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Friday, April 12, 2024

Wednesday – The Czech Is Bounced!

Now what?

We had a pretty good consolidation day yesterday as the levels I posted in the morning generally managed to hold.  We were looking for (and finished at) Dow 7,636 (7,660), S&P 805 (806), Nas 1,525 (1,516), NYSE 5,075 (5,064) and Russell 420 (416).  As we only really fell below our expected levels in a last-minute sell-off, I was willing to consider it a win and we went fairly bullish into the close, fully covering our long DIA puts with 3/31 $77 puts at $1.55, as it seemed like too much premium to turn down for a contract that will expire in just 4 trading sessions.

Our futures were, in fact, looking pretty good until the Prime Minister of the Czech Republic said: "Widening budget deficit and protectionist trade measures — such as the "Buy America" — all of these steps, these combinations and permanency is the way to hell.  We need to read the history books and the lessons of history and the biggest success of the (EU) is the refusal to go this way. Americans will need liquidity to finance all their measures and they will balance this with the sale of their bonds but this will undermine the stability of the global financial market," said Topolanek.

Why should we care what the Prime Minister of the Czech Republic (a country with 11M people and a GDP that is less ($170Bn) than AIG lost) of  has to say?  Well, because it's his country's TURN to be President of the EU!  That's right, this is like us putting the Deputy Mayor of Miami (no offense to him) in charge for a year since he was, after all, appointed by a guy who was elected by over 5M people…  I'm not saying the Topalanek's criticisms may not have some validity.  Certainly his timing certainly could have been better and we have to excuse him for being in a bad mood because, on just his country's first day on the job at the EU, HIS OWN GOVERNMENT JUST COLLAPSED IN A NO-CONFIDENCE VOTE ON HIS LEADERSHIP.   Just keep this in mind as you see the markets react to his rantings (oh excuse me – I meant remarks).

I'm now declaring this a pattern, following China's comments, that seems aimed at keeping the dollar from running away.  The problem on the international scene seems to be that, as other countries are trying to raise capital by selling their own bank notes – nobody wants them.  The US just auctioned off a record $40Bn worth of 2-year notes yesterday at 0.949%.  That means the dollar is attractive enough to buyers at this level and our notes look safe enough that people are willing to give us their cash for 2 years in exchange for less than 1% interest.  Bid to cover was, in fact, 2.71% – the highest level since October 2007 and, next week, Bernanke joins in as a new bidder with $300Bn to spend… 

Today the government will raise another $34Bn (20% of the Czech Republic's entire GDP) in 5-year notes and tomorrow $24Bn in 7-year notes and the 10-year note is still hovering at 2.65% so our cost of capital remains extremely low.  Of course, we need to sell $160Bn worth of notes this month to cover our $2Tn deficit and that's what's really getting under the skin of Topolanek and other world leaders as Czech Koruna has dropped 37% against the Euro since last summer and NO ONE is showing up to bid on their bonds as MER forecasts another 11% to go!

This is something we've been discussing since the fall, when I first warned that Eastern Europe could take down Western Europe.  Any further sell-off in Central and Eastern European currencies may strain government finances and trigger $300 billion in losses for local banks as rising repayment costs on foreign-denominated loans spark defaults, according to Deutsche Bank in a March 13 note.  It may also weaken the euro because of concern banks in the 16-member euro zone will be forced to write off some of their $1.3 trillion of loans to the region, according to an ING Groep NV report last month.

So Eastern Europe is in trouble and that puts the EU and the Euro in trouble and Japan wants a strong dollar at all costs (their exports were down 50% against a weak one) and China is holding $2Tn dollars of their own and doesn't really want them to devalue (but they also don't want the dollar higher as it forces them to peg their currency up against their other buyers – see yesterday's post for chart).  All this goes together to make the Euro look like a bad idea as a long-term investment or even a short-term one and that raises the borrowing costs for EU countries and causes inflation, which their Central Banks are mandated to combat by controlling the supply of money which makes all EU investments look very dicey compared to the US's "Highway to Hell" plan of spending all those cheap dollars we are borrowing to boost our economy.

It was a 1% jump in the dollar that hit our markets in the last hour of trading yesterday.  Always remember that stocks are themselves a commodity that are traded in dollars and it does matter a great deal what the dollar does from day to day.  At 2pm yesterday, you could trade a share of V for a barrel of oil at $54.  This morning, V is still $54 but a barrel of oil is under $52.50.  Corn, wheat, soybeans, gold, silver… also fell in comparison to the mighty buck as did Euros, Yen and Yaun – which means Toyotas, Gucci bags and flat-screen TVs got cheaper too!   Of course it takes more than a day to make a trend, but that goes for your investing too!   As I said to members in yesterday's chat: "Overall, still feels like a pullback – hard to keep perspective but we did gain 500 points yesterday and the last 90 were BS so giving them back shouldn’t even count."

Asia had a mixed day with the Nikkei flat, the Shanghai and the Hang Seng giving back 2%, BSE up 2% and our new pals in Australia up a point.  Generally, it looked like pretty sensible profit taking and nothing more with the Hang Seng coming off a 2,500-point run from 3/9 (22%) while the Nikkei is holding an amazing 22% run of their own.  As I predicted on Monday, that 2/9 high is acting as upside resistance in all global markets so it's not a "rally killer" if we consolidate up around here.  We have to make it through GDP (and Japans was off 12%!) and earnings in April but, if we can hold these levels after all that bad news – we may really have something to build on!  The Chinese government raised tightly controlled fuel prices, showing they are committed to keeping demand in check and that will be bad for oil.

Budapest banner says: "We want a new election"Europe is down about a point this morning (8:45) as they take their President's word very seriously it seems.  Even more serious than that is Hungary's pension crisis as 30% of the country now qualifies for one and CRISIS is way too mild a term for what is brewing over there as investors have stopped buying bonds and only an IMF bailout has saved the country from default so far. The system "fails on pretty much every level," says Mark Pearson of the Organization for Economic Cooperation and Development, of which Hungary is a member.  On deck is Romania, who are hitting the IMF up for $25Bn this week and we already discussed how the Czech PM has been bounced out of office by angry mobs of senior citizens.

If you don't think that can happen in this country – remember how Arnold got to be the Governor of California, which happens to be the World's 5th largest economy!  The problem with running a government that has a wide safety net for its people is they tend to get angry when you are unable to pay…  The EU has already had to reprimand France, Spain, Greece, Ireland and the UK for running deficits above the EU limits as they try to support their sagging economies while avoiding no confidence votes of their own.  Sarkozy has come out in defense of his own stimulus program, which also includes a bailout for France's Auto Industry.

Our Durable goods orders came in 236% better than predicted by the usual "experts" at +3.4% and even ex-transportation, they were up 3.9% so fantastic across the board.  Jan was revised lower, from -5.2% to -7.3% – a number that would have shocked us back then but, on the other hand, it makes the turnaround even more impressive.  Remember, we saw signs of this in the Inventory numbers as well as the Productivity Report last week so this is only really shocking to the people who they poll to come up with these seemingly random estimates (but if they were really random you would think they would randomly get it right once in a while).

We have home sales at 10 and no one expects much out of that (300K) so an upside surprise is very possible there as well.  Oil inventories are at 10:30 and we expect a net 2M barrel build, about on par for the course and oil has very firmly held $52.50 so the fix is still in as long as they maintain that level but, if not, OIH puts are the way to go.  Nothing that happens today really matters as we have a GDPhursday coming up tomorrow along with the usual 650,000 missing jobs – both pre-market so we'll be taking the money and running today and leaving our selves well-covered for whatever may come tomorrow.

Levels are the same as usual and I sent that out in an alert this morning to members along with 7 new plays and 2 new protective plays so make sure you read those as well!

 

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