This Week in Barrons – 8-5-2012
The
Bottom Line
With
all of the anagrams floating around Europe (each one kicking the can down the
road a little bit further than the last), have we come to the end of the
road? The next kick sends Europe spiraling into a
huge crevasse, too deep to ever be recovered. The bottom line: Will Germany allow the European Central Bank
(ECB) to print trillions of Euro's and buy up all the sovereign debt loads from
Spain, Greece, Italy… OR will they say “NO?” That is the culmination of 2 years of kicking
the can, creating rumors, and playing “Weekend at Bernie’s” with these
countries. Either the ECB goes nuclear
and sops up all of that debt, OR the Eurozone implodes. Therefore the future of the Eurozone lies
squarely at the feet of the German people.
On
Friday the market went nuts and gained 217 DOW points. The mainstream media told folks that it was
because of a great jobs report. The
problem with that statement is that the jobs report really stunk.
- - The ‘Household Survey’ showed a LOSS of 195K jobs.
- - The BLS (birth-death model) added 52,000 jobs to the report,
and none of those exist.
- - The hours worked were dismal.
- - The reported unemployment percentage increased!
- - Our only hope was that the report was so bad that The Ben
Bernanke will be forced to move sooner rather than later.
The
market really moved up on Germany’s (Angela Merkel’s) “trusted coalition” hinting
strongly that they were in agreement with Mario Draghi (the architect behind
the ECB plan) to change the basic "charter" of the ECB so that they
can indeed join Ben Bernanke in "Bankers Gone Wild" and print money at
will.
The second the news hit that Angela Merkel’s own coalition group was ‘on
board’ with this plan, the futures popped from slightly negative, to up over 100.
No lousy jobs report was going to stand
in the way of Europe receiving trillions in bogus Euros, in order that Italy
and Spain could then start borrowing money at incredibly low rates, instead of
the 6 - 7.5% that they’re paying now.
In
a nutshell, Mario Draghi wants the ECB to do what Bernanke did in 2008 – open
the faucet and pour trillions of freshly minted dollars into the system. But Germany has ‘seen’ that easy fix
before. Germany knows that printing
money creates inflation. The Germans experienced
one of the worst hyper inflationary periods the world has ever seen.
The Germans
know that when the price of goods rises rapidly due to inflation, the
government cannot raise taxes fast enough to counteract the effect. And when people realize that their money is
rapidly losing value, they spend it quickly – which further increases prices and
the vicious cycle itself. In 1923,
German employers would pay their employees 3 times per DAY, civil unrest became
common, farmers and cattlemen stopped delivering goods because they didn't want
worthless paper for their edible assets, and rioting and looting started
fraying the seams of what was once a stable society.
So,
here we are with Mario Draghi making plans for the ECB to become a true Central
bank and flood the Eurozone with freshly printed money. But what if Germany does NOT go along with the
plan? If Germany refuses, the Eurozone
will change forever. Italy, Spain,
Greece, and probably half a dozen others will spiral out of control and crash. The Germans with their strong economy will
survive, but their currency will RISE so quickly in value, that their main
income source (exported goods) will come to a halt. And if Germany cannot export, then
unemployment will rise, and their economy will tailspin. It seems as though Germany is caught between
the proverbial rock and a hard place.
On
September 12, they will vote over this whole notion. If they go along with it, I wouldn't be a bit
surprised to see a wicked market run up here in the US. As a form of ‘double whammy’, I also believe
that our own Federal Reserve will chip in with some form of accommodation here
as well, which would trigger a rally of really epic proportions. If they don't approve it, we're going to see
some real dislocations and everything the market has built up will come crashing
down.
From
where I sit, I think that they must go along – not because they really want to
– simply because the immediate fall out of ‘not going along’ will set in motion
the disintegration of the Eurozone, and it could have unforeseen consequences. Germany realizes that by letting the ECB print
money – they will trigger inflation. But
unlike in previous years, they don't have the burden of trying to make war
reparations and paying down their gold reserves. I think they will reason with themselves that
inflation will occur, but it shouldn't spiral out of control. After all, they have seen the US print for
ages and although we have inflation, it's not out of control (yet). Combine that with letting all those Euro
Countries simply crash and burn, could affect Germany in ways no one's quite
aware of yet.
- - Think of the ‘counter party exposure’ for their nation’s
banks, and the derivative contracts.
- - How badly would their exports be affected if their currency
rose above all the others in the zone?
- - With China slowing and the US below stall speed, can they be
reckless and flippant with the idea of not going along with the bailouts?
I
think Germany will go along with Draghi.
But, if Germany does NOT go along,
then it’s going to be time to get out the popcorn and watch a truly epic
situation unfold.
The
Market
There
isn’t much left to say after surviving last week. Four days of selling were reversed in one orgy
of buying on Friday. Once again the
market was "saved" from crashing through all manners of technical
levels, just like it was saved back on July 24th. Back on July 24th, the market again
wasn't saved due to wonderful fundamentals or glowing earnings, but rather because
someone in Angela Merkel’s coalition suggested that they would go along with
the ECB carpet-bombing the Eurozone with freshly printed dollars – sound
familiar?
Now
we enter a very interesting time. Factually – we won't know until 9/12 if
Germany's court will rule that they can indeed participate in the European
Stability Mechanism. If they vote yes,
and Merkel goes "all in" for Draghi's plan, we should see a very
large market move higher.
But 9/12 is a long way off:
- - Will we just keep going up in anticipation?
- - Will some of the Northern Countries in the Union complain that
they aren't much interested in supporting the Club-Med guys and the market
backs off?
- - Will the market backfill just because it needs to.
- - Or will they continue to support it on "hopium?"
My
guess is that 9/12 is too far off for them to punch through the triple top at
DOW 13,300. I tend to think that we will
fade back some this week, but it will not be a hard sell off, and maybe just a
fade down to near the bottom of the channel where we have been trading. Three times since June, the market has slid
down to DOW 12,500, and has used that to springboard us back up – and potentially
we drift down to 12,650’ish this time.
What we want to look for (over the next
several days), is whether we can remain above DOW 13,000. If we can get a volume push over Friday's
high, then we're going higher – probably to 13,300 before we stumble.
Tips:
Shout out to DS for recommending MLNX – it’s been on a tear
lately – congrats on catching that one.
Currently I’m holding:
- - SYNC – in at 11.15 (currently 10.09) – held
over earnings – my error!
- - SPY – in at 135.75 (currently 139.57) – stop
at 138.00
- - MRO – in at 26 (currently 26.84) – stop at
entry
- - GDX – in at 42.50 (currently 42.82) – stop at
entry
- - GLD (ETF for Gold) – in at 158.28, (currently
155.55) – no stop ($1,606.00 per physical ounce), AND, SLV (ETF for Silver) – in at 28.3 (currently 26.99)
– no stop ($27.79 per physical ounce).
Some of the stocks that’s I’m watching for this
additional push are:
- - IBM > 198.20,
- - LRCX > 35.10,
- - CHKP > 50.30,
- - TJX > 45.50,
- - COP > 56.00,
- - MLNX > 107.50, and
- - CAB > 47.30.
To follow me on Twitter and get my daily thoughts and trades
– my handle is: taylorpamm.
Please be safe out there!
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