New Trade

I emptied my futures account on Friday, apparently just in time.  I use Etrade, but they use MF Global for futures (I was told they are switching to another futures broker next week when I transferred my funds back to my brokerage account).
It looks like the market saw through the latest "plan" sooner than they have in the past.  At the risk of overstating things, it looks like its already starting to unravel.
- 50% Greek bond haircut CDS aren't trigger?  Really?  That happens and CDS mean next to nothing.  Watch as bond yields everywhere rise as a result.
- Even if the Germans want to leverage the EFSF through first-loss insurance and CDS (see last bullet point), who is going to invest?  Not the dumb money (China), and the other BRIC's have already ruled it out.  ("Why don't you just say, 'want to pour your money down a rat hole?'").
- The euro-economy looks headed for a recession.
- Italian bond yields are still near all-time highs, and look set to continue rising (risk of ECB/SMP coming to the rescue, if they have the balls).
- 2 yr euro swap-spreads are also still at/near all time highs.  VIX is rising again and EUR/USD is coming back to earth.

All of this has led me to enter a new trade: Bought EEV at 31.98.  I usually like to trade in WTI, but the WTI-Brent spread looks like it may be closing, and I don't have enough information to evaluate it.  Let's see how this goes...

Scusi, badaba boopi?

If Germany is the keystone of the Euro, Italy is now its linchpin.  With 10-yr yields hovering near all-time highs, Germany is demanding more austerity and reforms from Italy before they can be guaranteed by the EFSF, and probably even to continue under the ECB's SMP program.  As noted by Mario Draghi, rising borrowing costs are threatening to eat up a chunk of the €54 billion in austerity measures already approved by parliament.  But things are not looking good out of Italy: Berlusconi, douchebag that he is, is pointing fingers back at Germany, rather than manning up and doing what needs to be done.  Worse, the half-assed plan he plans to submit tomorrow falls short of German demands, as that is all he can muster up without his coalition breaking and new elections being called.  If his government falls, all bets are off - rising yields do not mix well with new debt issuance, and the uncertainty created by the absence of a government for at least several months has a good chance of being Italy's, and Europe's, coup de grace.

Well...

Well, the Euro PMI data came a little mixed, but to the downside, but the Industrial New Orders came higher than expected, so...  Not looking too good for the EMU, but the situation is still not beyond salvage.

There was also positive flash PMI from China, which has helped to boost commodities, notably oil and copper.  Looks like a risk-on scenario, but based on the same Euro plan-for-a-plan-that-we-already-know-won't-work, I'm not sure I will participate in the upswing; I don't like to chase momentum.  Solvency is still and always will be the crux of the crisis, and unless that's solved, the efforts to maintain liquidity are useless, no matter how big the bazooka is.  Italy seems to be flaking out on much-needed reforms, even with the Germans and ECB pressuring them to act; it will likely take their bond yields blowing out again to get them to act right...which doesn't seem too far from happening: 10-yr yields hit 5.95%, slightly below their unsustainable highs of 6.2% in early August.  French-German spreads are also hitting all-time highs.  ECB emergency lending is also near all-time highs, as are 2 year Euro swap spreads.

I'm having trouble reconciling the deteriorating liquidity and solvency picture in Europe with the equity and commodity risk-on trade.  Does someone know something I don't?  Is it Euro fatigue?  Is the market really taking Yellen's call for QE3 seriously?  Is there a serious chance of that happening near-term?  Is this ramp-up just a set-up for a smack-down?  I think its better to sit out until I can figure out what's going on...

Re-Re-Visit euro-FAIL

As I noted in my previous euro-FAIL post, the one and only uncontrollable monkey-wrench that couldn't be prevented from fouling the Euro-machinery, is a declining economy.  If the Euro has a will, they have a way--unless they re-enter a recession.  In that case, they will be unable to meet their deficit targets, no matter what austerity measures they pass.  So let's take a look:

Euro recovery-GDP was even worse than in the U.S., and it doesn't look like its in an uptrend.  We should be getting Q3 figures shortly.

Economic activity (these charts display PMI manufacturing and services, respectively) has been falling sharply in the Euro-zone.  Monday (Sunday night in the U.S.) will have the latest figures, so we'll see if they get a rebound-bounce like in the U.S., or continue their descent.

Time to fess up

I often wonder how much money I would have by now if I didn't make bone-headed decisions.  Not just wrong decisions; those happen.  I mean bone-headed decisions... just cut out those...  Anyway, like driving, or operating heavy machinery, don't trade while drinking, especially if you don't put stop losses on your position and go to bed forgetting that you entered a trade.  Wow, I sound like I need a 12-step program.  But I don't, I just need to not do dumb shit.  Needless to say, I lost a full 25%.  Ya, I know.
I still haven't gotten the new MS Office program, so I can't update the PSFI index chart, but it should now read 150%.

Looking for the next ride down

Unfortunately, I got spooked out of my last trade too soon, but I'd rather keep risk low with the kind of volatility we've had the last few months.  We bounced right off a technical top to the recent trading range today (S&P 1218), and if we don't break through it tomorrow or Friday, we'll probably head lower.  This is always subject to announcements out of Europe promising to promise to fix their mess.  Also, earnings season is upon us, so positive forecasts for the economy in forward looking statements also creates upside risk; I have a feeling its already baked in, though.
Downside risks (other than the technicals) include worse than expected earnings, a Slovak surprise, more evidence that Euro banks will resist recapitalization, no movement on Italy's part, a no-plan (or a b.s. plan) by the Oct. 23 scheduled date for a "plan," etc., etc.
Long story short, I'm still looking and waiting for a good spot to get in, long or short...we'll see how things play out.

Tone Changing Again

The market has moved so fast in the last 2 days, and the ECB left rates unchanged; the market tone seems to have changed...  so I'm going to take profits and take a step back.  We may go a little higher here, but we're likely to see another leg down (unless tomorrow's NFP numbers come better than expected).

Closed long at 1135.  Gain of 20%.  Not bad...

Update to PSFI Index:  I'm not able to use Excel to update the index, but it should read 192%.

And another thing:  To JCT: what good is low inflation if the Euro economies decline and therefore wreck the budget-balancing plans?  Primary mandate or no, I don't get it...why have a human making robotic decisions?  If you want robotic decisions made, have a computer decide.  Ridiculous.

Going Long

After the ISM releases came better than expected, and Europe...at least saying they finally get it..., and the fact that we're at the bottom of a trading range, I thought this was a good place to go long.

Long ES Dec '11 @ 1121

Revisiting Euro-FAIL

The short-term direction of the market hinges on two things: 1) whether the U.S. is heading in to a recession; and 2) whether Europe can get its act together.


1) ECRI believes recession is a certainty.  I'm not ready to put the nail in the coffin just yet, though.  Overall numbers are down, but not bad, and yesterday's Chicago PMI surprised to the upside.  Next week has alot of data coming out, notably the ISM and NFP figures (plus EU and Chinese PMI); I'm going to hold off on passing judgement.


2) Strangely, I'm now cautiously optimistic about the Europeans' ability to solve their debt crisis.  Why?  Is it because everyone else is so damn sure its all going to fall apart?  I hope its not because I'm that contrarian...To me, a breakup of the Euro is not possible; maybe an exit by Greece, but even that seems unlikely.  There is too much driving the member states together: in culture, in shared interests, in the belief that the whole is greater than the sum of its parts (i.e., ability to compete internationally, economies of scale. etc).  And history: most of the member-states spent the last several hundred of years killing each other to gain control of Europe; they now realize that peaceful cohesion is cheaper than war.
The problem is one of solvency, which has now given way to a problem of liquidity.  Until this year, most of the efforts were aimed at solving the liquidity problem.  I believe this is changing, and the change will be enough to get them out of this mess.
Efforts addressing solvency
- While its yet to be seen whether constitutional amendments prescribing deficit limitations will push governments to use creative accounting / push items off their balance sheets, they do provide a way to balance the budget...but oversight is needed to make sure what the government says is accurate, which I'm pretty sure the markets will do.  Germany doesn't have a constitutional amendment, but has enacted a law that requires the budget deficit to be < .35% of GDP by 2016 for the national government, and 2020 for the states.  Spain just approved a constitutional amendment to have near-zero deficits by 2020.  Italy proposed one at the same time as Spain, but it appears it is being pursued with less vigour.  France seems to think that it doesn't need one.
- Germany has reduced its deficit to about 3% of GDP (Slide 63) and estimates are that it will be about the same next year.  I don't think Germany will have a problem with fiscal prudence.
- France has proposed new taxes and spending cuts that aim to reduce its deficit from 5.7% of GDP in 2011 to 4.5% in 2012, shooting for 3% by 2013.  These are based on growth rates of 1.75%, though, and are likely to be missed.  Further, the Socialist party won the senate and may be able to delay or derail the proposed measures.  France's Debt/GDP is about 85%, and their deficit/GDP in 2010 was 7%.  I'd like to see more of a sense of urgency in France; S&P doesn't bluff.
- Spain has made great efforts towards balancing their budget, and they have alot more manoeuvring room than other Euro countries do.  Their debt/GDP is only about 70% in 2011 (Slide 58).  The deficit/GDP was over 9% in 2010 and expected to be about 6% in 2011; 4% in 2012 if trends continue (Slide 63).
- Italy passed €54 billion worth of cuts and taxes in August.  Tax and spending reforms are loudly called for by both Italian business and now the Germans.
- Greece will be allowed to default when the new EFSF is up and running, and maybe only after at-risk banks are preemptively recapitalized.
- Finally, the new ESM will require changes to the Treaty of Lisbon, et. al., but once enacted, will have automatic monetary sanctions for countries that don't meet the deficit targets.  It will be run by the EC, not the member-states.  The European Parliament voted on 9/27/11 to enact the new sanctions rules and a budget-surveillance system.
Efforts addressing liquidity
- Europe has at its disposal: A) the new EFSF has a total capacity of €440 billion (once passed by Malta, Netherlands, and Slovakia - by 10/17/11), which can now buy the debt of countries in the secondary markets  as well as recapitalize banks (through loans to the member-state) - all pre-emptively if need be (but is that a good idea?); B) the EFSM, with a capacity of €60 billion; and C) the IMF commitment, amounting to €250 billion.  This totals €750 billion.  Conservative estimates of Euro-banks' capital shortfall look to be around €250 billion.  That's if Spain and Italy don't get caught by rising bond yields.
- Levering the EFSF through the ECB?  Doesn't look like that one's going to work.  Not only has S&P suggested it could result in a downgrade of France, but German CDS has been rising since the idea came up. Further, its not likely Germany would go along with this, either in the Bundestag or the constitutional court.  However, there is discussion of a way to lever through an insurance company arrangement, but I don't know the details and am not sure exactly how that would work.
- Work towards the ESM continues, and there is talk of moving up its implementation, but I'm not too optimistic that Europe's leaders can do something both correctly and quickly.
- SMP program - bond purchases by ECB of member states (Slide 34) - unsterilized. Yes, with a Z.  There is talk this is going to end soon, as dissatisfaction of monetization has resulted in German defections from the ECB.
- Federal Reserve, in conjunction with the ECB, BOJ, BOE, SNB, and Bank of Canada, extended the existing U.S. dollar liquidity swap arrangements through August 1, 2012.
- ECB - 3 and 6 month Long-term Refi Operations (LTRO's) being offered and extended as needed.
Counter-argument
- There is one thing my positive outlook doesn't take in to account: a possible renewed Eurozone recession.  Deficit projections are all based on improving economic growth.  PMI figures on Sunday night (Monday) will shed some light on the path...