Posts Tagged 'drr'

Beware of Greeks Returning Gifts: Push Them Into Default

JP has been cutting my hair for about 15 years.  He says the initials stand for Jean-Paul but given his decidedly Asian roots, that would be akin to Woody Allen claiming his real name is Frederico Fellini.  But I understand that working in a salon versus a barber shop requires a higher end nom de plume.   JP’s hands shake, not a great affliction for someone who makes their living holding a sharp instrument to someone’s head; actually not great for the customer either.  But I like JP, and although most who see me would likely disagree, I think he does a decent job.  Until the Greek crisis grabbed the headlines, I never attributed his shaking to having held a pair of shears in his hand as a hazard of his employment.  All that has changed.

Me: Sorry, JP, but I have to call you my barber from now on, or hair cutter, if you prefer.  You choose.

JP: I am a hairstylist, not a simple barber.

Me: Wish I could agree but you’re on the downside of 50 and the standard for a hairstylist, according to Greek doctrine, is that you retire at 45.  Anyone who can’t afford to retire at that age is no longer a hairstylist but rather a barber.

Any doubt in anyone’s mind that if Greece stays in the EU, that we will be revisiting the debacle in 3 months, 6 months, 9 months and every day in between?  My solution to getting their foot off the neck of the global markets is to let them go, push them into default.  That is the only way to put this behind us and move forward.  Short term pain for long-term gain.  Clear the decks and onward and upward. Okay, enough clichés.  The overriding issue is that the profligate countries have to be weaned off the golden teet ofGermanyand, to a lesser extent,France.   Berlusconi has attempted to re-tradeItaly’s austerity plan by extending the implementation date for hiking the retirement age.  Irelandis seeking to re-trade their agreement.  At some point a deal has to be a deal and those living in violation of those agreements have to face the consequences of non-compliance.  By allowing Greeceto default, or pushing them into default (read: bankruptcy) others will get in line.  Of course, there has to be a shock and awe safety net forSpainandItalywere Greece to default but the ECB can and should provide that.  No sense being foolish about this – have to limit the contagion.  There will be enough unintended consequences as a result of this strategy but my sense is a Greek default won’t come as a surprise to anyone.  Of course, the CDS holders will get paid and those that wrote the insurance, or took the other side, will experience a result they weren’t counting on but there is a benefit here.  The CDS market will shrink; CDS writers will understand that countries can go belly up driving the cost of the derivative significantly higher.  And with the shrinking of the CDS market, high risk investments will decrease, involuntarily chasing high risk takers (read: French banks and former New Jersey Governors) out of the market.

Were this to happen it may temporarily prop up the Euro but make no mistake about it, the Euro is going lower.  Europeis trending into recession and the only way to combat contracting growth is by easing as Draghi did today.   TheU.S.economy is getting stronger while the rest of the world is weakening.  That translates into shortEuropeagainst long dollar.  Right now the Euro seems to win both ways; that can’t last forever.

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European Sovereign Debt Crisis Survey – What Is/Was Discounted In The Markets

In my view, the most important issue facing the markets is the European sovereign debt crisis. This issue is the breeding ground for so many other factors facing the global economy being that the EU collectively represents perhaps the most significant trading partner for China and the U.S. With this in mind, last Friday, I sent out a survey containing 5 simple questions to a small portion of my contact list with the intent of gauging what sophisticated, institutional investors believe the market is telling us about resolution of the crisis. Admittedly, the sampling was small in terms of respondents but the dollars under management significant. I supplemented the written survey with  conversations soliciting responses to the same questions. Fortunately, not one of my friends added me to their Do Not Call List. Now, in full disclosure, I am not a graduate of Quinnipiac University nor a former employee of Harris Polling, but this did not stop me from understanding the clear message of the data. The overwhelming majority of the respondents believe that the market is discounting the most positive scenario and that if this were not delivered, albeit with a time frame for compliance of 3 to 6 months, that the indices would hit new lows. Giving credence to this view is the fact that the recent rally in the S&P began contemporaneously with the Sarkozy and Merkel speech wherein they stated that they have a meeting of the minds regarding what needs to be done to stem the crisis. November 3rd was the drop dead date they offered for presenting a unified plan although recent chatter and an increased sense of urgency has served to have brought the date for resolution closer by a week.

Today, this changed, as Germany threw cold water on a shock and awe solution resulting in a 2% decline in the S&P. It would not be inappropriate to argue that the market went from an oversold to overbought and today’s action was normal consolidation but I disagree. Now, in fairness, I applaud the Germans for reining in expectations that became much too optimistic. I had, in fact, pointed out in prior notes that the news flow would create peaks and valleys in the averages along the road to November 3rd. Today was the first valley but I feel there will be more to come. I also mentioned late last week (Have We Seen The Future: The European Solution…  October 13th) that I had taken off some long exposure and right now I have no interest in revisiting my strategy. That was the right move and I further reduced my net long exposure early in today’s trading session.

I hope the Europeans continue to reset expectations but even if they do, it will only forestall the inevitable because I do not see shock and awe coming anytime soon. I remain cautious on the market overall and continue to see the Euro short as a compelling investment.


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