Europe edging closer to a solution – at least I hope so.

October 24, 2011

Global Macro

Congratulations to the All Blacks who got the monkey off their back with a hard-fought win over France at the Rugby World Cup over night. Lets hope that the French with their European team mates can go all the way this week with some sort of resolution to the crisis. But there is no magic bullet and tensions remained high over the weekend. Wednesday is the next installment with another meeting but there are tentative signs that we might be moving towards some sort of interim solution.

But this weekend’s slam dunk delivery of a plan to save Europe, recapitalise the banks and dig Greece out of its hole has simply failed to materialise. There is no magic bullet it seems – at least so far. Look at the headlines in the press this morning (Ed note – is it still press if you read it online and never buy the newspaper?). The FT says “Pressure on Italy in Eurozone struggle” another headline says “Rescue fund firepower at heart of dispute” The article on the Italian pressure says that “Germany and France have turned on Italy to demand further action to boost growth and reduce its huge debt”

Now I get why they are doing this but except for Ireland, which is a truly unbelievable case study in taking your lumps and getting on with it, the Mediterranean PIIGS seemed unanimously unable to actually deliver on austerity and then lets face it austerity is inconsistent with growth. So that in itself is a problem.

What the Big2 of Europe are trying to do is pressure Italy to get its act together to try to stop contagion from a Greek default so, perversely, this could be a signal that the deal over Greece is getting closer – no point hosting a Greek default if it is only going to give Europe a bigger headache. A further signal we are getting toward the package release stage is news that the banks will have to raise € 108 billion in new capital in order to better prepare Europes bank system for whatever is coming down the road. This number is bigger than initial estimates and comes, according to the FT, from the most recent short fall identified in the European stress tests. One question I have though is who would seriously put up the € 108 billion in capital when the chances are that it is going to be severely eroded by defaulting European countries. It would be rational not to put capital up at this point.

We’ll see what happens as the week unfolds. Already on thee radio this morning I have heard that the private banks should be looking to raise the capital on their own but there is a chance of government support should it be needed. based on what I wrote above I guess it will be because its simply not rational to stump up private capital to have it written off – greater good sure but that doesn’t sound like your average capitalist to me.

So this morning the AUD is lower by around half a percent at 1.0330 the EUR is off a smige as Bloomberg runs a story that the Banks have offered a 40% haircut but the politicians want 50%. That’s not too far away and probably just positioning by media.


It is easy to be bearish in the current environment and I guess that all of the fodder being provided by the Europeans is just more grist for the mill. But having come through the pessimistic crescendo of a few weeks ago and having bounced back from data that is not as appalling as many had factored in and with 75% of the companies that have reported in the US so far so the upside there’s a chance of a counter trend rally within an overall bear market.

Now remember that 2008-2011 comparison chart we showed last week put us in the sideways to up phase before the eventual fall. Now I’m not saying this is a fait accompli but as  Jeffrey Hirsch over at Almanac Trader said over the weekend,

The market has shouldered much negative geopolitical and economic news over the past several months and looks to be stronger for it.

I have to agree, which is why I have been calling it a pessimistic crescendo and likening it to the March 2009 low. Probably not as important or long-term but a good old clean out of the pessimists that is for sure.  Hirsch also wrote

Considering the recent velocity of the July-August 3-week-2000-point plunge, the speed at which the market recovered the last leg the bear off the March 2009 lows and in keeping with our 2011 Annual Forecast of 5-10% gains, I would not be surprised to see DJIA 12700 by the end of January, perhaps sooner. Since our October 6 Seasonal MACD Buy Signal (red arrow in the chart below) DJIA is up 6.2% and it’s up 10.8% since the low on October 3.

Now this is no guarantee that we wont see lower levels but Europe feels like its dragging itself to some sort of interim resolution and markets seem to have m more space for the topside than for the type of cascading pessimistic crescendo we saw during our Winter of market discontent down here in Australia.

Spring is sprung in the Southern hemisphere and while all the action is in the North Atlantic we might have some better times ahead in markets and for risk style assets for a little while.

But longer term its the economy that still bothers me so I see this as a tactical move in an overall secular bear market.

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at or Greg directly on

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  1. So, is the market overcooked? | Lighthouse Securities - October 28, 2011

    […] from Almanac Trader that suggests perhaps we should not.  Remember these are the guys I quoted here earlier this week who called 12700 on the Dow by […]

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