The Morning Call
The Market
Technical
The
indices (DJIA 14452, S&P 1552) remain out of sync, with the Dow above its
previous all time high (14190) and the upper boundary of its short term uptrend
(13726-14391) and the S&P below those comparable levels (1576) and
(1495-1569) respectively. Both remain
within their intermediate term uptrends (13517-18517, 1433-2017) and their long
term uptrends (4783-17500, 688-1750).
Volume
fell; breadth deteriorated, with on balance volume looking ugly. The VIX not unexpectedly jumped 13%,
finishing within its short term and intermediate term downtrends.
GLD
had a good day, though it remains solidly within a short term downtrend.
Bottom line:
while the Averages were down on the day, I was surprised that the decline
wasn’t worse given the headlines out of Cyprus . That suggests one of two things to
me---either the bulls remain alive and well and continue to ignore bad news or
I am unrealistically pessimistic about the downside risk of the EU sovereign/bank
solvency problems.
We will know
more in a couple of weeks. In the
meantime, I am sticking with the former interpretation with the caveat that I
am open to changing my mind. The
question remains, is this a topping process or a pause before another leg
up?
However, even if
there is a break to the upside, I don’t believe that a next leg will cover much
distance as the indices will be bumping up against the upper boundaries of an
80 year uptrend.
As a result, our
Portfolios remain better sellers.
Options
point to a big move (medium):
Fundamental
Headlines
No
economic news yesterday; and if there had been, it probably wouldn’t have
mattered anyway. Unless you were in a vacuum
chamber, you know investor attention was focused on the terms of the Cyprus
banks bail out which were announced over the weekend. I provided the terms in yesterday’s Morning
Call to which I add the following three links addressing the key issues:
JP
Morgan on Cyprus
(medium):
Counterpoint
(medium):
Part
of the bail out includes the provision that Cyprus
must supply one half of the bail out funds (roughly $5.8 billion). What has tightened the most sphincters is (1)
the tax [confiscation?] of a portion of depositors’ capital even
those for whom deposit insurance would apply and (2) the absence of any
contribution to the bank bail out from senior lenders. In other words, the banksters skate and the
little guys take it in the snoot.
At
8AM EST the Universe was in agreement
that this was one of the stupidest moves the eurocrats could have made. And at the moment of this writing, there are
rumors everywhere that the deposit insurance will be reinstated and that senior
lenders will be forced to take part of the $5.8 billion hit.
Here
is an entertaining response from an average European on just how moronic the Cyprus
bail out (in) is (9 minute video):
Ashes
to reality (medium):
Giving
them at least some credit for reversing a foolish plan, we are still left with
several questions:
(1) how could
they have been that stupid in the first place?
Doesn’t it reflect beyond a reasonable doubt just how little these guys
understand about the problems that they are being paid to solve? What is to
prevent them from making an equally idiotic decision in the future but where a
much larger sovereign/bank is involved and there is little time to reverse
their actions before real damage is done?
(2) how much
damage has already been done to depositor psychology? Will this move build in a guaranteed bank run
during the next hiccup?
(3) many of the
large depositors in Cypriot banks are Russian government officials, oligarchs
and mafia. They are still going to take
a hit and it may be higher that originally reported as they may have to share
with the senior debt holders the deficit created by re-guaranteeing the deposit
insurance. How is that going to work
out? History tells us that ‘you don’t
fool with Mother Russia’. So if I were a Cypriot banker I would be trying to
cut in line for the FBI’s new identity and relocation program. Or maybe the Russians demand
reparations. At the moment speculation
is that Gazprom has ‘volunteered’ to supply the necessary funds in exchange for
the drilling rights to Cyprus ’
offshore acreage---said to be quite large.
The bad news
here is that (1) this is just one more example of poor bank regulation and
incompetent eurocrat leadership that could easily create an even larger
disaster and (2) the uncertainty this creates about depositor psychology in
other EU countries.
The good news is
that (1) Cyprus is a wart on a goat’s ass and, therefore, its banking problems shouldn’t
be sufficient to bring down the EU much less the global financial system [barring
more numbskull eurocrat solutions] and (2) the US will probably benefit as it
appears once again to be the best house in a rotten neighborhood.
Bottom
line: while it seems that the Cyprus
situation may turn out to be less severe than thought at the outset, I do think
that we need to let it play out a bit longer before breathing a sigh of
relief. Furthermore, even if the US
is the best horse in a herd of nags, the issue remains, what do you pay for
that?
Our Valuation
Model suggests that the current investor risk/reward equation is not attractive
enough, except on a very speculative, short term trading basis, to warrant
chasing prices up from here.
I
like our cash position.
More
on valuation (short/medium):
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