Wishing the Times Were NOT So Interesting

The non-permabears I follow who were bearish in 2008 and perhaps 2007 and bullish for most or all of the up-move in stocks, are growling again. This blog has been growling as well for at least 2 weeks and has pointed out for months that stocks are fundamentally overvalued at almost record levels by two different measures, "q" and cyclically-adjusted P/E. Now that systemic contagion occurred with the famous meltdown last week, yours truly simply does not want to be in the U. S. equity markets. ETFs that own gold and foreign currencies are OK still, though some of them hit air pockets in the sell-off as well.

Charts tell the tale. The move up from the 2009 low was lengthy but the angle of the ascent was much weaker than the angle of the descent. If stocks were undervalued, they would laugh at Greek debt problems.

Given our wildly over-financialized economy, falling stocks will have an adverse feedback effect on the real economy. This is what happens when the powers that be try to revive "animal spirits" by printing money.

The problems we have with financial and monetary policy are worse than the excessive debt loads carried at all levels of society. They include lies such as those to Social Security recipients that it's your money, you paid in, you earned it, etc., disguising the pay-as-you-go nature of the scheme. We now have another lie in Obamacare, which passed due to almost certainly fraudulent assumptions such as that the Congressionally-mandated major cuts in Medicare physician reimbursement will finally occur and the pseudo-fraudulent tactic of providing years of tax increases before the costs really kick in.

Most of the country sees through the charade but can do nothing The time for real financial reform was a year ago, when Big Finance was on its knees. Instead Obama focused on remaking the U. S. health care system years from now. What a genius! Let the fire smolder while getting architectural plans for a major extension to the house. Helping Big Finance get on its feet was an essential part of the strategy that guaranteed that real reform would not occur.

The current Greek tragedy is small beer compared to what could come in the New World. Short-term, though, stocks are oversold. But they are too high. Treasuries may be over-bought. But there is no reported net inflation. Thus yields may arguable be too high. Interesting times, to say the least.

Copyright (C) Long Lake LLC 2010

Domestic Ramifications of the Greek Tragedy

Gold but not silver up. Treasuries and the dollar up. But there will be no speculative attacks against gold, though there may be a squeeze on unallocated gold a la Hunt Bros circa 3 decades ago. Treasuries, though, are vulnerable, as the U. S. has moved to limit interest expense by going very, very short term on its debt issuance. It would only be fitting for the crisis that was made in America to end here.

Gold has moved above the technical barrier of $1160/ounce. It far outperformed the gold miners (GDX). This is more evidence of a move to safety.

This period now resembles the rolling crises of 1997-8. Ultimately the U. S. benefited from importing the Asian deflation (or so it seemed in 1999), but the average stock peaked then even though the averages had much farther to go.

This same dynamic may already have occurred. DuPont had a strong earnings report but succumbed to Greece et al. Steady Eddies such as WMT and MCD did fine.

The next days and weeks should be quite interesting and dangerous. Leveraged late-to-the-party stock bulls might be at risk.

Copyright (C) Long Lake LLC 2010

Evans-Pritchard Opines

The columnist Ambrose Evans-Pritchard banged the gong often last year about dangers to Europe from the periphery of the European Monetary Union. Rising asset prices and staving off of a reply of the rapid downward spiral seen in the early 1930's led him to look like an alarmist. The rapid downward spiral seen in Greece this year, with worsening even today, makes him look better. His latest piece is titled Maastricht madhouse fuels EMU-wide contagion from Greece

His points are several and varied. The article is bite-sized and worth a read in its entirety and thus will not be excerpted here.

Gold is well into record price territory in Euro and British pound terms. Reflexively the USD relative strength has prevented that here. And if America were pursuing sound money policies, that currency strength would be well-deserved. Yet such is not the case. Wheels are turning.

Copyright (C) Long Lake LLC 2010

Beware! Greeks Are not Alone

From Eurointelligence today, THE CRISIS IS SPREADING TO PORTUGAL:

Investors are beginning to doubt whether the Greek rescue will be sufficient, according to the Financial Times, amid doubts that another package stands any political chance, given the uproar in Germany over the current package. The paper quotes Thomas Mayer of Deutsche Bank as saying: “I hope that I am wrong, but I fear that by the end of the year, they will find out that Greece needs a lot more money for 2011 and 2012, and that we will have serious problems getting another package through.”

These and similar fears were reflected on the financial markets yesterday, where Greek 10 year bond yields exceeded 8%, which makes a trigger of the EU/IMF package imminent.

In the meantime, the crisis is starting to spread to Portugal, the next weakest part of the eurozone’s house of cards. The finance minister, George Papaconstantinou, said yesterday that the formal request for aid might occur even before the end of negotiations with the EU/IMF delegation, which began yesterday, and is expect to take two weeks.

Portguese bond yields have been coming under additional pressure, with 10 year yields up to 4.77%, about 1.7pp high than Germany’s. El Pais picks on the IMF’s latest forecasts, in the Global Economic Outlook (more below) for Portugal, which show a strong downward revision for 2010 (to 0.3%). The report also mentioned that Portugal will miss the targets set out in its stability report. At the end of this year, the IMF calculated, Portugal will have a deficit-to-GDP ratio of 8.7%, while the deficit reduction will then proceed only at snail’s pace. In other words, the IMF believes that the stability programme of PM Jose Sokrates is a joke. (The Commission believes the same, and has recently asked Sokrates to make bigger efforts).

Media Conspiracies

Incidently, the Portguese business press, is full of stories this morning telling us that this contagion is not justified, citing anybody who defends up Portugal (Commerzbank for example, which says that contagion has no fundamental justification), while severely criticising those who say a negative word about their country. We observed the same phenomenon in the early stages of the Greek crisis, which was regarded initially as some foreign, or rather anglo-saxon plot against the country.

This is sounding like 1997-98, with rolling currency/debt crises. Then, the NATO countries were impregnable and imported deflation, helping to keep the boom alive. The same is happening now in the U. S., but then we were running governmental cash surpluses and had just won the Cold War and the Iraq War.

Yesterday in the markets, it appeared as if it were that era as well. The average stock per the Value Line Index peaked in 1997-8; a narrowing group of favored stocks led the averages higher into the 2000 ultimate peak. The same thing may be happening now; retailers were strong, drugs and financials weak. Gold rose along with the dollar and the long Treasury. This is getting interesting.

Meanwhile, the first stock I chose to re-enter the stock market with in spring 2009, McDonald's, traded horribly for months, basically tracking the long bond. Now, however, it looks like a star. It is by my count the only Dow Industrial at an all-time high. It beat earnings and sales expectations in reporting Q1 yesterday. It is neither cheap nor expensive, has enough skepticism to convert lots of non-holders to be stockholders, and appears to be gaining share in its market segment, which itself has been pressured the past 2 years and thus may see its own rebound.

The pattern is that MCD, DLTR, TJX and ROST are market leaders with strong but not overextended charts and rising earnings estimates. They are subject to bouts of profit-taking at any time, but every stockholder is happy and will tend either to dump high-flyers or underperformers during feared or ongoing market corrections rather than what for now are good actors reading from an upbeat script.

Bigger picture: What is different between the policies of the Greek government from that of the U. S.? And thus why does not the U. S. end up like Greece?

Thus we have the Scylla of the Japan scenario and the Charybdis of the Greek scenario. It's all about mise-en-scene.

This reality show bears watching.

Copyright (C) Long Lake LLC 2010