The World Is Drowning In Debt

Debt, debt and more debt flared into global financial crises last week as central banks from Greece, to Spain and the United States grappled with the imperiled finances of sinking nation states. 

Sovereign debt, along with bearish technical and fundamental indicators, makes this a treacherous moment for stock market investors both at home and abroad.

On My Radar

One of the major charts I watch for long term trends in ETFs and the U.S. stock market turned bearish this week which is yet another warning flag going forward into the “sell in May” and go away period.

The NYSE Bullish per cent Index measures the per cent of all NYSE stocks on a point and figure buy signal, and this index switched to “bear confirmed” as of May 20, 2011 which indicates a significant change of tone for the broad U.S. stock market.

The traditional chart of the S&P 500 (SPY) shows the index below its 20 Day Moving Average, which now becomes resistance, and above its 50 Day Moving Average which represents major support.  A break below the 1325 level on the S&P 500 would represent a serious breakdown and make steeper declines a more likely possibility ahead for ETFs across all asset classes.

The View From 35,000 Feet

Sovereign debt was the issue of the week as countries around the world struggle with what increasingly look like unsustainable debt loads.

Greece:  The problem child of Europe continued causing problems this week with Fitch cutting their ratings and putting the country on negative outlook while their Prime Minister says there’s no way they will need to restructure their debt.  But more and more it’s becoming obvious that at least a “soft re profiling” might be on the way and the market anticipates problems ahead with the 10 Year Bond yield hitting new highs last week.

The big problem here is that a number of big European banks are on the hook for Greek debt and some fear that default could trigger a significant banking crisis/collapse in Europe.

Portugal:  The IMF approved a $36 Billion bailout for Portugal to give it some “breathing room” to deal with its economic problems.

Italy: S&P lowered Italy’s outlook to negative.

Spain: This “too big to fail” country was wracked with demonstrations this week in defiance of a nationwide ban as mostly young people protested a national unemployment rate of approximately 20% that reaches as high as nearly 50% among youth in their teens and early twenties.  The Socialists are forecast to take heavy losses in this weekend’s elections and several articles in the general media pointed to the possibility of piles of “hidden debt” being uncovered in the provinces after the elections, as some reports indicate that debt has been kept off the official books to make things seem better than they are. 

United States: The Treasury Department continues to take “extraordinary” measures to keep the U.S. afloat as it has maxed out its credit card of $14.3 Trillion.  D-Day for a debt limit increase is August 2nd when the country would need to borrow again or default.  Vice President Biden is leading talks about cuts and tax increases but Republicans and Democrats appear to be trillions of dollars apart as the clock ticks on.

Weekly Economic Developments:

As I reported in one of my mid-week updates the news was mostly bad:

  •  Japan has reentered recession, its economy plunging for the First Quarter at a -3.7% annualized rate, twice as deeply as expected.
  • May Empire Manufacturing Index: 11.9 vs 21.7 previously 
  • April Housing Starts: 523,000 versus 585,000 previously
  • April Building Permits: 551,000 versus 574,000 previously
  • April Industrial Production: 0.0% versus 0.7% previously
  • April Existing Home Sales: 5.05 million versus 5.09 previously, a -13% year over year decline
  • May Philadelphia Fed: 3.9 versus 18.5 previously, down from 43 just two months ago which was the highest reading since 1984.
  • April Leading Indicators: -0.3 versus -0.7, the first decline since last June

The only glimmer of positive data was in Initial Unemployment Claims which declined to 409,000 versus 438,000 last week, but still above the psychologically and statistically significant 400,000 level.

What This All Means To You

What this means to us is that risk in the U.S. stock market is running high and the chance of a significant correction is relatively high.

At Wall Street Sector Selector, we continue to expect lower prices ahead in global stock markets and maintain our inverse ETF and put option positions.

The Week Ahead

Major Issues/Themes: Lots of important economic reports will come our way this week and be potential market movers.  We’ll get news from the beleaguered housing market and on Thursday we’ll see the second estimate of the all important Q1 GDP.

Tuesday: April New Home Sales

Wednesday: April Durable Goods

Thursday: Initial Unemployment Claims, Continuing Claims, Q1 GDP second estimate

Friday: April Personal Income, April Personal Spending, March Pending Home Sales,

Sector Spotlight

Leaders: (EZA) South Africa (FXI) China

Laggards: (EWS) Italy (EWT) Taiwan

After a very heavy travel schedule over the last couple of weeks, I’ll finally get a few days at home which I’m definitely going to appreciate.  It’s still cold in Bend where we’re still waiting for spring in the high Cascades.

Wishing you a great weekend and week ahead,