Posts Tagged 'uup'

Europe: The Lehman Moment Is Fast Approaching

I was bearish before; I’m even more bearish now. European sovereigns are evidencing a lack of confidence in their own bailout plan and the Lehman moment is fast approaching.  Have to be crazy to have much, if any exposure, to this market.  We will hit new lows.  How’s that for dire?

Building the bailout fund is incredibly similar to building a book on an IPO or secondary, something I have done hundreds of times. I can tell a bad deal from a mile away. This deal is bad.  With a hot deal, everyone wants in regardless of their fundamental view.  Funds will even play in an “okay” deal if they are confident the syndicate bid will support the selling pressure.  Sometimes, a fund is even willing to take a small  hit in the interest in maintaining a good dialogue with the Lead Managers.  But no one willingly goes into any deal if they expect to lose substantial funds.  Insiders – in this case, the EU countries with the most to lose if the deal falls apart – often add to their holdings on the offering, justifying it as a capital infusion or a necessary sacrifice.  If the UK were convinced the current plan to stave off European default would solve the crisis and substantial principal wasn’t at risk, they would gladly contribute rather than being labeled the “bad guy” by sitting out the deal.   The UK, however, recognizes that this transaction will break syndicate bid before the shares are delivered and that they have to keep their powder dry for when contagion hits their shores in a much bigger way.  Once it becomes clear to a book running manager that the deal is being given the cold shoulder by the conventional buyer, they then approach others, such as sovereign wealth funds.  In this case, that would be China but they have said no as well.

Coming up 50 billion short on a 200 billion euro book is a huge miss.   Unlike a lot of IPO’s and secondaries, the EU bailout can’t be downsized to get it to the market in an effective manner.  And by the way, a lot of downsized deals often fail because the market regards them as troubled.

Ultimately, the markets shun the underwriters with poor performance by getting their borrows lined up even before pricing.  Given the track record of the EU and IMF, the UK and US have already decided the ESFS is a short.

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France, Italy – Slow and Angry; EU Ratification Will Fail; US Stocks.

First some good news, the ratings agencies have finally cast themselves as the most consistent market indicator with an inverse correlation of 1.00  as downgrade events are now reflected in market moves higher.   Enough said.

Monti has not been in office long enough to change a roll of toilet tissue yet already had to call for a confidence vote.  This does not bode well for the future.

My view has not changed.  Achieving ratification of the EU treaty will be akin to asking turkeys to vote for Thanksgiving.  And even if the 24 non-French, non-German, non-UK governments do approve this union with a gun to their heads, compliance with their provisions will be tough to come by.  Monti made that clear today in a veiled threat to the Germans

“To help European construction evolve in a way that unites, not divides, we cannot afford that the crisis in the euro zone brings us … the risk of conflicts between the virtuous North and an allegedly vicious South.”

In other words, “don’t even think about asking us to do anything that we don’t want to do such as collect taxes.  Culturally, we don’t do that kind of thing.”

We saw some minor protests in the Italian parliament regarding the austerity measures, with the largest Italian labor union protesting more loudly on the cobblestone streets.  Put into perspective, these protests are targeted at austerity measures being implemented by the Italian government.  Can you imagine the anger when the Germans try to pull in spending?  The Greeks rioted in the streets against fiscal prudence and cost G-Pap his job before the treaty was a twinkle in Merkozy’s eyes.  I’m going to wait until Solution #6 makes the rounds at the next summit.

But I finally understand the lack of speed which the French operate.  In fact, yesterday’s legal accomplishments, the conviction of Carlos the Jackal for blowing up part of Paris and the conviction of Jacques Chirac for raping Paris, only took 30 and 20 years, respectively.  Translated into sovereign debt issues, that should give French banks enough time for the terms of the CDS they wrote on sovereign debt to expire.  Brilliant strategy.

Germany has made it clear they won’t pay up, the US will not contribute to the IMF to bail out Europe and China will use their foreign reserves to buy Europe – not European debt – but rather Europe.  I have asked many what they see as the solution to this crisis and no one has come forward with a solution prior to Europe’s Lehman moment. That’s what it took in the US, and we only have a 2 party system.

French banks will be nationalized as will others throughout the EU.  But that is only part of the solution. Ultimately, the other twin, Mario Draghi, will have to print money and buy more bonds.  The decline in the Euro is far from over – this is only a momentary respite.

Of course, none of this bodes well for US equities.  While Europe represents only 15-20% of our end market, the contagion casts a much bigger shadow.  S&P estimates will have to come down as the dollar strengthens, resetting valuations.  Europe will cascade into recession and China’s economy will continue to contract, further hurting global growth and the US recovery which has been tracking nicely.

The E&C sector and commodities have to continue to weaken as global growth slows.  I like domestic stories that are not dependent on a burgeoning economy for earnings growth.  Managed care remains a favorite and these companies continue to raise their earnings outlook as MLR improves with fewer doctor and hospital visits. WLP at 8.3X EPS with a massive buyback (20% of shares on top of 5% retired earlier this year) still looks cheap.  If employment ever picks up, this will add to growth. Sequestration provides a better result for them than the elusive budget deal. Health care overall looks attractive. MDRX, a company that provides technology solutions to doctor practices and hospitals, supported by a $30 billion incentive boost from the government to put all patients on electronic records, is inexpensive and it is an attractive acquisition candidate for a company such as ORCL that is on record as saying it wants to increase its presence in this business.  I took a small position in CSC, a stock that has been justifiably destroyed, while I do more work on it.  Meantime I get a 3% yield which appears safe.   And of course, there is QCOM, unique in its fundamentals in the tech space.

RIMM – the only question on this company is which will last longer – my phone or the company. Right now its neck and neck.  I used to love my Blackberry but now the service and my 18 month old phone, perform as well as Michelle Bachman at a debate.

As to Bachman, she has to stop using Tammy Faye Baker’s make-up person to be taken as a “serious presidential candidate” (her words).

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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