Fw: Risk/Reward Vol. 97
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I'm sittin on the dock of the bay
Watchin the tide roll away
Oh, I'm just sittin on the dock of the bay
Wastin time"---lyrics "Dock of the Bay" by Otis Redding
"For we can fly up, up and away
For we can fly
In my beautiful, my beautiful balloon."--lyrics from "Up, Up and Away" by the 5th Dimension
"She said, "You don't look my type
But I guess you'll do"
Third rate romance, low rent rendezvous."--lyrics from "Third Rate Romance" by Rosanne Cash
"Hear my phone keep ringing
Sound like a long distance call
When I picked up my receiver
The party said " Muddy Waters, there's another mule kickin' in your stall".---lyrics "Long Distance Call" by Muddy Waters
For the most part, I'm like Otis Redding, sittin' on the dock of the bay; watchin'. Hopefully, I'm not just wastin' time. The only move I made this week was a double short of the S&P 500 on Wednesday after reading another depressing edition of the Financial Times. I made approximately 2% by the time I sold the position an hour before the market closed that day. I am 2 for 2 in my directional bets. That said, day to day wagers are a crappy way to make a buck. The news this week was otherwise too mixed (good news from the US on jobs, bad news from Europe on debt and from China on a real estate bubble) to place any other directional wagers.
What has emerged from the smoke and mirrors of last week's summit in Brussels is one clear point: absent a bold, decisive pan-European move, the Eurozone is going to slide then fall into another recession. Time is short, and time is a-wasting. Even the perpetually optimistic Boo-yah Boy himself, Jim Cramer, placed the stock market on DefCon Level II, stating that it is now a matter of when (not if) a major European bank is nationalized, an event which will freeze an already cold credit market which in turn will send tremors through the stock markets. Statistics reported this week in the Wall Street Journal and the Financial Times indicate that the freeze is well on its way. Overnight borrowing by Eurozone banks from the European Central Band (ECB), a very expensive means of accessing cash utilized only by the least credit worthy, grew by 400% last week. US money market funds, once a major source of capital, have effectively withdrawn all deposits from European banks. Credit Agricole, France's third largest bank, is closing branches in over 20 countries in a major cost cutting move. Credit downgrades of European banks are being announced on a daily basis.
On the sovereign debt front, Italian debt "ballooned--up, up and away" with yields hovering near 7%. This week, the president of Italy's central bank announced that if Italy cannot reduce the yield on its sovereign debt to no more than 5%, Italy will not be able to meet its 2012 budget numbers. To add insult to injury, Eurozone borrowing costs will likely escalate if the rating agencies downgrade Eurozone debt, six members of which still have a AAA rating. Downgrades are becoming increasingly more likely. On Friday, Fitch, one of three recognized rating agencies, set the stage for a "lower rate rendezvous" warning that many European countries face credit downgrades and further stating as follows:
"Of particular concern is the absence of a credible financial backstop. In Fitch's opinion this requires more active and explicit
commitment from the ECB to mitigate the risk of self-fulfilling crises for potentially illiquid, but solvent Euro Area Member
States."
Has Fitch been reading Risk/Reward?
But, from my vantage point here on the dock, what I find most amazing (and encouraging) is how well the US stock markets have done these past few weeks. Take a look at a chart. The Dow remains near 12,000 despite the onslaught of horrible news from Europe and has not returned to the 10,600 -11,600 trading range that dominated from August through late October. Leading the buoyancy in these "Muddy Waters" are solid, high dividend payers whose businesses are primarily US based. Stocks in the following sectors are still "kickin in their stalls": telecoms (T, VZ), utilities (DUK, UIL, FE), tobacco companies (RAI, MO) and domestic oil/gas/pipeline plays (PER, SDT, KMP, LINE, EEP, CHKR, ETP). GE has also rebounded. Eurocentric companies in similar industries have not fared as well. For example, NGG, the large British utility, has fallen, and TEF (Telefonica), the large Spanish telecom, dropped through its stall with the announcement this week that it is cutting its dividend.
Pressure to do more in Europe is mounting, particularly from rating agencies. Today's financial news was dominated by France and Britain trading barbs on whose economy is more worthy of a downgrade. Fitch's call for the ECB to operate as a "backstop" as a condition to the Eurozone's remaining AAA countries (read, France) keeping their rating may cause the ECB and its puppet master, Germany, to rethink their resistance to permitting the ECB to become the sovereign debt buyer of last resort. Look for some movement on this before January 1. If it happens this week, we will see the stock markets rise, and we will all have a Merrier Christmas..
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