Global financial participants, like characters in Samuel Beckett's 'absurdist' play Godot, waited almost endlessly and painfully in vain for the arrival of a coordinated, workable, and practical Euro debt agreement.
Godot the two act tragicomedy originally written in French in 1948 (En attendant Godot) features two principal characters, Vladimir (Germany) and Estragon (France) who divert themselves while they wait expectantly and in vain for someone named Godot (Good Dough) to arrive. They claim him as an acquaintance but in fact hardly know him - admitting that they would not recognize him were they to see him. The pair discuss repentance, particularly in relation to the two thieves crucified alongside Jesus - and that only one of the Four Evangelists mentions that one of them was saved. This is the first of many biblical references linking the central theme of reconciliation with God as well as salvation. They often cry 'We're Saved!' when they feel Godot may be near. Vladimir (Didi) often expresses his frustration with Estragon's (Gogo) limited conversational skills. Vladimir is often hostile towards his companion. Estragon comments on the bleakness of his surroundings. He wants to depart but is told they cannot because they must wait for Godot. The pair cannot agree, however, on whether or not they are in the right place or if this is the arranged day for the meeting with Godot or are not even sure what day it is. As they wait Vladimir asks Estragon what they might do to pass the time. Estragon suggests hanging themselves. They abandon the idea should both not die which would leave one alone - an intolerable notion. They decide to do nothing: 'It's safer' explains Estragon just prior to ask what Godot is going to do for them when he eventually arrives. Vladimir struggles to remember. 'Oh ... nothing very definite,' is the best he can manage.
Their waiting is interrupted by two other forlorn characters, Pozzo and his heavily laden slave Lucky. Lucky is dragged onto stage by a noose around his neck by his master. Pozzo barks orders and often calls him a 'pig! (one 'i' only)' The pair are off the the 'market' for slave Lucky to be sold. Pozzo tells Vladimir and Estragon that they are on his land but acknowledges that 'the road is free to all.' Before they leave Pozzo asks if he can do anything for the pair in exchange for providing company and rest. Estragon tries to ask for money but is cut short by Vladimir who explains they are not beggars. After Pozzo and Lucky leave Vladimir and Estragon play at imitating them. They fire insults at each other and then makeup up. The play ends when a boy informs the pair not to expect Godot today but promises he will arrive the next day. They reconsider suicide but their rope (belt) breaks as they tug on it. Estragon's trousers fall down but does not notice until Vladimir tells him to pull them up. They resolve to bring a more suitable rope and hang themselves the next day should Godot not arrive. They finally agree to leave but neither of them makes any move to go.
The parallels between the classic absurd tragicomedy Godot - and the exasperating lack of 'Piigs at the Trough' Euro debt leadership - is painfully obvious and stunningly ironic.
In a recent article by the outstanding Financial Post columnist Peter Foster, he succinctly elucidates the complex issues and solutions only as he can. 'That governments can't see their way through the crisis is a reflection not of the situation's inherent hopelessness, but of their own debt addiction and flawed vision of competent macro management.' 'At every level there is to be avoidance of responsibility, investment in failure, and continued commitment to the notion that problems can always be passed "upstairs," that is, socialized. In other words - moral hazard on stilts.''None of this has anything to do with globalization or Anglo-Saxon capitalist greed, although European leaders are still weakly attempting to pin their problems on those wicked financial speculators.'
Mr. Foster furhter states that the EU will never find a long term solution until they acknowledge their problem: systematic irresponsibility. Italian head Capo Mr. 'Bunga Bunga' Berlusconi hopes to avoid a total collapse of his government by passing pension reform raising age eligibility by 2 years to 67 by the year 2026! On the bright side 67 is the new 57. Unfortunately most of Berlusconi's mistresses will now have to wait for at least another 45 years before they retire. Italian agreement has also been made to raise a paltry 5 billion Euros a year from divestment and improved returns from state property. These minimalist moves fall far short of the new definition of Austerity: living within your means! The EU's reckless ways of taxing (or not) and spending to buy votes perpetuating the unsustainable debt cycle has come to a painful end. The bill for decades-long financial orgy is massive and private lenders have no confidence in government's ability to promise or repay. Excessive debt has created widespread global instability. The world is being asked to de-lever while the EFSF craves to leverage (5x's) into trillions of Euros of new debt. Taxation, spending, over regulation, entitlement promises, and anti-competitive legislation has cooked their proverbial golden goose! None of these 'causes' will solve any part of the problem! Addicts using more drugs does not help to kick their habit! With drawl is never pretty picture!
Peter Foster's precise ultimate solution (opposite to the current version of Prez. B. Obama) is: 'not less market but more, and not more government (Godo) but less!' 'Waiting' expectantly for government (Godo) to solve these problems and NOT make them significantly worse will be in vain!
In the US, a very positive earnings season is well under way with the majority of companies surprising to the upside. A growing number (1.8 to 1.0) of these companies are cautious in respect to future guidance and extraordinary adjustments. The latest GDP data showed a healthy expected +2.5% growth - almost doubling the last reporting quarter. Jobless figures remain unchanged but expect the number to improve based on improving economic conditions and pre-election jiggery-pokery and fancy stick handling.
The downside pressure on the US housing market continues to abate with reports of 313,000 new home sales in September. Relators report shrinking inventories and cash buyers. September's 3.48 million homes marks the lowest inventory of homes for sale in the month of September since September 2005! The Standard and Poor's Case-Shiller Index showed that home prices rose in half of major cities reporting in the month of August. The President's new open ended 'Refi' financing program for distressed mortgages, HARP, looks only to further support the ailing housing sector. US home building stocks have rallied 30% from their lows.
The tech sector lost momentum this week following last week's Apple downside surprise. This week both Netflix (NFLX) and Amazon (AMZN) disappointed and offered negative guidance based on rising costs and shrinking margins. Next week's Groupon IPO looks to be somewhat of a Groupoff affair based on questionable marketing data. Less than 4% of the 1500 S&P companies have PE ratios greater than 50 times. If any of these rapid growth companies report disappointing (even slightly) earnings their stocks can quickly and mercilessly drop up to 30% before the red ink dries. Consumer confidence (39.8 vs 46 est) through Oct 13th., remains at an all time non-recessionary morbid level despite very upbeat retail sales stats. Consumer confidence averaged 69.3 during the last 5 recessionary periods. A major concern is data showing that the Savings Rate has dropped back to December 2007 levels at 4% from as high as 8% in late 2008.
The brisk and bullish month of October rally temporarily ran head on into significant resistance at just under 12,000 mid week - its 200dma - in a combination of short covering and improving domestic economic conditions. Tuesday's 5 year Treasury auction was priced at 1.055%, just above the record low of 1.015% in September. Most notably about this auction is that it may mark the last time (in the foreseeable future) in which the US debt/GDP ratio will be under 100%. The new cumulative official US debt total after this auction is $US15.010 trillion vs GDP of $US15.013 trillion resulting in a debt/GDP ratio of 99.99%. Wednesday's historic $US29b in 7 year bonds floats America into uncharted negative triple digit 'shark infested (under)water.' After the complex EU debt accord/plan was announced late Wednesday global markets rocketed through resistance areas on renewed confidence, short covering, and 'hopeful/wishful thinking.' The DJIA very bullishly 'gapped' through its downward sloping 200 dma trading as high as 12,300 - up a whopping 20% in 4 weeks. The DJIA closed up 3.4% on the week and 5.4% YTD. The broader S&P 500 also snapped through its 200 dma closing at 1,280 - up 3.5% on the week and 1.86% YTD. The NASDAQ closed up 3.47% on the week and 2.87% YTD despite recent negative earnings reports. With only one trading day left October looks to go down as one of the best months ever - up the most on a percentage basis since the ultra gloomy recessionary year of 1974.
In the commodity market, Dr. Copper smashed all previous records for the largest rise in a week - (over 6 standard deviations) - up over 20% in 6 trading sessions the biggest move ever to $US3.72/lb. Gold also joined the (inflationary) party adding $US140/oz (+8.75%) in 6 trading sessions to close at $US1,745/oz on Friday. Gold added at healthy 5.9% on the week and is up 22.42% YTD. Gold should have trouble breaching $US1,790/oz on the upside in the near term. Silver also participated on the upside adding $US5/oz (+17%) on the week closing at just over $US35/oz. Silver looks to add another $US5/oz before this short term rally ends. Crude oil has also had a stellar run of almost $US10/bl (12%) in the last 6 trading sessions to close at just under $US94/bl resistance. The Agra-grain market (Corn, Soy Beans, and Wheat) consolidated recent gains and look to add another 5-10% upside in the short run.
In Canada, retail sales rebounded in August increasing 0.5% following a decline of 0.5% in July. Canadian consumers are much less pessimistic than their US counterparts showing a slight improvement in September. The latest consumer confidence reading was registered at 70 for the month of September. Overall there has been a deterioration in the Canadian economic outlook over the last few months primarily due to persistent negative US morale. The B of C projects that the economy will expand by 2.1% in 2011, 1.9% in 2012, and 2.9% in 2013. Sensational earnings were reported by most material and energy issuers this week with many raising their outlooks and dividend payouts. Many senior producing resource stocks have been driven lower on 'ultra recessionary low expectations' over the past few months. Expect merger, acquisition, and takeover activity to increase significantly as we move into 2012.
The S&P/TSX Composite index added 4.5% this week closing at 12,519 - still 300 points away from its 200 dma. The TSX Index is down -7.07% YTD based on very low expectations and hedge fund liquidation. Recently the dividend yield on the TSX 60 rose above that provided from 30 year Canadian Treasury Bonds for the second time ever. The last time it occurred was at the market lows of 2009. The battered S&P/TSX Venture Composite has finally emerged out of its nasty down trend closing up almost 130 points (9%) in the last 6 trading sessions to close at 1,629. The Venture Index needs to rally 20% from current levels to return to its 200 dma. Similarly to 2007, the TSX Venture Exchange has been crushed by almost 50% (top to bottom) from it's 2011 high level of over 2,400. Expect this under performing (to say the least) sector to provide leadership in early 2012.
Bottom Line, 'some kind' of EU deal was hammered out in Brussels much to the relief of global financial markets. Most of the usual who, what, why, where, and when questions remain: as to who is going to finance this package, what are the important credit details, why are Greece's debts being (voluntarily?) written off by 50% and why do they get to immediately borrower more, and where will future leadership/control in the EU originate from?
Bad cop Germany will continue to be front and center in this tenuous balancing act. Deep pocketed China has yet to chime in with their various demands but expect them to be onerous. France, Italy, and Spain wait in the wings with substantially greater needs. The 'can' is getting progressively larger and substantially heavier to kick down the 'one way' road!
The European Banking system is massive with over $US46 Trillion in assets - equal to 82% of global GDP. Greece's debt to GDP falls from 160% to 120% - a still unsustainable level. Very little room has been left for future 'toe stubs' and 'eye pokes!' Critical moral hazard concerns now appear to be more of a romantic notion. This weeks 'plan' is a doubtful 'solution' but rather more creative financial foot work and further time gaining balance sheet 'expansion.' The real question is how much more burden are tax payers going to have to 'involentarily' take and how much more (if any) can they handle? This 'slippery slope' leads to nowhere good!
Another huge concern for me is the Mal treatment given to the Greek CDS holders and the negative effect this may/will have on bond markets and interest rates worldwide. Breaking the faith and trust of these derivative contracts is a serious error in judgement. It looks to me to be a significant 'unreported' Black Swan event which may/will have many serious unintended consequences. CDS coverage doubtful = no insurance = dump CDS's = dump doubtful bonds is my simplified analysis. High Interest Rates = Death. I realize that Government is firmly in the 'pockets' of the banking industry and obediently carry out their 'sorted' bidding - but this is a move they may live to deeply regret!
In the 'Real Bad Timing Department' the Italian Defense Ministry just received their shipment of 19 Maserati armoured supercars - an outrageous indulgence at a time when the defense ministry is supposed to be reducing its budget by 2.5bn Euros over the next 3 years. Today's Italian bond issue put borrowing costs at historically high levels breaking over 6% on the Maginot line.
Global equity markets will probably take a break from this recent break neck rally. Expect upside revisions to economic models and corporate earnings expectations. Many managed portfolios were braced for pending financial 'Armageddon' and are woefully under represented. Trillions of non-yielding assets remain on the anxious sidelines. I do not rule out a new recovery high for the year of over 12,900 for the DJIA once markets consolidate recent gains - and possibly before Santa slides down our chimneys.
Ultimately, I believe that new inflation driven all-time highs above the 14,000 level (2006/07) for the DJIA are not out of the question. All time highs for both the DJIA and S&P would be possible in my opinion prior to the upcoming US Presidential election in late 2012. Look to accumulate good quality material, energy, & industrial equities on deeper pull backs. Avoid the interest rate sensitive issues. Keep stops tight.
This absurd debt drama is only the first act!
'A liberal is someone who feels a great debt to his fellowman, which debt he purposes to pay off with your money.'
G. Gordon Liddy (1930-)
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