Night after night, morning-to-morning, it’s the same routine. The iPad sits at the ready, less than an arm’s length away on the nightstand, sharing space with an old school Blackberry, an alarm clock separating two generations of technology. It’s the last thing I look at before I go to sleep and the first item I reach for when I wake. I’m seeking out news, waiting for the solution. That’s what I need to get off the sidelines, to put my cash to work. Sure equity valuations are cheap, that is if you believe the global economy is not worsening. Sure Treasuries are overvalued and in a bubble and asset allocation begs for a swap into equities but these factors have been in place for a year. In the interim, China has markedly slowed and Europe is in an economic near death spiral. Ergo, I need something new: a plan that will work. I am fairly confident that I know what the answers are, I’m just hoping that some variations of it appear in a Reuters or Bloomberg headline:
ECB Lends $2 Trillion to Spain and Italy – Funds Targeted for Banks;
Greece Accepts Receivership: Icahn Reveals That He is Part Greek and Agrees to Head Creditors Committee
I would settle for one out of two, the ECB lending program being my first choice. The last two days brought scant hope, with Spain’s Budget (a clear oxymoron) Minister asking for other “European Institutions” to “open up and help facilitate” a recapitalization of their banks. (http://www.bloomberg.com/news/2012-06-05/spanish-minister-urges-eu-aid-for-banks-in-first-plea-for-funds.html). I guess, a recognition by Spain that they have a problem is the first step toward a solution. Record outflows of capital and the seizing up of the banking system has a way of offsetting the effects of too many carafes of sangria at three hour lunches more so than afternoon siestas. However, there is little chance of Germany injecting capital directly into Spanish banks. And then today, we had the ECB’s Mario Draghi tell us not to worry, capital is not fleeing, hoping to dispel us of the facts. Nice try, Mario, but this will not help me sleep any better.
Here is how I believe the issue should be resolved in order to restore some semblance of sureness to the market. Actually, this is not really my original thought but rather that of an extremely successful hedge fund manager as we discussed the issues during a game of golf. However, as a part-time talking head and part-time author, I am in conflict: the former imbues me with little respect for identifying ownership of ideas, claiming all as my own, while the latter avocation imbues me with abhorrence for plagiarism. Since no one is paying for this advice, I will default to the former and provide what I believe would put the market back on firmer footing in response to Europe. While the ECB is not allowed to buy new issue debt from sovereigns, it can loan money to them. Spain will ultimately agree to a program and, in return, the ECB will provide a 30 year loan with a nominal coupon to the government, specifically targeted for the banks. This will not crowd out any other creditors, thus limiting resistance. As part of this rescue package, and in lieu of using Spiderman towels and English lessons (wouldn’t German be more appropriate?) to lure potential depositors, the banks will offer greater levels of deposit insurance, backstopped by the ECB. There will be greater, collective EU oversight to large EU banks as a condition to German participation without obligation of further German funding.
Perhaps the above won’t happen so here’s another thought. It was also reported by Bloomberg that the EU and ECB is at work on a Master Plan (http://www.bloomberg.com/news/2012-06-03/ecb-eu-drawing-up-crisis-master-plan-welt-am-sonntag-says.html) and may have something ready by the end of June. Well, that would be nice but this would have to be authored and led by someone other than Merkel’s countrymen since Germany’s last Master Plan didn’t work out well for anyone and time has done little to erase the memory. The problem is that no other European economy has the economic wherewithal to plug the dyke. I imagine that Germany does a daily calculation comparing the breakup of the currency and the potential impact on trade with the cost of being the sugar daddy for the rest of the EU, albeit without the typical prurient perks of being so benevolent. The Germans undoubtedly realize that they would have the world’s strongest currency were the EU to fail, thus crippling their own economy by making the price of their goods uncompetitive. Here’s a solution: cut off the EU like you would a drug addicted stepchild and allocate those funds to internal spending, thus inflating the D-Mark and maintaining competitiveness in global trade. Instead of the annual Oktoberfest, have a Freitagfest and a 4 day workweek, placing them on more even footing with the rest of socialist Europe. That won’t drive the DM to levels on par with the drachma but will get you moving in the right direction.
So as my search for the evidence of a solution forges on, I remain on the sidelines although even the hint of a legit solution (or of an improving US economy) will rally an oversold market. Oversold rallies, however, such as today’s (June 6), are to be sold, not embraced. Commodities will remain under pressure and steel is still a great place to be short as analysts now begin to look for losses in the upcoming quarter. Recall that last year, X reported a loss despite a combined 13% volume and price increases. Their end markets, with a slowing global economy, won’t be so kind this time around. They didn’t even bother to offer a mid-quarter update at their analyst day today.
One more thing – look for downward revisions to multinationals pick up speed as the dollar retains its strength.