May 24, 2010, 08:00 EST [img]http://www.joe-duarte.com/images/line_main_top_03.gif[/img] Dr. Joe Duarte's Market I.Q. [img]http://www.joe-duarte.com/images/line_main_top_05.gif[/img] [img]http://www.joe-duarte.com/images/line_main_top_07.gif[/img] [img]http://www.joe-duarte.com/images/000.gif[/img]
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Intelligence, Market Timing, And Trading Strategy For Traders and Investors
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Spain: A New Greece Emerges
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[img]http://www.joe-duarte.com/images/pic_04.gif[/img] What's Hot Today:
U.S. stock index futures were pointing to a lower opening on Monday. The Euro was below 1.24 on the dollar. Asian markets bounced some, but European markets were headed lower. The market may have gotten its bounce on Friday, and the start of a new dow leg may be on the way.
- Existing Home Sales 10:00 AM ET
- 4-Week Bill Announcement 11:00 AM ET
- 3-Month Bill Auction 11:30 AM ET
- 6-Month Bill Auction 11:30 AM ET
Europe: The benefit party and "lifestyle" may be coming to an end. According to The New York Times: Across Western Europe, the “lifestyle superpower,” the assumptions and gains of a lifetime are suddenly in doubt. The deficit crisis that threatens the euro has also undermined the sustainability of the European standard of social welfare, built by left-leaning governments since the end of World War II."
In fact, a big jolt of reality is what seems to lie ahead. Since World War II, as The Times points out: "Europeans have benefited from low military spending, protected by NATO and the American nuclear umbrella. They have also translated higher taxes into a cradle-to-grave safety net. “The Europe that protects” is a slogan of the European Union." But now " all over Europe governments with big budgets, falling tax revenues and aging populations are experiencing rising deficits, with more bad news ahead. With low growth, low birthrates and longer life expectancies, Europe can no longer afford its comfortable lifestyle, at least not without a period of austerity and significant changes." No wonder there are riots. Thing are about to change, in a big way.
And the man on the street, literally has a lot to say. According to The Times: 'In Athens, Aris Iordanidis, 25, an economics graduate working in a bookstore, resents paying high taxes to finance Greece’s bloated state sector and its employees. “They sit there for years drinking coffee and chatting on the telephone and then retire at 50 with nice fat pensions,” he said. “As for us, the way things are going we’ll have to work until we’re 70.” In Rome, Aldo Cimaglia is 52 and teaches photography, and he is deeply pessimistic about his pension. “It’s going to go belly-up because no one will be around to fill the pension coffers,” he said. “It’s not just me; this country has no future.”'
We just thought it was worth reporting, in case anyone in Washington reads The New York Times, which is considered by many to be a left leaning publication.
A Euro OOPS, could lead to a U.S. debacle. According to The Washington Post: "the knife-edge psychology currently governing global markets has put the future of the U.S. economic recovery in the hands of politicians in an assortment of European capitals. If one or more fail to make the expected progress on cutting budgets, restructuring economies or boosting growth, it could drain confidence in a broad and unsettling way. Credit markets worldwide could lock up and throw the global economy back into recession."
And what's the connection? According to The Post: "For the average American, that seemingly distant sequence of events could translate into another hit on the 401(k) plan, a lost factory shift if exports to Europe decline and another shock to the banking system that might make it harder to borrow." And it only took the Post a few weeks to figure it out. Way to go guys.
Poll: overwhelming majority doubts that Congress knows what it's doing with regard to the economy. According to Rasmussen Reports.com: "Even as Congress puts the finishing touches on legislation asserting more government control over the U.S. financial industry, most U.S. voters continue to believe the legislators have little idea what they're doing when it comes to the economy. The latest national telephone survey of Likely Voters finds that just 27% are at least somewhat confident that Congress knows what it’s doing when it comes to addressing current economic problems. An overwhelming majority (72%) are not confident in Congress to address these problems. These figures include six percent (6%) who are Very Confident and 43% who are Not at All Confident." November may be hugely interesting after all. [img]http://www.joe-duarte.com/images/000.gif[/img]
[img]http://www.joe-duarte.com/images/pic_04.gif[/img] Spain: A New Greece Emerges [img]http://www.joe-duarte.com/images/blok_rub_top.gif[/img] When In Doubt, It's Better To Spell It Out [img]http://www.joe-duarte.com/images/blok_rub_bot.gif[/img]
The takeover of a Spanish bank, over the weekend, gave sellers a new excuse to move prices lower overnight. And according to some, the situation may be much worse than anyone had thought, as Spain's banks may have as much as 300 billion Euros worth of unreported mortgage related losses on their books.
There are those who complain about the lack of transparency in U.S. bank balance sheets. But the situation in Spain may be much worse than that. One market observer told CNBC.com that Spain's situation is so bad that the country is now an "anti-market" entity and that "it is impossible to tell how bad things are as banks refuse properly price houses sitting on their books following the collapse of the market."
The bottom line is that no one has any real idea as to how much money has already, or is going to go up in smoke in Spain, as the lack of realistic accounting with regard to how many toxic assets are sitting on the balance sheets of individual banks, or even the central bank, which may have taken on some of the bad mortgages during the height of the crisis.
This is in contrast to the U.S., where Fannie Mae and Freddie Mac, along with the Federal Reserve periodically disclose some semblance of the amount of toxic assets that they each have on their balance sheets. To be sure, this isn't any less daunting, given that Fannie and Freddie will likely never be solvent again, and that they account for 90% of the insurance on U.S. mortgages. But at least the markets and individuals have some sort of number to hang their hats on.
Yet, Fannie and Freddie are now the next time bombs. As The Wall Street Journal points out: "Fannie Mae and Freddie Mac, the mortgage-finance giants that are now wards of the government, are on their way to becoming the single-biggest cost to taxpayers from the financial crisis—ahead of the banks, auto makers, or even insurer American International Group." In fact, the U.S. government has now pumped $145 billion into Freddie and Fannie in order to keep the companies, and the U.S. housing market and the economy from collapsing, given housing's central role in the economy.
The problem for Spain, and Europe, is that the U.S. has had lots of experience in this sort of thing for many years, having juggled deficits for decades, as U.S. workers, and taxpayers continue to foot the bill. In Europe, as Greece has highlighted, the social safety net has decreased the amount of financial support for the governments to a point where they can no longer sustain the constant drain on their coffers related to entitlements. The U.S., for its own, may be close to that point, but has not yet shown signs of the same vulnerability.
Furthermore, as The Journal points out: "The losses being reported today are a legacy of mistakes made during the boom, not from current activities. It's unrealistic to suggest that the government can walk away from those losses or limit the amount taxpayers will cover unless it's willing to sacrifice confidence in U.S. investments. The loans that Freddie and Fannie are making today have much tougher underwriting standards and are expected to be profitable for the companies." In contrast, Spain has yet to even acknowledge the extent of its problems, much less even suggest a set of solutions, which means that the trouble for them is just starting.
Germany is also starting to make aggressive moves. The country has proposed slashing its entitlements and has begun to put together a set of austerity measures which it plans to keep in place for several years.
Meanwhile Spain's Prime Minister, Jose Luis Rodriquez Zapatero, was talking tough about "austerity" and asking the wealthy to “make more effort” in order to shoulder the country's growing financial issues. It's not certain to what degree Spain has a tax collection problem along the lines of Greece. But it makes sense to consider that as part of the equation as well.
What it all boils down to is that the markets seem to have moved on from Greece as the flashpoint. And they are now moving toward Spain.
Conclusion
Think of the process we are witnessing as the discovery process that goes on in legal and criminal proceedings. Investigators dig for clues, and when they find them, they add them to what is already known and the set of available conclusions evolve.
The markets now know that Greece lied about its deficits, that it used derivatives to obfuscate the European Union, that there are large numbers of people in Greece who don't pay taxes, and that the government there acted irresponsibly. The market has punished Greece. And Greece is being bailed out by Europe.
That means that there is not a whole lot more to factor in with regard to Greece, other than whatever has been done will either succeed or not succeed. But that's a problem to be dealt with later.
The market's collective attention has now moved on to Spain, where we have had rumors and expectations of problems. Now information is starting to leak out. There are big problems in Spain's banking. There are billions of Euros worth of dead loans somewhere in the system, either on bank balance sheets, or somewhere on the central bank's balance sheet. No one knows for sure, how many, how much they may be worth, or where they are.
The Spanish government is acting tough, talking about austerity and hinting at higher taxes for the rich. But they haven't really stated what the problem is, or what they plan to do about it, other than to get tough and pay their bills.
That's the problem. No one really knows what the issues are. So the proposed solutions aren't addressing anything concrete. All of which means that Spain is now the new Greece, and that volatility will continue.
And when the concept is murky, traders sell. Period.
We'll be on Twitter some time today before the market closes with some updated comments.
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[img]http://www.joe-duarte.com/images/pic_05.gif[/img] Market Moves U.S. Dollar Bull ETF (NYSE: UUP) Struggles
The U.S. Dollar Bull ETF (NYSE: UUP) struggled last week, but may have new life this week.
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Chart Courtesy of StockCharts.com
The Euro rallied last week, mostly because it was very oversold, not because anything good had happened in Europe. But revelations that Spain's banking system may be the next black box to implode made the dollar the "go to" currency overnight.
To be sure, the U.S. isn't exactly an oasis of prosperity right now. But there are indications that some growth has taken place, at least in the last couple of quarters. The most recent jobless claims report, and the upcoming employment report may change that notion, as there are news of increasing layoffs in the U.S.
And there is likely another round of mortgage losses on the way, as "prime" Option Rate adjustable mortgages reset in the U.S. The combination of job losses, and rising mortgage defaults, could hurt the dollar's status as a refuge currency.
But, for now, it seems as if the market is willing to overlook that potential problem, as it's not yet totally visible. In the market's eyes, Spain is now visible. And since markets make bets on whatever is more visible, for now the dollar looks like a better bet than the Euro.
Technically, UUP has been able to hold up near $25. If the dollar bounce holds, UUP should be able to hold up for now.
Dr. Duarte owns shares in UUP.
