2/26/12…Italy, sequestration, and the cause of the debt crisis

From the Friars Club Encyclopedia of Jokes: “The trouble with the average family is it has too much month left over at the end of the money.” – Bill Vaughan – like the U.S.!

Bloomberg Quote of the Day: “The buck stops with the guy who signs the checks.”

 – Rupert Mudoch…unless he can foist responsibility on someone else, eh, Rupert?


Bloomberg Top Stories:

*Stocks in Europe Decline as Italian Bond Yields Climb; Dollar Strengthens

*JPMorgan Says It Expects Headcount Will Decline by About 4,000 this year

*Italy Stocks Drop With Bonds While Default Swaps Rise on Election Deadlock

*Sequestration a Big Word for U.S. Cuts Seen as Benign by Currency Markets

*Fed Faces Explaining Billion Dollar Losses Testing Stress From Easing Exit

*Gold Cycle Has Turned in Goldman View as Exchange-Traded Holdings Collapse

*Hungary Cuts Main Interest Rate to a Record Low in Simor’s Last Decision

*Bank of America Surge Affirms Buffett Bet as Moynihan Recovers From Gaffes -???

Hello…it plunged 1.1% yesterday, -7.4% in 3 days!!! Stock is now $11.11 –out at low and not seen since 12/17??? Financial stocks were -2.5% yesterday, worst index!

*Berlusconi Concedes as He Weighs Alliance to Break Italian Vote Deadlock

*Italy Confronts Political Vacuum With Leaders Trying to Avoid New Election

*Merkel’s Euro Doctrine Is Threatened as Italians Reject Austerity Measures

*Kellogg Among Food-Sellers Earning Failing Sustainability Grade From Oxfam


Last Friday, I discussed the possibility of an inflection point, was I wrong?

Total NYSE total volume ROSE yesterday to 3.89B shares vs 3.41B vs 4.26B and 4.2B shares, highest of 2013 by about 400M shares; yep – it was a DOWN DAY as has been the case: high volume on down days, low volume on rallies!?! Real NYSE volume also ROSE to 819M shares vs 683M from 800+ for two straight sessions –  this has not occurred since 9/13-14! Ave vol. 12 mos. 747M, ytd 705M. There have been just seven  800+M shares in 2013. The last thing you want to see is high volume on market declines!

  1. after several weeks of new highs running from 200-680 (2/19), then plummeting to just 121, lowest since 12/14, they rose slightly yesterday to a weak 273 vs 214.
  2. Advance/Declines were HIGHLY negative at -3.6x vs +3.1x and -4.4x vs +2.6x  for the pair after having been only slightly positive throughout the rally with just one day above +3.4x: +9.7x on Jan. 2. The prior two sessions A/D’s ran -3.3x and -2.3x ! Ditto for Breadth with a high of +10x, also on Jan. 2. Down days had not been more than -2 on either. It was positive on Friday at +4.6x and +2.6x. on NYSE and -3.6x and -2.3x on Nasdaq. Look at the selloff yesterday and then Wed/Thurs. also down days: -9.7x vs -10.6x and -3.3x on NYSE and -4.5x vs -5.1x and -4.1x on Nasdaq. Now THAT is a warning, and with Friday coming…
  3. The Nasdaq indices had relied on big gains on a few stocks while the movers have been not much more than 50% positive. NDQ 100 yesterday 90 down, 10 up! YTD, the Nasdaq is up 3.2%, the 100 just 1.5%! The major indices are up 4-5%!
  4. NYSE Financials were the big loser yesterday -2.5% (followed by Transports, -2.2% and the Russell 2000 small cap -2.1%!). It has been down over 1% each of the last three sessions. 12 mo. high on 2/19 and off  5% since then. At the high it was +7.9% ytd, now just 3.8%. BofA still most active and fell by 1.6% yesterday, off 8% in two sessions to $11.11, lowest since 12/17, breaking the 40/50 day m/a’s for the lowest close this year – from $12.42 high on 2/13: -9.7%! Caution!
  5. Last but not least volatility (S&P VIX) which had back to back lows going back to 2006 – huge complacency, has risen 52% in four days: 12.13 – 18.99 (with an intraday high Monday of 19.11, highest since 12/31 – highs on 12/30-31 were 22.72 and 22.19 respectively, highest since 6/15, as Congress tried to avoid the ‘fiscal cliff.’ When they acted (sic) it declined to multi year lows??? Congress is coming back from ‘break’ and has only till Friday to avoid sequestration …another last second deal? Most say NO!!! This is far worse then yearend and it is even more contentious between GOP and Dems!!! An increase in VIX is associated with more puts being created than calls!!! It is still now well above the 40/50/200 day m/a’s: 14.10,14.73, and 16.90!!!

Only three more days to shop before the Doomsday effect kicks in!

Global equity markets are being slammed which began late in the European session yesterday after the Italian election results became in doubt (note prior day CLOSES in Europe in ( )  gave up most of the big gains vs when I reported them – which turned out to be the session high!): UK -1.3% vs +0.3%(+0.6%) vs +0.8% vs -1.6%; France -1.9% vs +0.4%(+1.7%) vs +2.1% vs -1.8%; Germany -1.5% vs +1.5%(+2.3%) vs +1.1% vs -1.8%; Japan -2.3% vs +2.4% vs +0.7% vs -1.4% vs +0.8% vs -0.3% vs +2.1% vs -1.2% vs +.5% vs -1% vs +1.9%, Hang Seng -1.3% vs +0.2% vs -0.5% vs -1.7% vs +0.7% vs -1%; Kospi -0.5% vs -0.5% vs +0.2% vs -0.5% vs +2%; India -1.6% vs +0.1% vs flat vs -1.6% vs flat. U.S. stock futures higher – but we had that big reversal YESTERDAY on the Italy news: DOW +30; SPX +3.60; NDQ +3.75. Good luck!!!

Bonds put in a MAJOR RALLY on the stock market reversal and are little changed  overnight stretching the ranges of the 10 yr Treasury range of from 2.06% to 1.86% last 7 sessions, now 1.86% vs 1.96%, and the 30 yr’s 3.23% to 3.05%, now 3.05% vs 3.18%. The long Tip is 0.52% vs 0.60%. Libor update: 0.243% 3 mos., 0.457% 6 mos. – BOTH dropping again! Foreign bond yields mixed with modestly lower yields for the big guys and HUGE hits for the troubled nations (note changes are from prior days close so don’t include the intraday hit!!!): Germany 1.47 -9!; UK 2.01% -7!; Italy 4.84% +36!!!; Spain 5.31% +16!!!; Portugal 6.32% +27!!!; Greece 10.81% +14 (note this one didn’t suffer much from the Italy news??? Japan 0.68% -2.

Gold rose yesterday but in light of the still $106 loss from the 1/17 high of $1699.90 did surprisingly poorly on equities tanking and attests to the huge overbought (still) positions in the Gold ETF’s! It closed at $1586.60 +$13.80, safely above Thursday’s low of $1554.30 – not seen since May 2012! It has been up for three straight sessions, so what? Overnight it is $1594.90 +$8.30.The total breakdown through the 40/50/200 day m/a’s, has major resistance $1657-1668, as well as $1600, a double bottom from 8/14-15, with critical support now at $1550 – safely below. If broached, $1526.70 is next support. Last time it was below $1500 was Sept. 2011!!! Crude barely budged during the turmoil since a week ago Monday’s key reversal. It closed at $93.11 -.02???, below the 40 day ($94.94), AND $93.60, the 50 day, but not before putting in another low of 92.07, lowest since 12/31/12! Overnight it is $92.39 -..73 with support at the 200 day, $90.45.

Some random thoughts:

First, Italy…where a comedian split the vote and has now created global turmoil. This is not even a satirist like Stephen Colbert…just a jokester! That goes to show what a mess the country is in. Yesterday, global markets were strong, then news of the Italian fiasco came shortly after the U.S. open – the Dow had worked up from +60 at the open to about +98, then tumbled all the way down to a 216 point loss – worst of the year – closing at 13784, the session low! Note that Financials were the worst performer with NYSE Financials -2.5%, but Brokers and KBW Banks both off 2.7%!!! Financials are key to any strong market in this global environment! Imagine…an Italian election causing a global rally – until the results were in question – then the entire world sinks? THINK!!!

Sequestration now appears inevitable. For the following reasons:

*Obama feels that he can’t give in to more cuts without revenue increases, meanwhile Boehner says (mirroring the Tea Baggers), they have given in all they can/will. Bull! Just as with the Defense budget, we are in serious need of tax reform (i.e. carried interest), yet the GOP will not go against its biggest contributor. You can be thankful that Romney lost or there would be no chance at reform…especially if the Senate had gone to the GOP!!!

*The GOP is wrapped up in so many ideologies to protect their status with fundamentalists, and the financial lobby (both parties are also being controlled by the pharma lobby which is preventing a huge savings to Medicare by allowing it to negotiate prescription drugs). Meanwhile, Eric Cantor has taken up the stance of the defrocked Tom DeLay as a firebrand, whipping the dissenters into line and making outspoken inflammatory comments. There can be no ‘grand bargain’ with this type of thinking!

*Who will lose? Some say the impact is overblown…is it? There are those who have government affiliated jobs (defense, grants, etc.), who cannot be sure that they will still have their jobs in the coming months unless something is done – now!!!

*The best guess is an immediate loss of ‘only’ 700,000 jobs. Only? Consider that that is about four months of the job creation we have been seeing over the past year and will also result in a sharp increase in unemployment – IF the sequestration lasts more than a couple of weeks!

*Is the détente on the debt ceiling now off the table? Could well be as the stakes rise. Note that ‘defrocked’ S&P which cut the U.S. Government rating to AA+ from AAA, has now been followed by Moody’s cutting the U.K.’s Aaa rating to Aa1 – neither of these has any effect but both were clearly designed to make the two countries wake up to the facts…doesn’t seem to have effect, especially since our bonds rallied after the ‘cut.’ This of course was more due to the turmoil in Europe which continues…witness our rally yesterday!

*I am not a fan of the Democratic Party but LOATHE the actions and thinking of the GOP which for my entire life I was proud to be a member of. They now represent the wealthiest Americans (many of whom achieved that by creating the financial crisis and continue to benefit), fringe groups, and the financial and pharma lobbies). This is not the party of Lincoln…it has become a sham. End of my thinking on this! You decide!

I will close with a link to the best, most concise analysis of how the financial crisis began – hope this guy does one on the crisis of government too! http://www.crisisofcredit.com/

It is just 11 minutes long and you have to listen to it, but it is time well spent.

There was just one error…I wrote the following to the creator, Jonathan Jarvis:

Jonathan, your presentation was outstanding! Other than one glaring error: the dot.com bust did not occur in Sept. ’11 as your slide shows, but in Sept. 2000. This is an easy fix.

From Jan. ’01 to Feb ’03, the Fed cut the Discount Rate FIFTEEN times (12 in 2001 alone!), from 6% to 0.25%. Note that prior to Feb. ’03 it had been a huge penalty rate to Fed Funds. The slide says the Fed was much more concerned with the implosion of real estate prices than they said.

In June 2006, the targeted Fed Funds Rate was 5.25% – indicating the Fed was well aware of the leverage being accumulated by the big banks! That was the peak…nearly 2-1/2 years before the fall of Lehman Brothers! By 9/07, it was cut to 4.55% (13 cuts in 15 months, then to 0-0.25% on both F.F. and D.R. by December 2008!). Note that this was about the time the stock market peaked! Housing prices had already peaked back in 2006, yet asset-backed securities demand remained strong…prompting originating lower and lower quality loans (liar loans, no docs, subprime).

It would be a nice addition to include the role of the rating agencies in creating the demand for these faux-AAA securities.

Thank you for a very clear explanation of a highly complex problem. What is maddening though is that unlike the S&L crisis where over 1,000 people went to jail, no one did and in fact many continue to hold senior, well-paying positions. This despite the creation of Sarbanes-Oxley following the Enron debacle, and now Dodd-Frank which the financial lobby has neutered.

Meanwhile the blame is placed on FNMA/FHLMC who were late entrants to the ‘game’ and only held the AAA tranches of the CMO’s. What a travesty…and it is ongoing!


…the only question remaining is why we let them get away with it. This from a capitalist country that not only  allowed the big banks management to benefit from risking the global economy, but held them harmless. Worse, we are poised to do it again…the only question is: when?


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