Saturday, December 10, 2011
The EU Summit didn’t conclude with a statement or hard number backstop for the ‘zone’s sovereign debt rolling over next year. However, EU President, Herman Van Rompuy, stated this morning that as regards private-sector involvement, we have made a major change in our doctrine: from now on we will strictly adhere to the IMF principles and doctrines,” and added “or, to put it more bluntly, our first approach to PSI, which had a very negative effect on debt markets is now officially over.
Even if the official statement is not explicit, this is being interpreted as am unequivocal backstop. If their PSI approach is over, that is bailing in the banks and bondholders who hold the questionable sovereign debt , the full blown bailouts, if needed, will continue. By explicitly stating PSI is over, the EU is implying the big bazooka will be there to fund any shortfalls in rolling over bond maturities.
Increased global systemic risk has put the fear of God in the EU leaders. They now know what’s at stake but a wholesale bailout of the banks and bondholders is a hard sell to their domestic constituents and parliaments. The fiscal pact is a step in the right direction and clears the way for ECB bazooka if needed, in our opinion. Furthermore, many analysts were very skeptical after the details were released, yet the markets are up and sovereign spreads are slightly tighter. This is a good sign.
Market Behavioral Analysis:
Treacherous market conditions continue. However, we know feel that equity markets believe that world wide CB’s are poised to print what ever is necessary to avoid total economic collapse. Equity markets are not the economy and equity prices will move hire as economic conditions continue to decline. Their prices will be inflated along with other assets. The only place not to be will be the current “safe havens” of US Treasuries and German Bund.
We have exited our short position established from 1223 at 1247 for a loss. The technicals are beginning to look more bullish. Equity markets may be looking past the ugly fundamental data to the realization that the ultimate “fix” will be historic fiat printing and the inflation of asset prices, stocks included. The move back to the Pivot we were expecting stalled at the 200 Day X MA. We would look to be long on a close above the 200 Day MA @1263.
We have established a long March DAX position @ 5945. Market reaction to EU Summit and the pullback to the Pivot have us believing that a rally is imminent. Looking to take profits at Pivot Top 1 @6424.
After our roll we are short March US Bonds from 141’05. Whereas equity markets may be looking forward to the inevitable fiat print and the associated nominal price gains, EU Summit reaction was muted but we believe in the right direction and we look foe acceleration. The EU plan will be fiat printing or there will be a collapse of the economies in Europe that will result in a worldwide recession which will induce Fed fiat printing. We may feel some pain first but are looking to the Pivot at 139 for profit target. Eventually we believe that 129 will be reached before June.
We closed short EC from 1.4040 at 1.3333. The stall in the decline has been too long in duration and we feel that a bounce back to the Pivot will resume. We look to establish shorts there
We exited our long from $95 at 101.15 and are currently flat. We look to established longs at either a pullback to the Pivot at 89 or a two day bottom at 94. In the long run the resolution of Debt Crisis will be fiat printing and higher commodity prices Crude especially.
We still are long SI and are looking for a move to 36 to take profits as the world continues too seek stable “money”.