The Rain in Spain

The news releases from the United States were not positive as jobless claims continue to rise along with leading economic indicators and consumer sentiment surveys dropping. 

The big news in Europe is Spain’s deputy prime minister Soraya Saenz de Santamaria is flying to Washington to meet with Tim Geithner and IMF director Lagarde.  While Largarde has recently taken a harsh stance with troubled Euro countries, the near-term outcome does not look promising for IMF aid very soon.  While I expect the IMF will be involved before the Euro crisis is over, the political debate between countries for an increased role in the IMF and world affairs will move to the front and center.  Emerging countries appear to have the financial strength versus developed countries to be able to contribute. 

While Bank of Italy’s governor Ignazio appear to be stating the obvious that investors now doubting cohesion about European governance and the ability to ensure the survival of  the Euro, Italian prime minister Monti warned of a backlash against fiscal and structural discipline.

In Spain, banks are stuck with an estimated $184 billion Euros of bad property debt and the government just provided Bankia another $23 billion and most investors believe the bank is now nationalized.  Look for the ECB and Europe’s political leaders to announce or talk about using the European Stability Mechanism (ESM) to provide liquidity to Spanish banks.  After all, it is reported that $65 billion of withdrawals have occurred as Spanish citizens start to doubt the banking system.

An update on UUP.  Since the low on April 30^th, the Dollar bullish fund has gained 5.6% while the S&P 500 has declined by roughly 6%.       

Downside target for Euro and S&P 500

The recent call on the market and the Euro has been correct with the S and P 500 dropping to the 1290 area and the Euro now below $1.24 to the U.S. Dollar.  I expected a bounce at 1290 and that happened while I was away.  The S&P 500 appears to have more downside directly ahead to a target of 1213.  The Euro is completing a five wave down structure looking at a target of $1.19.
From these levels, a bounce should occur leading the S&P 500 to a .618 bounce to the 1344 level. The Euro should retrace at least .382 to around the $1.29 area.
The headlines are troubling with major banking liquidity issues in Spain along with government bond yields now over 6.68%.  In Italy 10 year yields are now back over 6%.     

Sell in May and go away

This morning in Europe the shares of Bankia (In Spain) were plunging by over 27% as the bank was nationalized last week.  Reports are that customers had withdrawn over $1 billion in the last week from the institution.  The news has started to affect other banks in the region with Italian banks hit hard. The news along with the Philly Fed index turning weaker along with the U.S. Leading Economic Indicators turning down has hit the S&P index hard.
Sell in May and go away seems to be the trend for this summer. I will join the trend by taking a break from writing for a week while I am on vacation. I will review the S&P 500 targets when I return.

Bank downgrades in Italy

While investors are focused on Greece and J.P. Morgan this week, the Euro crisis is just starting.  Look at the news released this week that investors have not focused on:
Moody's Investor Service cited Italy's recession and increasing bad debt as it downgraded the deposit and long-term-debt ratings of 26 banks in the country.  Meanwhile, the credit rating agency warned that Spanish banks face challenges despite setting aside €30 billion to cover losses related to real estate loans.  A Moody's official said the rating agency will postpone possible downgrades on more than 100 banks worldwide as it assesses fallout from JPMorgan Chase's trading loss and other factors.

The real underlying problem in the E.U. to focus on is Italy and Spain.  The other issue is if the E.U. and U.S. economies are slowing down or entering another recession/depression phase, China’s exports will slow popping the bubble in Asia.  Iron ore price has already fallen “off a cliff” and is one “canary in the coal mine” indicator to exit stocks.

While the Federal Reserve may announce QE 3 and the ECB will likely announce LTRO 3, how long before investors start to question the “lenders of last resort” cannot do anymore without running the risk of devaluing currencies around the world.  With the latest talk in Washington is focused on fiscal restraint or cutting spending, U.S. politicians must be careful just to cut wasteful spending or risk slowing the U.S. economy further.  Looking ahead the ECB, Federal Reserve, the European Union and the U.S. government are backed into a corner on monetary and fiscal policy. The real concern will be higher unemployment and the price level collapsing over the next year.  With the announcement this week by Moody’s, banks will be unwilling to lend and will be selling assets or shrinking balance sheets in the years ahead.  Let’s watch these events for a while to see if announcements may provide some short-term relief.

Crisis just starting

With the news today from Greece, the other financial dominoes will be in the minds of bond investors soon. The announcement of the loss at J.P. Morgan will be interesting as to what position they took a loss on. Was the position on Greek bonds or other hedges?  The top five financial institutions for derivatives I mentioned should be monitored closely for upcoming announcements.  No change as of now on the target of 1290 on the S&P 500.

I will review the S&P 500 target to see if a lower target is possible at this time. However, in technical terms this is only the start of the downturn.  This is possibly only wave one of major wave three to the downside.  We are due for a wave two bounce after wave one only after a full wave waves down are completed. A wave two bounce will like retrace .618% of the final low at 1290 or lower. This downturn is in the very early stages with more trouble ahead likely this fall. 

J.P. Morgan and Credit Derivative Issues

According to Bloomberg, J.P. Morgan just has taken a $2 billion credit derivative dollar loss related to a “hedge”.  While analysts have been questioning the loss, my recent comments on the total size of the derivative market will result in further announcements of this size.  What will be interesting to me will be how the top five players I previously mentioned will handle the Greek Credit Default Obligations among other derivative financial dominos in the European Union.

http://www.bloomberg.com/news/2012-05-10/jpmorgan-chase-says-cio-unit-suffered-significant-loss.html

Euro Crisis II

The markets around the world are selling off on the news from Greece as the new leadership is attacking the “barbarous austerity”.  As the financial dominos start to drop in Europe, Spain’s ten year yield is back over 6% this morning.  One of my concerns has been the amount of U.S. money market fund investment positions outside the United States in search of yield.  An estimated 35% of assets of U.S. money market funds are in European holdings.  I was very concerned about this last fall, until the U.S. Federal Reserve extended swap agreements to help with the last liquidity crisis.  The European bank liquidity issue has been propped up with over $1 trillion Euros borrowed from the ECB called the LTRO.  The LTRO is a three year lending operation to European banks.  Usually a “lender of last resort” does not need to extend credit to banks for such a long period of time.  When European banks unwilling to lend to each other due to increased counterparty risk, the short term spike funds parked at the ECB’s Central Bank Deposit facility is another warning sign and concern for liquidity in the region.      

Another look at unemployment in the United States

After reading an interesting article about how many people are not in the labor market, I wanted to add some comments about 86 million people not working in the United States.  If you take 86 million people not working and divide it by total population of 311 million, around 27.65% of the U.S. population does not work.  The interesting part of this article is the major debate surrounding about the two groups who suffer the most.  The population under 25 and over 50 has the highest rates of unemployment.  A change in employer’s hiring practices and engaging workers back into the labor force will be the key to the future economic growth in the United States.  While employers need to focus on working conditions, compensation, and benefits to attract workers, the labor pool needs time and in some cases a new attitude to adjust to the new positions available by deciding to accept additional education or training. One interesting current example I can point to is welding classes in Des Moines are in demand, as a current shortage of workers exists. A lot of blame can be shared or fingers can be pointed on why companies cannot find workers, but when employees have been laid off from traditional manufacturing, industrial, or oil field positions for many years, you cannot expect the population will spend time or money to be educated or go through training required.  You can expect the population to head for other career growth areas. While technology positions seem to be in demand, not everyone can go back to school at age 50 to take the financial risk of retraining for another career that may not develop.  One interesting point in the article is the 36 million people who may have decided to stop looking, or instead to care for children or support spouses who do work.       

http://money.cnn.com/2012/05/03/news/economy/unemployment-rate/index.htm?iid=HP_LN#

Unemployment and Job Report

The market has appeared to finally turn as I suggested dropping on the employment report.  The target I was looking at before the wave down is over is 1290 on the S and P 500.  While everyone seems to focus on the narrower version of the unemployment rate dropping to 8.1%, the wider version of the U-6 is the key to the U.S. economy turning around. The rate of job growth of 115,000, when economists expected over 160,000 is troubling.

Please look at this link:  http://portalseven.com/employment/unemployment_rate_u6.jsp to look at the U-6 unemployment rate historical data in the U.S.

Spain and other Europe Events

With Spain now officially in recession and another domino falling with the events is the Netherlands, it is amazing to me the Euro is not trading 1 to 1 with the U.S. Dollar.  While in the near-term the U.S. economy appears to be holding up better, the outlook appears dim in the E.U. as citizens will need to decide on some tough economic measures to insure the currency survives in the present form.  With unemployment over 25% in Spain, and with youth unemployment running double that rate the country looks poised to join Italy as the next major dominos to topple over in the E.U.  How can I forget Portugal? Stay tuned.