I want to briefly cover the macro environment as sentiment right now is probably the most important issue regarding the near term price direction sustainability. Yesterday I said very directly that one more perfect storm in Europe like we just saw, could send Wiley Coyote finally looking down and getting reacquainted with gravity, despite what Wall Street has planned in the near term.
Deutsche Bank, the BAC of Europe, reported very poor earnings today. The Capital shortfall in EU banks is not an easy problem to fix, ultimately there probably isn't a fix, but despite the German public and government's protests, it's looking more and more like the ECB will have to come up with some sort of liquidity injection. We know there's not only capital problem, but a liquidity problem as well (think of this as cash flow vs profits or the cushion against further contagion, there is clearly a problem in both).
As a result of this problem that has manifested in the repatriation of Euros (talked about recently), news is out today that there is an "initiative" under way to allow EU banks to access cash from the ESM which is supposed to be a firewall. If the limited funding of the ESM (which is not enough to deal with Spain if it get much worse) is going to be deployed to the banking sector, than the EU banking problem is much bigger than we thought. The timeline in which this may be completed is two weeks, meaning it is situation critical. Spanish banks don't have the funding that corporations depend on (in the EU corporations depend on an average of 70% of their funding from the banking sector vs the US at 30%).
Germany is already kicking and screaming about this proposal, but as mentioned, with the French elections and voter sentiment, it is looking more and more like the divide between north and south in the EU is leaning away from Germany, after all it looks like Germany is about to lose it's biggest ally in the French elections.
The implications here of the ESM being used for bank funding are probably a lot larger than I can describe, it's a big problem.
We also saw European Confidence Indications hit 2009 lows today; Economic, Manufacturing, Services, Consumer and Business Climate all came in a large misses. This only accelerates the flight of capital out of the EU banking sector.
10 EU member states (with the UK joining the list this week) have entered a double dip recession.
In the US this morning, Initial Claims missed-no surprise, just look at the Economic Surprise Index linked on the site.
| Released On 4/26/2012 8:30:00 AM For wk4/21, 2012 | ||||||||||||||||||||
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I find it a bit surprising the market has weathered the IC and Euro news as well as it has thus far, perhaps one of the reasons was the revision of the prior from 386k to 389k. You would think the higher revision would be taken bearishly, but the Financial media (Wall Street propaganda arm) has spun this to look bullish, the logic is this week's miss at 388k is a decline from last week's upwardly revised 389k print, in reality both are bad news, however just to add some more confusion, the QE crowd sees bad news as good news-the rationale being the worse the economy declines, the higher the probability of more QE. The trend here is 10 consecutive weeks of misses and 16 of the last 18 have missed, revisions of the prior week's data higher are a given. This is bad, but because of the number of people falling off the 99 week benefits, the data actually looks better than it is!
So with the market in somewhat of a holding pattern, it is actually much stronger than it could otherwise be had Wall Street not set this volatility shakeout cycle in motion. The question is, can they reach their goals before the economic data overwhelms the small accumulated positions used to pump the market higher?
We are definitely getting in to a very sticky patch, thus I continue to look for opportunities to add shorts in to strength.
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