I have an account with one of the well known WS names. The guy I work with calls this morning. He says:
“Across the entire’Wealth Management’ side of our firm we have clients who are sitting on cash earning zero return. For that reason we think stocks have to move higher.”
The guy is right. I’m scared to step up and so are a lot of others. So I say back to him, “I’ll think about it.” I did, my thoughts:
The recommendation is to position for a year-end rally. That’s what’s supposed to happen. It happens every year. But all I see is uncertainty.
What’s the Best Case for the EU as far as the markets are concerned? The answer is that a deal in excess of $3 trillion is coming. This is what the market is currently looking for:
- A deal where there is a soft landing restructuring of Greek debt.
- A “solution”, where dozens of big banks will be infused with fresh government capital (a la the US TARP).
- The outcome will be the socialisation of the banking sector and the problematic public sector debts of the PIIGS. This massive transfer of debt/risk will be facilitated with a leveraged SPV.
- Numerous weaker financials will be absorbed by the State(s) (a la Dexia). The terms of those TBTF wind-downs will be market friendly. Equity holders will not be wiped out, Preferred and subordinated debt will benefit from a new State guaranty.
- Coupled with the above, there will be an IMF package to assist in the bailout to the tune of $400 billion.
That’s the Best Case? To me that is a disaster. If all this were to happen it would result in a near immediate downgrade of both France and Germany. The “guarantees” of the SPV guarantors would be devalued in a month.
If this is the way the world is going to go, it is a road fraught with risk. The EU would look like the USA with Fannie and Freddie. Trillions of dollars of debt and guarantees would be “off balance sheet”. The losses would be born by Germany and France.
I think there is a very real risk that a “positive” outcome in the EU will lead, in short order, to a broad based credit crunch in Europe. The solution to that problem will be for the ECB to print money and the Federal Reserve will have to (again) come to the rescue with a multi-trillion increase in dollar swap lines to the EU Central Banks. The “Big Bailout” is a very slippery slope in my opinion.
That is an outcome that I would rather ‘sell on the news’ then ‘buy on the rumour’.
The Worst Case (as far as the market is concerned) is that the deep thinkers in the EU actually start listening to the voters in France and Germany.
The result is that the “Grand Plan” to save the Euro experiment is a dud. An outcome under this scenario is a deal that is woefully inadequate to the task.
A popgun approach. Any “successful” plan must put the German taxpayers at risk. A plan that falls short of today’s very high expectations would be seen through by the markets in just a few hours.
On the USA side of things, there seems to be a disconnect between the real economy and equities. Over the next six weeks we have a few hurdles to cross:
- Another Continuing Resolution is necessary to keep the government running. The date for this is November 18th.
- There MUST be a resolution of the Bi-Partisan deficit commission on $1.4 Trillion of deficit reduction. (November 30th)
- As of today, the outlook for any 2012 stimulus is up in the air. Failure to pass any legislation will result in a $120 billion middle class tax increase that would kick in January 1. (The reversal of the “one-year only” 2% FICA tax reduction.) We may end up with the “Jobs Bill” being very much a slice of bread when a few loaves are needed. Should that be the case, 2012 GDP estimates would fall to the 0-2% range.
It’s just a joke to think we are out of the woods with energy prices. Look at this chart of the real cost of crude for much of the country. This chart is telling me that $105 oil is the bottom of the range. It’s also telling me we are headed back up, not down, as Mr. Bernanke keeps telling us. (I discount NYMEX crude pricing as a measure of anything).
There is a credit crunch that’s sneaking its way through the US debt markets. The latest evidence is in Jumbo Prime loans. See Zero Hedge for details (link). It’s creeping into critical areas of finance. Consider these words and charts from UBS:
The high yield primary market was virtually shut this week, with no deals pricing in the fourth $0 volume week since the start of August.
Since August, weekly volume has averaged a meager $699 million, versus $6.7 billion per week during the same period in 2010
Secondary markets have continued to trade wider. This week, the Broad Market, B-rated, and CCC-rated high yield indices all touched 2011 wides (and their widest levels since 2009). The BB-rated Index, while having fared better than its lower rated peers, also touched a 2011 wide during the week, and its widest level since mid-2010
It’s increasingly clear that a credit contraction is in the works. In part, that’s due to folks like me that look at high yield debt returns and see capital loss resulting from default and restructuring. High grade debt pays nothing. Why bother.
There is no good news coming from China over the next few months. Period. Depending on how the currency issue with the USA is resolved, it could get ugly.
We shall see what the markets will bring. There is too much cash on the sidelines and cash has been made trash by Bernanke. My broker friend may be right that the broad tape has to move higher. But I don’t trust it. I’ll keep the money in the wallet for a bit longer.