Tidal forces are pulling the European Union apart. On one end, European governments have taken on debt and liabilities—both public and private—which they cannot possibly meet, rendering many of the smaller European states insolvent. On the other end, Europe is unwilling to carry out sovereign default and restructuring of debt of any one of its member nations. So as Europe gets closer and closer to the Global Depression, we are seeing as these two opposing forces—insurmountable debt vs. unwillingness to default and restructure—pull the continent apart as surely and relentlessly as tidal forces. — Gonzalo Lira
In July of 1994, a comet named Shoemaker-Levy 9 crashed into Jupiter—it was quite a sight.
According to astronomers, Shoemaker-Levy was a comet that was captured by Jupiter’s gravity twenty or thirty years before it was discovered. As the comet circled Jupiter, at one point it passed the Roche limit—the line around a large mass where its gravity will rip apart a smaller mass by way of tidal forces.
Comet Shoemaker-Levy,
after Jupiter’s tidal forces
ripped it apart.
By the time Shoemaker-Levy crashed into Jupiter, tidal forces had had their way with the comet. As the picture shows, it was no longer a single comet—it was a string of small lumps of rock and ice
Tidal forces are pulling the European Union apart.
On one end, European governments have taken on debt and liabilities—both public and private—which they cannot possibly meet. These debts and liabilities are near-term enough that there is only one way to characterize many of the smaller European states: They are insolvent.
On the other end, Europe is unwilling to carry out sovereign default of any one of its member nations. Indeed, there is a sense that—constant drumbeat of the Germans aside—Brussels is unwilling to evencontemplate the very notion of sovereign default and debt restructuring. Brussels and the European Central Bank believes in bailouts, not default, because they believe that the entire European project rests on the non-default status of all the EU members. They believe that all EU debt is backed by the entire EU, no matter how irresponsible the EU country that issued the EU debt.
As we watch Europe get closer and closer to the Global Depression,…
The following is Part I to David DeGraw’s new book, “The Road Through 2012: Revolution or World War III.” This is the second installment to a new seven-part series that we will be posting throughout the next few weeks. You can read the introduction to the book here. To be notified via email of new postings from this series, subscribe here.
******
Editor’s Note: The following is Part I to David DeGraw’s new book, “The Road Through 2012: Revolution or World War III.” This is the second installment to a new seven-part series that we will be posting throughout the next few weeks. You can read the introduction to the book here. To be notified via email of new postings from this series, subscribe here.
When we analyze our current crisis, focusing on the past few years of economic activity blinds us to the history and context that are vital to understanding the root cause. What we have been experiencing is not the result of an unforeseen economic crash that appeared out of the blue with the collapse of the housing market. It was certainly not brought on by people who bought homes they couldn’t afford. To frame this crisis around a debate on economic theory misses the point entirely. To even blame it on greedy bankers,…
Paul Farrell’s take on Jeremy Grantham’s recent essay Seven Lean Years (previously posted on Zero Hedge) is amusing in that his conclusion is that should Obama get reelected, his entire tenure will have been occupied by fixing the problems of a 30 year credit bubble, and if anything end up with the worst rating of all time, as the citizens’ anger is focused on him as the one source of all evil. "Add seven years to the handoff from Bush to Obama in early 2009 and you get no recovery till 2016. Get it? No recovery till the end of Obama’s second term, assuming he’s reelected — a big if." Also, Farrell pisses all over the recent catastrophic Geithner NYT oped essay, which praised the imminent recovery which merely turned out to be the grand entrance into the double dip: "In his recent newsletter, "Seven Lean Years Revisited," Grantham tells us why expecting a summer of recovery was unrealistic, why America must prepare for a long recovery. Grantham details 10 reasons: "The negatives that are likely to hamper the global developed economy." Sorry, but this recovery will take till 2016."
For those who have not had a chance to read the original Grantham writings, here is Farrell’s attempt to convince you that Grantham is spot on:
But should you believe Grantham? Yes. First: Like Joseph, Grantham’s earlier forecasts were dead on. About two years before Wall Street’s 2008 meltdown Grantham saw: "The First Truly Global Bubble: From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure, and the junkiest bonds to mundane blue chips; it’s bubble time. … The bursting of the bubble will be across all countries and all assets … no similar global event has occurred before."
Second: The Motley Fools’ Matt Argersinger went back to the dot-com crash of 2000: Grantham "looked out 10 years and predicted the S&P 500 would underperform cash." Bull’s-eye: The S&P 500 peaked at 11,722; it’s now around 10,000. Factor in inflation: Wall Street’s lost 20% of your retirement since 2000. Yes, Wall Street’s a big loser.
Third: What’s ahead for the seven lean years? Wall Street will keep losing. Argersinger: "Grantham predicts below-average economic growth, anemic corporate-profit margins, and other
Due to the European debt crisis, counterparty risk is increasing as banks are reluctant to lend to each other, which is remiscient of the bank freeze at the beginning of the fiancial crisis of 2008. The LIBOR-OIS spread which is a gauge of banks willingness to lend, widened 2 basis points today to a spread of 26. Despite the unveiling of the near one trillion dollar Stabilization Fund last week, it continues to drift higher. The spread has now increased 20 basis points from the most recent low achieved on March 15.
As mentioned last week here at Bondsquawk, the spread inched higher from 13 basis points in late July 2007 to 19 basis points the following week. As market conditions deteriorated, the widening accelerated. By late August, the spread widened to 73 basis points and the route was on. During the height of the financial crisis which is marked by the fall of Lehman Brothers, the spread reached a high of 364 basis points by October of 2008. While it remains to be seen if this will turn into another credit crunch as we have warned several days ago and as Bank of America’s Jeff Rosenberg had suggested earlier today, today’s action is certainly a growing concern and deserves further monitoring.
Debt woes in Greece have sent bond yields soaring and increased the prospect of sovereign default. A restructuring of Greek debt will deal a blow to lenders in Germany and France that are insufficiently capitalized to manage the losses. Finance ministers, EU heads-of-state and the European Central Bank (ECB) have responded forcefully to try to avert another banking meltdown that could plunge the world back into recession. They have created a nearly-$1 trillion European Stabilization Fund (ESF) to calm markets and ward-off speculators. But the contagion has already spread beyond Greece to Spain, Portugal and Italy where leaders have started to aggressively cut public spending and initiate austerity programs. Belt-tightening in the Eurozone will decrease aggregate demand and threaten the fragile recovery. We are at a critical inflection point.
From American Banker:
"Bank stocks plunged last week under the theory that banking companies will take large losses in Europe. The theory is correct. Banks will get hurt," Richard Bove of Rochdale Securities LLC wrote in a research note.
Bove wrote in a separate report last week that "big American banks have a bigger stake in this drama than thought." He estimates that JPMorgan Chase has $1.4 trillion of exposure across all of Europe alone, while Citigroup Inc. has $468.4 billion.
Analysts said large U.S. banks have opaque ties to the region through their overseas counterparts. U.S. money-center banks trade derivatives, orchestrate currency swaps and handle other transactions with large European banks. U.S. banks may not hold a lot sovereign debt in Europe, but those European institutions do. If Greece defaults, that could create a crisis of confidence in the European banking market that would spread to large U.S. banks.
"Obviously, the European banks have exposure to Greece. The U.S. banks have loans out to those banks," said Keith Davis an analyst with Farr Miller & Washington. "There are a number of different ways they can have exposure — it’s not hard to imagine how a wildfire can spread." (Europe’s debt Crisis, US Banks Exposure", Paul Davis and Matt Monks, American Banker)
China and the United States have begun to hunker down and pursue deflationary policies. China has already been blindsided by a steep 14.5% rise in the renminbi over the euro in the past 4 months which is beginning to hurt exports.…
Earlier today we disclosed what were not one but several massive central bank interventions in the Euro-Swiss Franc exchange rate. The intervention was large enough to push the rate up by 300 pips, a gargantuan amount in a world where applied leverage is often in the thousands. The amount of capital required to achieve this was likely unprecedented. Yet what bothered us was why would the SNB so glaringly intervene in the FX market not once but three or even more times. Thanks to the Telegraph we find out that the reason was a massive €9.5 billion capital flight from Germany into Swiss deposit accounts just this morning, according to BNP. Unfortunately for Germany this is only the beginning of capital reallocation from the country into neighboring Switzerland. And the technical bounce in the EUR today was in fact an even greater sign of weakness: in fact, as the IMF’s Tim Kingdon pointed out, the money run in Club Med banks last week resulted in a massive €56 billion of interbank lending as the move from the periphery to the core accelerated. Now that the next stage of the run is from the core, Europe will very soon find itself with depleted depository capital very soon. Because if money is fleeing Germany, it is certain that France, Italy and the UK can not be far behind.
Below, is a chart we posted earlier of the record Swiss National Bank intervention.
And here are more details on today’s unprecedented move from Evans-Pritchard:
The market is left asking what skeletons are lurking in the cupboard," said Marc Ostwald from Monument Securities. The short ban follows a report by RBC Capital Markets that circulated widely in the City accusing German banks of failing to come clean on 75pc of their €45bn exposure to Greek debt.
German lenders have the lowest risk-weighted capital ratios in the world after Japan. They were slow to rebuild safety cushions after the sub-prime crisis, and now face a second set of losses on Club Med holdings. Reporting rules have let Landesbanken delay write-downs, turning them into Europe’s "zombie" banks.
Even so, nothing adds up in this BaFin episode. Germany acted alone, prompting a tart rebuke from French finance
Portugal’s credit grade was cut by Fitch Ratings for the first time, underscoring growing concern that Europe’s weakest economies will struggle to meet their debt commitments as finances deteriorate.
The rating was lowered one step to AA- with a “negative” outlook, Fitch said in a statement today, adding that further economic or fiscal underperformance this year or in 2011 may lead to another downgrade. The euro extended its decline, dropping against all but one of the 16 most-traded currencies. Portuguese stocks and bonds fell.
“A sizeable fiscal shock against a backdrop of relative macroeconomic and structural weaknesses has reduced Portugal’s creditworthiness,” Douglas Renwick, associate director at Fitch, wrote in the statement from London. “Although Portugal has not been disproportionately affected by the global downturn, prospects for economic recovery are weaker than 15 European Union peers, which will put pressure on its public finances over the medium term.”
The governments of Greece, Ireland, Italy and Spain are seeking to narrow budget deficits that have swollen as their economies have been battered by the recession. Portugal’s deficit is 9.3 percent of gross domestic product, more than triple the European Union’s 3 percent limit. Failure by the EU to agree on a mechanism to help countries shore up their finances has hurt the euro, putting it on course for its worst quarter against the dollar since 2008.
The Portuguese and Greek economies may face a “slow death” as they dedicate a higher proportion of wealth to paying off debt and investors drive up government borrowing costs, Moody’s said on Jan. 13. While the two countries can still avoid such a scenario, their window of opportunity “will not be open indefinitely,” Moody’s said.
Slow Motion PIGS Wreck
PIIGS stands for Portugal, Ireland, Italy, Greece, and Spain. I dropped an "I" to focus on the "Club-Med" countries.
“Fitch opened up another front against the euro,” said Alan Ruskin, head of currency strategy at Royal Bank of Scotland Group Plc in Stamford, Connecticut, who predicted the
There are broad indications hinting that Italy and Greece are not the only countries that have used swap agreements to manipulate its budget and deficit figures. France and Portugal may be two other European economies which have resorted to similar manipulations in the past in order to qualify as part of single currency member nations (Euro Zone). Below is a small subset of the research that I have been gathering as I construct a global sovereign default model. This model is very comprehensive and thus far has indicated that quite a few (as in more than two or three) nations of significance have a 90% probability of defaulting on their debt in the near to medium term.
More on this later. Now let’s dig into what we have found that looks like gross manipulation of the numbers in order to hide debt in several European countries. I think I’ll call it the Pan-European Ponzi. Conspiracy theorists are going to love this post.
Like Italy (see below), Portugal has also been known for years to take advantage of derivatives contracts to dress up its budget numbers in the late 1990s. In a recent press article (Debt Deals Haunt Europe) Deutsche Bank’s spokesman Roland Weichert commented that the bank executed currency swaps on behalf of Portugal between 1998 and 2003. He also said that Deutsche Bank’s (DB) business with Portugal included "completely normal currency swaps" and other business activity, which he declined to discuss in detail. He also added that the currency swaps on behalf of Portugal were within the "framework of sovereign-debt management," and the trades weren’t intended to hide Portugal’s national debt position (yeah okay!).
Though the Portuguese finance ministry declined to comment on whether Portugal has used currency swaps such as those used by Greece, it said Portugal only uses financial instruments that comply with European Union rules. Thus, if the use of these instruments complied with
Italy, saddled with the euro region’s second-largest debt, is the “biggest threat” to the economy of the 16-member bloc, according to Nobel Prize-winning economist Robert Mundell.
“Italy has got to be worried,” Mundell, a professor at Columbia University, said today in a television interview in New York. “If Italy became a target then this would create a big problem for the euro. Whatever is being done to Greece, possibly to Portugal and maybe Ireland, has to also save Italy from that problem.”
Italian officials have tried to prevent Italy from being lumped together with some of the euro zone’s smaller economies – – Portugal, Ireland, Greece and Spain — that have drawn investor concern about their ability to control deficits and debt. Italian Prime Minister Silvio Berlusconi said Feb. 10 that those nations were doing “much worse” than Italy and that the “markets have given us their faith.”
“It would be very difficult if Italy got tarnished with the same problem,” Mundell said, referring to the risk the European Union may need to provide financial assistance to some of its members. “It would be very difficult to bail out Italy.”
Mundell won the Nobel Prize in 1999 for research that helped lay the foundation for Europe’s single currency.
Italy’s high debt level would create problems for the entire euro region if rising financing costs make it difficult to service the country’s borrowing, Mundell said. Italy has about 1.8 trillion euros ($2.5 trillion) in debt, more than five times that of Greece and the equivalent of about a quarter of the euro zone’s debt.
If markets were to lose confidence in Italian public finances, then the European Central Bank would have its hands tied by the Maastricht Treaty, which says the central bank must orient monetary policy exclusively toward keeping inflation under 2 percent.
“The Treaty of Maastricht puts a straight jacket on the ECB,” Mundell said. “Monetary policy itself would have to bend a little if a country as big as Italy got into trouble.”
An analyst at Deutsche Bank created some buzz the other day when he said that the PIIGS’ (Portugal, Ireland, Italy, Greece, Spain) debt crisis could be a “dress rehearsal” for a U.S. one.
It makes for a catchy headline, but the funding crisis in America will play out differently than the PIIGS’ bloc does. The key difference is our ability to print money and devalue the dollar. QE is off-limits for EU members, at least. Bernanke would probably call that an advantage, but I’m not so sure.
Either way, it is nice to see some light shined on America’s debt problem. It’s not pretty, and the sooner we deal with it the better. From BusinessWeek:
The cost of insuring against U.S. and U.K. debt defaults may rise in the same way as it has for so- called European peripheral nations including Greece and Portugal, Deutsche Bank AG said.
‘The problems currently faced by peripheral Europe could be a dress rehearsal for what the U.S. and U.K. may face further down the road,’ Jim Reid, a strategist at Deutsche Bank in London, wrote in a research note today.
The cost of insuring against U.S. and U.K. debt defaults may rise in the same way as it has for so- called European peripheral nations including Greece and Portugal, Deutsche Bank AG said.
‘The problems currently faced by peripheral Europe could be a dress rehearsal for what the U.S. and U.K. may face further down the road,’ Jim Reid, a strategist at Deutsche Bank in London, wrote in a research note today.
I heard the “dress rehearsal” line on Bloomberg yesterday, during a Niall Ferguson segment. Scroll down for the clip, it’s among the better mainstream coverage of the global-debt-crisis coverage.
Worse than Greece?
The fundamental outlook for PIIGS is bad. Greece has gotten the lion’s share of attention lately lately. But you could argue the same or worse for the United States or U.K.
Zero Hedge recently escalated the acronym-hoopla by adding the U.K., Turkey, and Dubai to create STUPID. Regular readers objected to the absence of the U.S., expanding it to STUUPID.
America’s situation isn’t pretty, and may be worse than PIIGS’ or STUPID’s long-term. In the Bloomberg clip I mentioned earlier, Niall
I've heard just about all of the great investors of our time speak by now and suffice it to say that the bar for me to be impressed is pretty high. But PIMCO'S CEO and Co-CIO Mohamed El-Erian was spectacular this morning at the 2013 Investment Summit in New York City.
In my mind, no one else has as good a grasp on the macro crosscurrents affecting the investment landscape paired with the innate ability to communicate them so simply. He m...
UPDATE 1: Japanese stocks turned negative (NKY -600pts from highs, -1.5% on day; and TOPIX down over 4% from highs); Japanese banks -11% from yesterday highs; S&P futures down 10 points from after-hours highs...
UPDATE 2: *KURODA WANTS TO AVOID INCREASING VOLATILITY IN BOND MARKET (yeah thanks... as useful as saying "we all want to avoid syphilis")
UPDATE 3: Nikkei 225 Drops below 14,000 - TOPIX down 11% from highs
For the second day in a row, and in spite of comments from Abe and Kuroda on communicating with the market (as Kuroda says BoJ Monetary easing sufficient), Japanese capital markets are out of control...
Few stocks have attracted more news over the last six months than nutritional supplement maker Herbalife (NYSE: HLF).
Even casual market observers are aware of the circumstances surrounding the the initial bout of extreme volatility in the name back in December 2012. The shares went into free-fall at the end of the year after hedge fund manager Bill Ackman revealed in typical sanctimonious fashion that his firm Pershing Square Capital Management was short around $1 billion worth of the stock.
Amid much pomp and circumstance, Ackman laid out his short thesis at a New York investment conference and...
HD - Home Depot – Shares in the home improvement retailer are trading lower on Thursday, off the lowest levels of the session but still down 1.25% at $78.69 as of 11:50 a.m. ET, amid a down day for U.S. stocks. Trading traffic in newly issued weekly options on Home Depot suggests some traders are taking advantage of the dip today and positioning for shares in the name to resume hitting record highs next week. The stock yesterday rallied as much as 3.6% to touch an all-time high of $81.56 after the company reported better-than-expected first...
The pre-market anxieties were little changed by this morning's slightly better-than-expected unemployment claims. The eurozone indexes were all down 2% to 3% when the US markets opened. The S&P 500 promptly plunged to its -1.20 intraday low in the first nine minutes of trading. But the index trimmed its losses in an irregular trend to its afternoon intraday high at 2:50 PM, when the market was just a hundredth of a point from break even. This was in contrast to eurozone, where the STOXX 50 closed its session down 2.05%. The S&P 500 saw some selling in the final hour and finished the day at -0.29%, well off its morning low. Presumably the abated selling suggests generally reduced fears about the Fed tapering QE in the near term.
To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...
Futures down moderately after yesterday's outside day. The extreme overbought conditions on the weekly and monthly index charts are finally relenting some. Even uber bulls would prefer solid entry points on stocks rather than chasing constantly. The S&P 500 had not touched the 10 day moving average since May 2nd, until yesterday – a not common situation. In theory the S&P 500 could go all the way down to 1597 – which was its primary breakout level – and still be in decent condition, but surely dip buyers trai...
The market went through some gyrations on Wednesday in reaction to Fed Chairman Bernanke’s testimony before the Joint Economic Committee. He first defended continued quant easing by warning, “A premature tightening of monetary policy could lead interest rates to rise temporarily but also would carry a substantial risk of slowing or ending the economic recovery.” Stocks dutifully rallied and all major indexes hit new intraday highs.
But alas, consensus is apparently not a given over the longer term. The minutes hinted that a tapering off could start sooner, “A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth.” So …...
Reminder: OpTrader is available to chat with Members, comments are found below each post.
This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).
We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options.
Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.
To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here
Reminder: Craigzooka is available to chat with Members regarding his virtual portfolio performance, comments are found below each post.
By Craigzooka
I am going to share with you how I manage my IRA and the power of reducing your cost basis. My goal each year is a 20% return in my IRA. Sometimes I make it and sometimes I don't, but I believe that all of my success is due to reducing my cost basis. To illustrate the power of reducing your cost basis here are some trades we did last year. These trades are taken from an educational portfolio we ran in a paper-trading account for a little more than a year.
We bought RIG on 5/15/2012 for $44.13, sold it on 1/18/2013 for $46 but booked a profit of $1,154.
We bought MT on 1/4/2012 for $19.24, sold it on 12/21/2012 for $15 but booked a profit of $454.
We bought CHK on 1/27/2012 for $21.93, sold it on 10/19/2012 for $18 b...
Stock market posts another record setting week, but the big news came after Friday’s close.
Courtesy of NASA
The stock market put on another record setting show with the Dow Jones Industrial Average (NYSEARCA:DIA) closing at a record high 15,118 and the S&P 500 (NYSEARCA:SPY) closing at 1633.70, another all time closing high.
For the week, the Dow Jones Industrial Average (NYSEARCA:DIA) gained 1%, the S&P 500 (NYSEARCA:SPY) climbed 1.2%, the Nasdaq Composite (NYSEARCA:...
Reminder: Pharmboy is available to chat with Members, comments are found below each post.
Well, well, well....it is good to know that there are others in the scientific arena who believed that YMI Bioscience's data (cough - Gilead) is a better drug than Incyte's Jakafi. Now, the definitive data are still unknown, but there was enough evidence from a Phase 2 trial to take a small risk for a huge reward. So, let's forget about Apple (AAPL), and do nothing but biotechs from now until Congress passes universal health care coverage for prescriptions....and drive the prices down so that research and development is no longer feasible to conduct in the US. Even Seattle Genetics (SGEN) has been on a tear as of late...
Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(blogroll, archives,
more).
Contact Ilene to learn about our affiliate and
content sharing
programs.
Twitter
LinkedIn 
del.icio.us
When we analyze our current crisis, focusing on the past few years of economic activity blinds us to the history and context that are vital to understanding the root cause. What we have been experiencing is not the result of an unforeseen economic crash that appeared out of the blue with the collapse of the housing market. It was certainly not brought on by people who bought homes they couldn’t afford. To frame this crisis around a debate on economic theory misses the point entirely. To even blame it on greedy bankers,…
Courtesy of 
German
Spanish
French
Italian
Portuguese
Japanese
Korean
Russian
Chinese
Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(
