THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"It is easier to find a man who will volunteer to die than to find those that are willing to endure pain with patience."---Julius Caesar
"We all come into this world naked. The rest is drag."---Rupaul
"They got little cars that go beep, beep, beep
They got little voices going peep, peep, peep
They got grubby little fingers, and dirty little minds
They're gonna get you every time."---lyrics from "Short People" by Randy Newman
"All things come around to him who will but wait."---Henry Wadsworth Longfellow
It took Caesarian patience to stay on the sidelines these past 2 weeks as the market made some very nice gains before fading on Thursday and Friday. That said, the gains came on low volume (not a good sign) and still fell far short of getting back to August 1st levels. The Dow fell 7.3% between August 1 and September 2. Despite my foolish toe dipping on two occasions in August, I remained out for most of the month and thus only experienced a 0.4% decline.
As discussed last week, I do not expect to re-enter the market unless a long term solution to the Eurozone sovereign debt crisis is reached, some sign of economic growth in the US emerges and/or some good news comes from China. Some good news did come from China this week. Imports of copper, an economic growth bellwether, increased, but are still 37% below last year. In addition, the manufacturing index for China improved in August. But, I need more than this to leave the sidelines.
There is no good news about the US economy.
And as for the Eurozone sovereign debt crisis, HOLY GENDER BENDER! Except for Dominique Strauss-Kahn (DSK), the only Europeans demonstrating cojones this month have been Angela Merkel and Christine Lagarde.
Chancellor Merkel is willing to confront the hawks in her own political party (and perhaps to violate the German constitution--see below)
in order to push approval of the accommodations on Greek debt she promised last July. That stated, she has remained adamant that she will not pledge the full faith and credit of Germany to backstop sovereign debt problems generally. She is walking a tightrope, but has done so masterfully (or should I say mistressfully) so far.
Christine Lagarde, the new head of the International Monetary Fund (replacing the testosterone driven DSK), has demonstrated even more "je ne sais quoi". At what otherwise was an uneventful Jackson Hole conference, Ms. Largarde threw down the gauntlet ("En garde!") to her fellow Europeans stating that which no one else has had the guts to say---Eurozone banks, the holders of 45% of Eurozone sovereign debt, need to raise more capital in order to withstand the risk of sovereign debt default. The likes of SocGen, BNP, Deutsche Bank and Santander need to raise $200billion to $1trillion more in equity to compensate for the inevitable write off they will take when the sovereign bonds they hold are "marked to market" . In so stating, Ms Lagarde made it very clear that she does not expect Europe's few solvent sovereigns (read, Germany) to ride to the rescue of their fellow countries or their banks.
Mon Dieu! No Frenchperson has made such an unwelcomed entrance onto the world stage since Pepe LePew!
But alas, ma chere Christine, if not Germany then who will ride to the rescue? The Eurozone sovereign debt crisis has the potential to be as disruptive to the world's stock markets as the Lehman Brothers bankruptcy of 2008, and it will not cure itself. To add insult to injury, as reported this morning in the Financial Times (FT) (and as predicted here two weeks month ago), BOTH Italy and Greece are dragging their feet in implementing the austerity programs upon which the promise of debt relief are conditioned.
To make matters worse, the FT on Wednesday reported that the European Central Bank (ECB-the Eurozone equivalent to the Federal Reserve) has purchased 110billion Euros worth of sovereign debt since May, 2010 with more than one third being purchased in the past two weeks. More importantly however, according to the FT, the ECB has lent more than 525billion Euros to various Eurozone banks and taken back sovereign debt as collateral. Put bluntly, the ECB has placed itself in a position that it cannot withstand a sovereign debt default and may be forced to resort to its only real power---the power to loosen monetary policy, making cheaper, devalued Euros available to countries to be used to repay debt (tantamount to printing more money) After all, currency devaluation is the traditional way European countries repay sovereign debt. For example, at the time Italy converted to the Euro, its native currency, the lira, had an exchange rate of 2000lira to the euro! Oh, and by the way, we are doing the same thing back here in the good old US of A--cheapening the dollar to make repayment of our own sovereign debt (Treasury bills and notes) easier. OH,you think not? Have you been to Canada recently? Today you get 0.98 loonies for a greenback; on the day President Obama was inaugarated you would have received 1.25 loonies. This hurts, but when administered slowly somehow it seems less painful.
How does an investor deal with the European situation if Euro devaluation is one path chosen to deal with the sovereign debt situation? Frankly, I don't think it changes anything---get the best yield you can---unless the rate of devaluation in the Eurozone far outstrips that of the US. Then, it makes sense to short the Euro vs. the dollar. This move is just like a sports bet---Yankees vs. Red Sox/euro vs. dollar. The "bet" can be done through EUO, a double short ETF. I bought a EUO position on Wednesday when I noticed that for no good reason the Euro was at a monthly high against the dollar.
REMEMBER, mesdames and messieurs, there have been NO DECISIONS made by anyone in the Eurozone on how to fix the sovereign debt problems with only provisional fixes in place for Greece. Why? Because the entire Continent has been on holiday for all of August. However, look for some BIG NEWS from the German high court on September 7th when it rules on the legality of German participation in the Greek bail out proposed by Chancellor Merkel. If this decision goes against German participation, the whole Eurozone will panic---which will not be good news for stock markets, but will make shorting the Euro look like genius.
But alas, as crooned by Randy Newman, being "short" makes me feel "grubby" and "dirty" . Being short is a trader's game, and I long to be an investor (no pun intended). But what is a Long-Fellow (pun intended) to do while waiting for some good news? Is merely being patient good enough?
PS. If you are in the market, you may want to look at Chesapeake Energy (CHK)or its convertible preferred (CHKpD). Chesapeake is shopping a 25% interest in its recently acquired acreage in the Utica shale field, one that is rich in natural gas liquids--much more valuable than simply natural gas. Chesapeake bought the acreage for $1.25 billion but believes that once developed it will be worth $20billion which would double the value of the company. I don't expect that kind of reaction when the 25% interest is sold, but I do expect a healthy pop.
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