Saturday, November 12, 2011
As European Banks find that they are unable to borrow to fund their expenditures and roll their debt with out relying on ECB funding, equity markets may finally be learning what the peripheral bond markets already know, there is no plan that can avoid severe economic contraction. Inflation inducing printing of fiat still seems the only answer that will be acceptable to central bankers and the populace at large.
The EIB is the EU’s IMF-equivalent and is the largest international non-sovereign lender and borrower. It is defined as “the European Union’s long-term lending institution established in 1958 under the Treaty of Rome. It supports the EU’s priority objectives, especially European integration and the development of economically weak regions.”
5Y Euro-denominated AAA-rated EIB bond spreads crashed wider, blowing past the 2009 record highs and clearly indicating that European capital flight is in full swing.
It is clear that the contagion is spreading as Bund yields start to underperform (no capital flight to safety within the Euro-zone) and furthermore, as the chart above shows, the stress on the EFSF has now spread to the EIB’s publicly tradable debt.
Market Behavioral Analysis
The equity markets seem to be beginning to understand that debt to cure a debt crisis is not the answer, and that austerity will slow economic growth and earnings prospects. What happens when Germany is forced to recapitalize its banks and its debt to GDP ratio explodes from @80% to over 100%? We felt that the equity markets would have staged a rally on the changes in Italy and Greece but in the words of Pete Townsend maybe they are indicating that they “Won’t Get Fooled Again”.
The S&P has closed below the Pivot and we have established a short position @1223. The “good news” of changes at the top of Greece and Italy failed to spark a rally and any real buying. It seems as though all the news was already discounted and now all that is left is the realization that you can’t cure a debt crisis with more debt. The austerity the new PM ‘s in the changed governments will attempt to implement will surely be negative to growth in the short term. We are looking for a move to S&P 1160. We will evaluate the trade there. The ultimate first target is Pivot Bottom 1 at 1090.
We are short US Bonds from 141’16. As spreads of French, Spanish and Italian bond increased against the German Bund we expected more of a flight to “safety” rally. It seems the entire world may have already gotten their full of the endless supply of UST. As we near the “Super Committee “ deadline for reporting we expect no agreement will be reached. One should not lose sight of the fact that what they will be calling spending cuts are really nothing but proposed slowing in planned spending increases and that in the end the profligate congress and President will be spending more. Target for this trade is Pivot Bottom 1 at 137.
We are short EC @ 1.4040. Euro has resumed its slide. First target is 1.3000. The “good news” rally was short lived as the realization that the austerity needed and the printing necessary to save the Euro will drive the price to our first target of 13000.
We exited our long from $89 at $100.10. Crude attained the $102 Pivot Top 1only minutes later. The rate of the rise kept us from establishing shorts there and we are looking for a pullback to @ $95 to re establish a long. Pick any of the following reasons: Fiat Printing, Resolution of Debt Crisis, Mid-East Conflict, and the laughter better unemployment numbers.
Our long has been established at 3.2220. Copper has broken the breakout of the W bottom. This throws the chart into some discord. We will remain long looking for a move to the Pivot of 3.8600.