This Week in Barrons – 6-28-2015:
Grexit is no Graccident
Dear Ms. Yellen:
This week our Supreme Court validated same sex marriage, and our President did an ‘end run’ in order to get his TTP trade agreement approved. But let’s discuss the mentality of refusing to pay what you owe – when you owe it, and then blaming your inability to pay on the lender. Maybe in 2007-2008 when that Wal-Mart worker was buying the $5M house for $500 a month – you had a case of the banks not disclosing the finer points of the deal. But in the case of Greece, we are talking about an entire nation of educated individuals, which signed agreements for billions of euros, and are now attempting to blame someone else (IMF & EU) for their own inability to repay their own debts. If this works, shouldn’t college graduates try this as a way of NOT repaying their student loans?
As any politician, Alexis Tsipras (the Greek Prime Minister) would like to remain in power. His best chance of doing so may be to let Greece leave the EU. As of Saturday evening, there was a ‘no deal’ scenario on the table. This will (most likely) lead to a ‘bank holiday’ on Monday. Following the ‘bank holiday’, Greece will then institute capital controls – putting restrictions on how much of ‘your own money’ you can withdraw from your bank. Ms. Yellen – we all need to watch this very closely because (as we all know) the U.S. is also ‘broke’.
In an interesting negotiating ploy, PM Tsipras (just hours before the final round of negotiations) took everyone by surprise by calling for a national referendum/vote by the Greek people on austerity. “We did not have the mandate without consulting the Greek people,” said the Greek Finance Minister. “For a decision like this, we believe that 50+1% is needed.”
But this Grexit is NO Graccident. With just four days left to reach a deal (after months of failed talks and no resolution in sight), it looks like the time has come for Greece to pull the plug. Many of Tsipras’ radical left coalition want to retake control of Greek’s monetary policy; however, a majority of Greek citizens disagree because they know that leaving the euro would destroy their savings, give them less spending power, and distance them from the rest of Europe.
Even if Tsipras had agreed to a deal with creditors, getting the measures through his own parliament would have been virtually impossible without the opposition being on board. And going that route would have triggered new elections – costing him power and ultimately his job. By calling for a ‘democratic’ referendum, Tsipras is attempting to shift the blame onto the backs of the ‘evil’ creditors. Tsipras knows that the vast majority of Greeks oppose the creditor’s memorandum, because (in return for bailout money) it would force them to accept deep spending cuts and pension reforms. By Tsipras pushing the vote on the referendum to July 5, it means that the referendum is pointless. By July 5th, Greece will likely have defaulted on an IMF loan and the ECB will have cut off liquidity to Greek banks – leaving them vulnerable to collapse. Put simply, Greece is on its way out of the Eurozone. PM Tsipras can claim it was all Europe’s fault for not letting the Greeks decide, when in fact, by calling for the referendum AFTER the payment due date – he made the decision for them.
I appreciate that this negotiating ploy allows Tsipras to keep his job. But it will also cause an exit of many wealthy Greeks from their home country, and will relegate Greece to ‘3rd world status’ for some time to come. The IMF and the EU trusted Greece to pay them back. How is Greece (or businesses within Greece) ever going to borrow non-collateralized funds again? Why would anyone lend money to someone if one of the requirements for repayment was the DESIRE to pay you back? I don’t know anyone who ever WANTED to repay a loan. That’s the reason loans are referred to as ‘obligations’ and why they are listed in the ‘liabilities’ column of your personal / corporate balance sheet. I’m sure if I asked every college graduate whether they WANTED to repay their student loans – I would receive a resounding NO. I’m sure if I asked anyone with a credit card bill whether they WANTED to pay that bill – I would receive another resounding NO. How many loan agreements have ever been written saying that you don’t have to repay the loan if you don’t FEEL like it?
Greece, how does the WANT to repay the loan ever come into the repayment decision? PM Tsipras your last-minute negotiating strategy was no Graccident, and it may have saved your current job – but you’re going to have to pull a rabbit out of a hat to get your next one. A country is only as good as the money it can borrow, and right now Greece – I do not WANT to lend you a dime.
Every day the sun blankets the earth with enough solar energy to power every home on the entire planet for about 2,000 years. The earth receives about 8.2 million ‘quads’ of BTU energy per year from the sun. The human race currently uses about 400 quads of energy per year. Therefore, solar energy hitting the earth exceeds the total energy consumed by a factor of 20,000.
This week I had the sincere privilege of escorting Hyliion (http://hyliion.com - a small company in the energy space) down to Washington, D.C. to ‘show-off’ it’s energy saving technology. 7 years ago I predicted that the only way out of our current financial mess was to return to ‘cheap energy’. That path seems to be working. But along with enhancing the supply, we are going to have to simultaneously reduce demand. And that’s where companies like Hyliion and solar come into play. The key to any of these newer technologies is the energy storage system that is being used, and most often that is ‘the battery’. Unfortunately batteries: (a) are expensive, (b) are heavy, and (c) they wear out. Storage is the key and watch for that technology to change quickly over the coming years. Biosolar is a newcomer to the battery space and claims that it could power a Tesla (auto) 2 times further, for one-fourth the price, and recharge faster. People are beginning to pay attention to the battery/storage problem, and that means that the solution is no longer an ‘if’ but rather a ‘when’.
Gretigue, is the buzzword that Wall Street coined over the endless fatigue over the ‘Greece is saved’ vs ‘Greece is doomed’ headlines that we experience every day. And now with the Greek referendum, this thing may just never end.
This week the S&P’s closed at 2101, and Carl Icahn told CNBC that this market is ‘very overpriced’. When the big guys start saying things that go against the main stream ‘keep the faith’ routine, it means that they are covering their butts. Carl doesn’t want to catch hell from the public when the market rolls over, and he was caught saying ‘buy stock’. This way he can still invest, and if there is a serious correction he gets to say: ‘Told ya so’. And of course the market is overpriced. You mix lower earnings, with QE, and toss in corporate stock buybacks and you get an overpriced market. Understand that the corporate buybacks are being implemented using borrowed funds – so there is nothing ‘cheap’ about this market. I constantly wonder how healthy most of these companies are having $50M in cash, and $500M in debt.
We remain in a range bound trading bracket, with 2125 being the top of the S&P range, and about 2075 at the bottom. When a market is locked in a sideways channel, often it can get tossed around inside that channel by virtually anything. One earnings report can send you up 100 DOW points, and one scare about rate hikes can send you down another 100. The days are completely dominated by rumors mixed with a little bit of news.
This range will break when it breaks, and until then we don’t have much choice but to splash around inside it. I think it’s safe to say we’ll remain range bound for at least the next two weeks. This coming week is shortened for Independence Day, and the July 4th trading week is routinely the slowest week of the entire year. The July implied volatilities have already been reduced, and will only continue to fall as we move along.
We could conceivably remain range bound for a few more months. I think things will get more interesting at the end of this week – when we have the June jobs numbers to analyze. We will then dive straight into earnings season starting with Alcoa on July 8th. And we will finish up July with another FOMC meeting on July 29th. So although on the surface things appear calm, underwater there is a tremendous storm brewing.
- LL (Lumber Liquidators) for a new Iron Condor,
- HUM (Humana), AET (Aetna), UNH (United Health), Cigna and XLV are all poised ‘technically’ to move higher, and
- I continue to sell Iron Condors (40 to 90 days out) on the SPX around the 2100 level.
I’m currently holding:
- AGU (Agrium) – SOLD the July 97.5 / 100 Put Credit Spread,
- DPZ (Domino’s Pizza) – SOLD the July Iron Condor 95 / 100 to 125 / 130,
- IWM – SOLD the August 112 / 114 to 132 / 134 Iron Condor,
- KR (Kroger) – SOLD a July 70 / 72.5 Put Credit Spread,
- RH (Restoration Hardware) – BOUGHT a July / August $95 Calendar,
- RUT – SOLD the August 1140 / 1150 to 1330 / 1340 Iron Condor,
o BOUGHT the July 1180 / 1250 / 1310 Butterfly
o SOLD – Iron Condor – July @ 1990 / 1995 to 2180 / 2185,
o SOLD – Iron Condor – July4 @ 1860 / 1870 to 2235 / 2245,
o SOLD – Iron Condor – July4 @ 1940 / 1945 to 2175 / 2180,
o SOLD – Iron Condor – July4 @ 1955 / 1960 to 2185 / 2190,
o SOLD – Iron Condor – July4 @ 1955 / 1960 to 2175 / 2180,
o SOLD – Iron Condor – July5 @ 1870 / 1880 to 2230 / 2240,
o SOLD – Iron Condor – July5 @ 1925 / 1930 to 2195 / 2200,
o SOLD – Iron Condor – July5 @ 1935 / 1940 to 2195 / 2200,
o SOLD – Iron Condor – July5 @ 1925 / 1930 to 2185 / 2190,
o SOLD – Iron Condor – Aug1 @ 1935 / 1940 to 2225 / 2230,
o SOLD – Iron Condor – Aug2 @ 1920 / 1925 to 2230 / 2235,
o SOLD – Iron Condor – Aug @ 1840 / 1850 to 2250 / 2260,
o SOLD – Iron Condor – Aug @ 1885 / 1890 to 2180 / 2185,
o SOLD – Iron Condor – Aug4 @ 1895 / 1900 to 2195 / 2200,
o SOLD – Iron Condor – Aug4 @ 1895 / 1900 to 2240 / 2245,
o SOLD – Iron Condor – Sept1 @ 1880 / 1885 to 2215 / 2220.
To follow me on Twitter.com and on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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Until next week – be safe.