Insights

Greece Dropkicks the Euro, Bad Debt is Back!

In 2008 and 2009 we had toxic bundled up mortgage debt and the toxic debt of financial companies and derivatives clobbering the market.  Then we hit a speed bump on the way to the Dow Jones Industrial Average bouncing to 10,729 and that was the toxic debt of a multi-billion dollar real estate company in Dubai.  Now we are getting to the major league of toxic debt – sovereign debt.  Money ran to the safety of the dollar and Treasury bonds today, or it might be more appropriate to say that money was running away from the Euro and the sovereign debt of Greece, Portugal and Spain today.

How does this affect stocks here in the United States?  For almost a year now, as the Federal Reserve slashed interest rates to near zero to prop up our faltering economy, huge dollar carry trades have been made.  The ‘carry trade cowboys’ have been shorting the dollar and buying stocks and commodities.  This is the linkage – as the dollar jumped higher today on money flooding out of Europe, the short positions in the dollar got squeezed and forced to buy in or cover.  When you short a financial instrument, you are selling it to someone and the money they pay for it is given to you.  Now the cowboys to buy their dollar shorts in and in order to do this, they are raising money by selling their stocks and commodities they bought with the short proceeds.

You didn’t think last year’s massive rally was based upon economic fundamentals did you?  Company earnings?  Other than a slightly repaired banking system, the economy is still in deep weeds with 10%+ unemployment.  About the only economic numbers that have been changing for the United States is that unemployment and our debt has been going up.  This has been happening globally and the weaker economic countries like Greece are to the point where no one wants to lend them any more money.  If a lender shows up, they want to oversee how the money is spent and to make sure budgets are adhered to, etc…  You can think of this as an intervention if you like.

Have you ever seen the person an intervention is called for happy?  The people of Greece are not too happy as they see this intervention, or meddling, of the European Union as objectionable.  To be more precise they see the EU/Greek Governments plan of freezing their budgets and no pay raises as objectionable, and as a highly unionized country, they are going on strike.  This certainly does not help tax collection and so on and on it goes, the vicious circle of an economy you certainly don’t want to be lending money to.  So you sell Greek bonds, you sell the Euro as Greece is not the only member country this is happening to, you notice that the other EU countries have loaned Greece a lot of money so you sell them too.

When you sell the euro you buy the dollar, causing the cowboys to sell stocks and commodities driving down stock markets around the world.  Looking around you see that the only market going up is Treasury bonds, the ultimate instrument of investing safety and the port in the storm.  Then you notice Moody’s (the credit rating agency that pretty much missed the entire credit crisis – they went fishing I guess) is warning the United States about their credit rating.  Uh oh.

Crash!  Bang!  Ouch!

The Dow Jones Industrial Average dropped 268.37 points today (-2.61%, 10,002.18) and broke their support level at 10,090 mentioned here in past ‘Wraps’.  Next support level is at 9,820.  The S&P 500 fell 34.17 points (-3.11%, 1,063.11) breaking support at 1,070 with the next support level at 1,046 (200 day EMA).  The Nasdaq 100 closed lower by 51.71 points (-2.88%, 1,732.99) and is right on support at 1,730 with next level down at 1,674 (200 day EMA).

The PowerShares DB US Dollar ETF (NYSE: UUP) made a new high for 2010 gaining 0.64% (+$0.15, $23.55) as the CurrencyShares Euro trust ETF (NYSE: FXE) got hit for 1.11% (-$1.55, $137.16).

Commodities got clobbered as well with New York spot gold dropping $46.90 an ounce (-4.23%, 4:17 p.m.) but held support of $1,060 (mentioned in previous posts).  They are selling everything but Treasuries so covering shorts for gold here is not a bad idea but I would wait until the dust clears a little to establish new long gold positions.  Nymex crude got smoked, dropping $3.97 a barrel (-5.16%, 4:08 p.m.) to $73.01.

The 10-year Treasury rose 30 ticks (30/32) to $98 8/32 with the yield dropping to 3.59%.  The 30-year jumped $1 26/32, almost two handles (2 points), to $97 18/32 as yields dropped 11.5 basis points to 4.52%.  These are big moves for the bond market.

London -2.17%, Paris -2.75%, Frankfurt -2.45%, Tokyo -0.46%, Hong Kong -1.84%, Sydney -0.62%, and India was up 2.06%.  I have no idea why India was up – maybe they shorted Greek bonds.  Asia did not get hit as hard as their exchanges closed before the selling really started.  Most likely, they will catch up going down tomorrow.

Everything got sold.  Bad Debt is back!

Want more bad news?  Tomorrow we get the Employment Situation number at 8:30 a.m. and the consensus estimate is we did not lose any jobs in January.  I will believe that when I see it.  The overall percentage is expected to come in at 10.1%, which is an uptick from the current 10% level.