Europe
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Just like in the US mortgage crisis, a whole bunch of banks and their friends took on some questionable European debt.
These sophisticated mega bond holder were happy to buy questionable bonds because they could bundle them and sell the on the opaque Derivatives Market (Credit Default Swaps) – This questionable insurance put additional leverage on the debt.
Gains were privatized and the risk socialized =
Crony “free market” capitalism
The debt in Europe is massive and when the bond rate of a particular country hits 7% (10 year bond) payments become unsustainable. The question becomes who is going to socialize the risk?
The USA has already donate $5 trillion in stimulus, bailouts loans, money printing, taxes etc. because of the 2008 credit crisis which came to a head when Lehman Brothers had $150 billion in bad bond debt.
Now the largest debtor country in Europe has $2.25 trillion in debt approaching 7%. A number, in the past, that has forced other countries into messy “controlled” fluid bankruptcies. Also meltdowns on global stock markets.
Who is going to Socialize the Risk?
Crony “free market” Capitalism
Just like 2008, we don’t even have an accurate accounting of which globalized shadow bank has how much debt. Only that this over leveraged European debt is MASSIVE
European mechanisms for dealing with this debt are structurally weaker the the USA (fodder for another editorial) and the potential size of the debt in HUGE.
Reading the Tea Leaves - Nobody is willing to socialize the risk. So the Sword of Damocles hangs over stock and financial markets around the world.
Perhaps the only thing that will motivate more socializing of the risk is when a too big to fail bank goes belly up becuse it has too much European debt and through the opaque CDS market – fear of worldwide contagion spreads.
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Obama’s Stand
Like it or not Obama has drawn a line in the sand on deficit reduction -
The Super committee has now officially imploded. Countries far worse off than ours (Ireland, Portugal, & Greece) have already implemented far more relatively onerous tax hikes and deficits cuts.
Obama’s line in the sand to Congress - I will veto any attempt to undo the automatic cuts if you try to exempt any part of them (Pork = any previously agreed cuts that come into effect if plan is not approved). He will only approve a complete plan.
This president is serious about a comprehensive deficit plan
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STOCKS
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Fundamentals simplified
- The Bulls case - Emerging markets are basically sound and the USA is picking up steam.
- The Bears Case - Europe (the world’s largest economic block) has a huge fiscal crisis with no apparent solution.
Yesterday, US markets fell significantly due to European news.
The day after a significant move in one direction is the “confirmation day” It tells us if traders have doubts about the big loss/gain.
US market open is dominated by European trading, The DAX (Germany’s stocks – by far the leading market in Europe) is up +0.22 at 8:20 AM EST. Expect US markets to follow.
By using the homepage of Stockcharts.com you can follow the DAX and other major European indexes in real time. Use the “Today in Market chart and highlight the appropriate index. (It’s free)
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Reading The Tea Leaves
Our #1 technical forecasting tool, the McCellan Oscillator fell to -72.62. 50DMA at +18.29 = Bullish
While we did see a record -140 on the MO in August, a -73 with the 50 DMA at +18 means the market is ripe, technically, for some sort of rebound.
Bottom Line – News from Europe can and will trump the technically bullish oversold US market.
Technicals give us some short term hope, but then there’s the Sword of Damocles.
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Paul’s Corner
What? A big Swoosh? The sound of your grandkid’s inheritance being sucked out of your portfolio? Yup not a great day, but you know the drill today will be up 600, right? As usual Barr gave a great warning last Friday and hopefully you protected your assets.
How would you like to have had a warning on Nov 9 and exit signal on Nov 16? Take a look at Ian Woodward’s (HGSI) latest blog where he discusses %B and Bandwidth.
Clear as mud eh? Well it’s pretty simple stuff. %B represents where a stock sit’s in its Bollinger Band and Bandwidth is the actual measurement of the width of the Bollinger Bands surrounding your stock. Using the two you can accurately gauge the health of a single stock or the overall market.
Ian has been preaching this stuff for several years. Recently I questioned Ian about a certain move of the Bollinger Bands of the S&P 1500 index. In our discussion he spotted a way to take the position of the index within its Bollinger Band (%B) and multiply it by the Bandwidth you get a very fast confirming indicator.
Ian’s chart shows the early warnings on Nov 09 and the Outta Here warning on Nov 16.
This stuff is only a few weeks old and doesn’t have years worth of confirming signals to prove the wealth of this new indicator, but from what I see it’s a real silver bullet in the HGSI market analysis tool kit.
YSL 7 is just about finished. Barr and I have a few stocks to kick around, hopefully next Tuesday we will publish.
Happy Thanksgiving all!
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Put/Call Hedge Trades
This is NOT an event driven hedge trade like GMCR or ANF.
Longer Term a Call on AAPL and a Put on AMZN.
Reasoning
- It’s very hard to make an investment in an events driven market. You have little idea which way stocks will turn.
- Technically APPL’s chart is much better than AMZN. The later in free fall.
- Exit strategy – Exit 1/2 the trade with 5+% gain. Let the rest ride.
More in comments section or tomorrow’s blog.
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Positions
Hopefully Longer term positions.
GLD - DGP is the more risky double long gold ETF. 1/2 position added at 173.85. Sold through a stop order at 165.20 The 1/2 position had a 4.5% loss
USO - (2x oil prices ETF UCO riskier) Back under consideration if/when stocks dip further.
EUO (double short the Euro currency) 1/2 position Bought at 18.60 Friday
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Longer Term Outlook
3+ months
NEUTRAL
Investors411 has 5 different valuations - BULLISH, CAUTIOUSLY BULLISH, NEUTRAL, CAUTIOUSLY BEARISH, and BEARISH.
Everything written in BROWN is a repeat from a previous day(s)
AS ALWAYS, DO YOUR OWN RESEARCH BEFORE INVESTING
ALL TRADING INVOLVES RISK AND POTENTIAL LOSS OF PRINCIPLE
CHECK ALL DATA, I MAKE MORE THAN GRAMER ERRORS.
