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Daily State of the Markets Good Morning. I was asked a very fair question yesterday morning right about the time the market opened. The caller, who is a financial advisor as well as a longtime friend, wanted to know why on earth stocks had opened up more than 180 points in the first couple of minutes (the first three minutes to be exact). He made a somewhat exasperated reference to the bear case that he thought was well entrenched and wanted to know what the heck was going on. My response was short and sweet, “That was yesterday’s news; today it’s all about the yields.” Apparently, my friend had not read my latest missive or checked the State site, and thus, he was not up on the morning’s latest happenings. So, when I explained that yields on 3-month T-bills at Spain’s latest auction had fallen from 5.2% to just 1.7% at Tuesday’s auction, my friend was obviously surprised. “Seriously? Are you sure those numbers are right?” he exclaimed. After assuring him that yes, the numbers had been double- and triple-checked, his next two questions, which came in rapid fire, really said it all. “How on earth do rates fall from 5.2% to 1.7% in a month? And if this is true, is thing finally over?” While I seriously doubt that my friend is fully versed on what is actually happening in Spain and/or why, his point about “this thing” possibly being over got me thinking. But before I could comment on whether or not we could even consider the sovereign debt crisis solved, I was asked for some more explanation about Spain. “No, skip that last part, that’s probably a silly idea,” he directed. “Let’s get back to how the heck the Spanish pulled this off – dang, that’s impressive.” While I reminded him that a 3-month T-bill rate of 1.7% was still infinitely higher than the next-to-nothing one might earn by lending the U.S. money for 90 days, he insisted on hearing more about the dramatic decline from 5.2% to 1.7%. Knowing that my friend had the attention span of a gnat, I cut directly to the chase. “The last time the Spanish Treasury held a T-Bill auction, there was a great deal of fear about the potential for both a sovereign default and/or a ‘Lehman moment’ for one of the big European banks. So, nobody was willing to lend Spain the money.” The silence at the other end of the line told me that he was with me so far, so I forged ahead. “And now that the ECB has offered up 3-year paper at 1% and the ‘Sarko trade’ is all the rage, suddenly it looks like there might be some interest – or dare I say it, some confidence – in sovereign debt again.” “The ‘what’ trade?” he asked. I proceeded to quickly explain that France’s Nicolas Sarkozy is being credited with the idea of encouraging the banks of Europe (well, okay, the banks of France anyway) to borrow unlimited amounts of euros from the ECB at 1% and then reinvest that fresh cash in sovereign debt at much higher rates, thereby locking in a healthy profit in the process. “Boom – everybody wins,” I said. Skipping ahead, I finally got to the topic I was most interested in exploring: the idea that the ECB’s “mini bazooka” as it is being called, might just do the trick to turn things around – at least as far as the stock market is concerned. Remember, traders too have short attention spans. Thus, I’ll suggest that if the street can be convinced that rates are unlikely to rise any further in places like Spain and Italy, traders might just begin to focus on something else for a while such as the U.S. economy. Otherwise, we’re likely in for more of what we’ve seen over the past five months. But before we brush aside the sovereign debt crisis for any length of time, we need to recognize that the ‘Sarko trade’ is not without risk for the banks/buyers. You see, any new sovereign debt purchased will effectively INCREASE the amount of potential default risk the buyer has. As one analyst put it Tuesday, “increased availability of bank funding doesn’t actually alter the inherent sustainability of sovereign debt.” Thus, loading up on questionable debt may not be a terribly responsible idea. In addition, there are no strings attached to the funding provided by the ECB. The key here is that the banks may decide to borrow the money at 1% and do other things than buy sovereign debt with it – such as paying down their own debt. We shall see. Keep watching those yields. As for the question of whether or not this thing is over, I am not going to say that this is the ‘Jaime Dimon moment’ that we saw on March 10, 2009 – but I will say that it IS a possibility. Fingers crossed. Again, the key will be the yields in Italy and Spain. Turning to this morning… The ECB says it lent EUR489 billion to more than 500 banks in its initial offering of the 3-year LTRO, which suggests that demand was quite strong. European markets and U.S. futures initially rallied on the news but have since turned lower with the German Dax falling more than -0.6%. Finally, a weak earnings report from Oracle is dragging down the NASDAQ futures. On the Economic front… We will get a report on existing home sales at 10:00 am eastern. Thought for the day… Happy Holidays!! Pre-Game Indicators Here are the Pre-Market indicators we review each morning before the opening bell…
Positions in stocks mentioned: None For more of Mr. Moenning’s thoughts and research, visit StateoftheMarkets.com The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment. Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided. The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed. The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered with the U.S. Securities and Exchange Commission as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer. Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice. Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results. |
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