International Settlement stop hunt seeking to send correlated risk assets higher courtesy of a spark in upward momentum. Sadly today not even this glaring attempt to jump broad risk into the stratosphere is working. And ahead of a weekend where it is rumored Europe may reopen on Monday, we can't wait for the inevitable snapback.
What we do know for certain is that what is not driving the EUR higher, is news of another semi-bank run in post bank-downgrade Spain, only this time not at nationalized Bankia, but at Banco Santander. From the WSJ:
Banco Santander SA's SAN.MC +2.97% U.K. unit lost about £200 million of deposits on Friday as jittery customers worried about the lender's financial health, according to a senior executive.
The deposit outflows on Friday, amounting to about $316 million, represented roughly 0.2% of Santander UK PLC's total customer deposits, said Steve Pateman, Santander's head of U.K. banking. Those deposits stood at £120.1 billion at the end of last year.
"We had a modestly negative day," Mr. Pateman said.
Santander UK has spent the day scrambling to soothe anxious depositors. Customers apparently are nervous about the British bank's vulnerability to Spain and its fragile banking system, and were further rattled by news coverage of a downgrade of the bank's credit rating late Thursday by Moody's Investors Service.
Customers have been visiting Santander branches and calling customer-service agents to discuss the bank's financial situation, Mr. Pateman said. Branch managers are explaining to them that Santander UK is fully independent of its Spanish parent and that the U.K. bank benefits from strong supervision by the U.K.'s Financial Services Authority, he said.
Mr. Pateman said about 70% of customers who visited Santander UK branches on Friday to discuss their concerns left without withdrawing their funds. The other 30% couldn't be convinced, he said.
"They say, 'I got caught by Northern Rock and I don't want to get caught again'," Mr. Pateman said. Northern Rock is a British bank that collapsed in 2007.
