Short Takes

Let’s assume Greece and its private creditors reach a “deal”. That deal is far from the final hurdle to preventing a Greek default. According to the Wall Street Journal:

A deal could pave the way for a second bailout package for Greece. However, there have been fresh warnings from euro-zone governments that Greece must improve the implementation of its austerity measures in order to get further assistance. Mr. Rehn has said the euro zone, the European Central Bank and International Monetary Fund may need to inject additional money for a second Greek bailout.

Once a Greek deal is done, an assessment of whether Greece’s debt is sustainable will follow. After that, its official creditors—other euro-zone countries and the IMF—will decide how much money is needed to fill Greece’s remaining financing needs.

The question then is how many of the €200 billion in Greek bonds will be tendered by private bondholders. If too many hold out, then the debt-sustainability sums won’t add up. Greece has said it could then move to force unwilling creditors to accept the bond exchange, transforming the deal from one that could be called voluntary to a coercive default.

Germany also appears to be adding one more significant hurdle according to the BBC:

A leaked plan from the German government proposes a eurozone “budget commissioner” to take control of Greece’s tax and spending, reports say. The Financial Times, which has a copy of the plan, calls it an “extraordinary extension” of EU control. Greek Education Minister Anna Diamantopoulou called the German plan “the product of a sick imagination”. The European Commission said the budget “must remain the full responsibility of the Greek government”. A German official told the Associated Press eurozone finance ministers were discussing the plan.

You have to take any comments relative to Europe with a grain of salt, but the source of the tweet below is credible.

As we outlined in the past, the levels of debt in Europe relative to tax revenues and capital needs for insolvent banks produce an unsustainable situation. Any additional funds given to Greece will most likely have similar outcomes to a flush of a toilet in the coming months. According to Bloomberg (01/28/2012), the Germans seem to agree:

Lawmakers from German Chancellor Angela Merkel’s coalition rejected increasing aid for Greece, Der Spiegel said, citing members of the parliament in Berlin. There can be no further aid if Greece doesn’t implement the agreed adjustment programs, the magazine said, citing Horst Seehofer, chairman of the Christian Social Union, the Bavarian sister party of Merkel’s Christian Democratic Union.

Recent reporting from the Guardian also seems to hint at a greater probability of default than what is priced in the financial markets. Excerpts from a January 25 Guardian interview with Angela Merkel are below:

Angela Merkel has cast doubt for the first time on Europe’s chances of saving Greece from financial meltdown and sovereign default, conceding that Europe’s first ever multibillion euro bailout coupled with savage austerity was not working after a two-year crisis that has brought the single currency to the brink of unravelling.

“We haven’t overcome the crisis yet. Of course, there’s Greece, a special case where, despite all the efforts that have been made, neither the Greeks themselves nor the international community have yet managed to stabilize the situation.”

“There would be no point in promising more and more money without tackling the causes of the crisis,” said Merkel. “Amid all the billions in financial assistance and rescue packages, we Germans also need to watch that we don’t run out of steam. After all, our capacities aren’t infinite, and overstretching ourselves wouldn’t help us or the EU as a whole.”

Note the ongoing mention of Greece being a “special case” in an attempt to stem the almost inevitable tide of contagion. As we showed graphically on January 27, the ever-increasing yield on Portuguese bonds is indicative of a market that also believes Portugal will be a “special case”. Euromoney also expressed concerns about contagion:

While it may not morph into anything further, the daily chart of the S&P 100 Index below is limping into the weekend. Numerous indicators show slowing momentum. A close below 595.89 would add to our concerns. The ETF symbol is OEF.

In early January we stated it made sense to see how the S&P 500 acted between 1,285 and 1,340 (see 1:47 mark of video). Today we sit at 1,316, which means no resolution has come yet. We will pay attention with an open mind, but it is always good to have a base case laid out for the short-, intermediate-, and long-term. From a short-term perspective:

1. The last push higher in the S&P 500 looked too strong technically for a typical end of a move, which means it would not be surprising to see another push higher, maybe beginning from 1,316ish to 1,293ish.
2. If we push higher, resistance may come in near 1,327, 1,330, and then 1,340.
3. If the move higher is weaker, using indicators such as RSI, it may be followed by more significant downside, possibly below 1,200.
4. Potential areas of support to watch would include 1,285, 1,275, 1,253, 1,210, and 1,192.

A more immediate bullish scenario may follow breaks of 1,330 and 1,343ish. Numerous markets in the United States are looking tired on monthly charts. Thursday’s high was 1,333; so, exercising some patience if we move as high as 1,343 makes good sense.

The leaders in Europe want you to believe that Greece “is a special case” and that no other country will be giving bondholders “haircuts”. The market is not buying it. The graph below, from Zero Hedge, shows five-year Portuguese bonds just hit a new crisis low. Think about that – after all the bailouts, backstops, money printing, unlimited three-year loans, and market intervention from central banks, Portuguese bonds are currently showing the highest probability of default during any other point in the crisis.

The graph above throws some cold water on the face of the “everything is under control in Europe” theory currently touted by Wall Street. The odds are very good the news media will be able to republish many articles recently written about Greece by simply finding “Greece” and replacing it with “Portugal” in their word processor of choice.

The situation was summed up well in the Telegraph (01/26/2012):

A report for the Kiel Institute for the World Economy said Portugal would have to run a primary budget surplus of over 11pc of GDP a year to prevent debt dynamics spiralling out of control, even in a benign scenario of 2pc annual growth. “Portugal’s debt is unsustainable. That is the only possible conclusion,” said David Bencek, the co-author, warning that no country can achieve a primary budget surplus above 5pc for long. “We won’t know what the trigger will be but once there is a decision on Greece people are going to start looking closely and realise that Portugal is the same position as Greece was a year ago.”

From Bloomberg:

“I can understand the strict attitude creditors are taking,” Andreas Plaesier, a Hamburg-based banking analyst at M.M. Warburg, said by phone. “Greece’s behavior could well lead you to believe that this isn’t the last step and that other writedowns could follow. There’s also the concern over whether other countries like Portugal will seek to have their debt load lightened.”

From Bloomberg:

The last time RSI exceeded 70 while the VIX stayed below 20, 11 months ago, the S&P 500 reached a 32-month high before dropping 6.4 percent over the next month, data compiled by Bloomberg show. The VIX is the benchmark gauge of S&P 500 options prices. “We’re definitely in a rare spot,” Josh Dollinger, Chief quantitative and technical strategist at BTIG in New York, said in a telephone interview. “These are extreme readings. They more often than not prove to be exhaustion tops.”

Still have an hour to go, but an S&P close below 1,325 would be best case scenario. A close below 1,331 also aligns with the exhaustion case. In terms of increasing the odds of an intermediate top, a close below 1,315.38 would be a plus. Thus far, we have made no changes today. S&P 500 may still try to make a move back toward 1,327, 1,330, or even 1,340. The recent move was relatively strong, which means even if we are “exhausted”, a weaker move higher (technically) may be required.

We are working on client game plans; comments will be brief. Yesterday’s close above 1,325 put the daily DeMark combo count into a fragile state. There is some hope for it being a good signal if we remain below 1,331.91 on a closing basis. The outcome could be bullish since “bad signals tend to be really bad”, which is reflective of a strong market. Odds are good we will make some moves today, especially with a close above 1,331.91.

Other factors: German bonds weak, U.S. dollar weak, euro strong, Italian yields falling, European stocks firming.

Good news for the exhaustion/reversal case: S&P 500 made a high today that will most likely trigger another monthly DeMark exhaustion signal for the S&P 500; we would need to finish the month above 1,277, which was the November 2011 high. Monthly signals have a good track record; something we will respect.

Bad news for the exhaustion/reversal case: Three “stop-loss” or DeMark risk levels were violated in recent days: (a) 1,324 on a weekly chart, (b) 1,312 on a daily, and (c) 1,325 on a daily. As we noted last night, if the signals are “wrong”, they tend to be “really wrong”, meaning stocks could march higher in a rapid manner. Another close above 1,324/1,325 may prompt us to consider making some changes. We will prepare for more upside as well as more downside.

The Fed opened the door to more “easing” and “accommodative policy” through late 2014, which means they will continue to flood the financial system with printed money and they will continue to grow their balance sheet; both of which tend to be friendly for asset prices.