Summary – A top-down review of interesting calls and comments made last week in Treasuries, monetary policy, economics, stocks, bonds & commodities. TACs is our acronym for Tweets, Articles, & Clips –our basic inputs for this article.
Editor’s Note: In this series of articles, we include important or interesting Tweets, Articles, Video Clips with our comments. This is an article that expresses our personal opinions about comments made on Television, Tweeter, and in Print. It is NOT intended to provide any investment advice of any type whatsoever. No one should base any investing decisions or conclusions based on anything written in or inferred from this article. Macro Viewpoints & its affiliates expressly disclaim all liability in respect to actions taken based on any or all of the information in this article. Investing is a serious matter and all investment decisions should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives, suitability requirements and risk tolerance.
1. Greece – Everyone against Merkel’s Germany
The biggest turning point in this Greece fight was the release of the IMF report last Friday, two days before the Greek referendum. And as we said last week in our section Strange things happen in Wars, the IMF would not have released that report (which insisted on some debt forgiveness) without at least the blessings of America. So the release of the IMF report was a signal that USA, IMF, rest of Europe and, of course, Russia & China were all united against Merkel in her quest for pushing Greece into submission. All this hinged on Greeks NOT voting strongly yes last Sunday.
The Greek people delivered a more emphatic NO than anyone had expected. That made it simple for the anti-German united front. That allowed PM Tsipras to speak to President Obama after meeting with Chancellor Merkel & President Hollande. Then President Obama spoke with Ms. Merkel and the fix was on. President Hollande spoke out publicly in favor of Greece and clearly with the support of other Southern European nations. The rest was sheer optics.
Wolfgang Munchau of the FT wrote about the United Front on Friday:
- “But Alexis Tsipras has achieved something that has eluded him in the past five months: he has managed to split the creditors. The International Monetary Fund insists on debt relief. The French helped the Greek prime minister draft the proposal and were the first to support it openly. President François Hollande is siding with Mr Tsipras. And that changes the stakes for Angela Merkel.”
- “And if there is a deal, there will have to be an explicit reference to debt relief this time. The IMF insists on it. And even Donald Tusk, the president of the European Council, says so. This is an important development, but it is not clear that all creditors will, or can, agree.”
We wrote last week that:
- “ … in a classic German overreach, Merkel let a wonderful semi-victory slip away in her quest for total surrender”
When Merkel brushed aside the overture by Tsipras to call off the referendum, that’s when she forced America’s and hence IMF’s hand. Because no one, except Merkel-Schauble, wants a blow up in Europe at this time. And, as Varoufakis said publicly on Friday, Merkel-Schauble were prepared for a blow up in the larger interests as they saw it:
- “Schäuble is convinced that as things stand, he needs a Grexit to clear the air, one way or another. Suddenly, a permanently unsustainable Greek public debt, without which the risk of Grexit would fade, has acquired a new usefulness for Schauble.”
- “What do I mean by that? Based on months of negotiation, my conviction is that the German finance minister wants Greece to be pushed out of the single currency to put the fear of God into the French and have them accept his model of a disciplinarian eurozone.”
So will the Germans bow to the wishes of all others & accept this new but same old proposal by Greece? Or will they dismiss it as the nonsense it is? No one believes that Greece will do anything that it says it will or that the Greek economy will grow in the near future. So this is another bailout, pure and simple. This is why Schauble offered to take Puerto Rico if the US will take Greece off of their hands.
The markets think the deal is on. Will Merkel-Schauble go along? Or are they ready to fight the decisive battle of the Germany-Southern Europe Euro conflict? Remember what IMF’s Olivier Blanchard said on Friday on CNBC?
- “stress tests of the last 10 days reassure us make us think that if things go badly in Greece which again we dont want to happen but if they did the rest of the world will probably survive quite well”
Clearly Schauble & Co have the same confidence. It is up to Merkel.
Two weeks ago, we speculated about a Guro or a Greek Euro that could be struck at a significant discount to the Euro to allow Greece to regain some semblance of economic growth. This week, Martin Feldstein spoke on CNBC Squawk Box about a plan for a leave of absence for Greece:
- “They could leave giving up the Euro, they could create a new Greek euro or drachma and when they have got their act together, when they have got their economy in better shape, & it may take several years, they can reapply for admission; they aren’t being thrown out of the Eurozone, certainly they are not being denied the privileges, the rights of being members of the European union, trading rights & labor market rights”
Our bet is that such a Grexit will happen. As of now, we think later not now. But then, we felt the same on the Friday before the Sunday they let Lehman go.
- Gluskin Sheff @GluskinSheffInc – Today’s Breakfast with Dave: The European drama makes Zorba the Greek classic seem like a children’s story
2. China
Whatever China does is huge.
- jeroen blokland @jsblokland – This chart illustrates just how huge the #volatility on #China’s equity market is. Intraday moves vs the &P 500 index
This volatility allows for quick trading profits & losses. This week, Bear Traps Report traded China well by putting out a Buy ASHR call on Wednesday and a Sell ASHR call on Thursday. Kudos to them.
- howardlindzon @howardlindzon – How bad the crash was in #China. Wow “@sobata416: “Shanghai market cap down $2 trillion in 17 days”
But,
- Joseph Weisenthal @TheStalwart – Per BofA, Chinese equity funds just had their largest inflows of all time. http://www.bloomberg.com/news/articles/2015-07-09/the-chinese-stock-meltdown-that-makes-the-greece-saga-look-trivial … vie @julieverhage
Since the first day Jim Chanos began speaking about China, both the bull case and the bear case have been simple. The bull case is that China is different than other countries; Chinese leadership is smart and they can handle adversity in China by their intelligence and their absolute control over China. QED.
This case was made again by Jim Stewart in a NY Times article and his case was enthusiastically promoted by Jim Cramer on Friday. Rick Santelli made a similar case in his clip about Investment Returns being a new entitlement:
- “if Greece can make it 5& half – 6 years, how long can China try to prop up their market; I think a big miscalulation – I don’t agree with any of whats going on but I don’t think its blackswan soup yet; ….“
Andy Mathews of Mathews funds posed to a simple question to the bears on CNBC on Friday:
- “We have seen very little wealth effect on the way up. So why should there be a wealth effect on the way down “
The bear case has been just as simple. History teaches that every intelligent team of autocrats screws up big and every bubble eventually bursts. And when confidence in the one infallible entity eventually shatters, the fallout is very hard and that confidence, like Humpty Dumpty, can never be put together again.
The Chinese market can stabilize because half the market cannot trade and the rest of stock owners are not allowed to sell on pain of death. Being simple minded, we ask who will put new money in a market when you cannot sell what you already own. Simple again – smart foreign investors who can trade US-listed ETFs. Hopefully, the stocks in these ETFs are allowed to trade and the counterparty holding the shares in China can sell. But as long as new money keeps coming into Chinese funds, not to worry.
But a couple of people did worry publicly:
- John Rutledge on CNBC on Friday – I have never seen a bubble blow up half-way
- Ruchir Sharma of MSAM on BTV/CNBC/WSJ – Amount of margin debt in China greater than any margin debt for last 20 years; the most extreme bubble I have seen –
What is the downside of this bubble? Ruchir Sharma wrote in the WSJ:
- “But if Beijing can’t stop the market’s tumble, there could be a sudden shift in the perception of exactly how far economic growth might fall under the weight of too much debt. If that floor crumbles and the Chinese economy spirals downward, it will make the drama surrounding Greece feel like a sideshow. China has been the largest contributor to global growth this decade”
The obvious counter-argument would be that Beijing knows this better than any one in the US and so Beijing will simply not allow this bubble to burst. Remember, the first decline in the Nasdaq 2000 bubble occurred in April 2000 but the final bottom was reached in October 2002. So there might be a lot of time for the Chinese bubble to burst.
3. Fed
By the end of this week, both Greece & China didn’t seem to matter to the markets:
- InterestArb @InterestArb – Stocks & Bonds both pretty much back to where they started the week $ES_F UB_F
That means we are back again to will they or won’t they raise rates?
- Friday – Gluskin Sheff @GluskinSheffInc – Dave: Not a lot new from Yellen compared to her post-meeting remarks a few weeks ago – she’s looking for the smoking gun but can’t find it.
Rosenberg was more explicit in his CNBC Futures Now interview on Thursday
- ” … Fed will be extraordinarily patient – no smoking gun on inflation – very hard for Fed to raise rates when the CRB index is making new lows … “
On the other hand,
- ForexLive @ForexLive – Fed’s Rosengren: It may be appropriate to raise rates in 2015 http://news.forexlive.com/!/feds-rosengren-it-may-be-appropriate-to-raise-rates-in-2015-20150710 …
Frankly, the Treasury market is speaking Rosengren’s tune. Yes, yields do fall when concerns rise about contagion. But yields bounce back viciously as soon as such concerns subside. We wish Chair Yellen would get that first rate hike out of her & the market’ system as soon as she can.
On the other hand,
- Friday – Joe Kunkle @OptionsHawk – 7-10 Year Treasury $IEF sizable buy 30,000 Dec. $106/$111 call spreads
4. Stocks
4.1 Europe
- Dana Lyons @JLyonsFundMgmt – Re Europe: Markets did indeed reclaim important Fibonacci levels in short order > thus, bull scenario re-ignited
4.2 – EM
- Thursday – Jason Goepfert @sentimentrader – Largest weekly outflow among active ETFs = $EEM. Largest inflow = $XLF…that’s a new 5-year high.
4.3 US
- Thursday – Pedro da Costa @pdacosta – Stock Market Short Sales at Their Highest Level Since Financial Crisis http://bloom.bg/1TmRYvG
This could be a perfect set up for a real rally, wouldn’t it? That is sort of what Dana Lyons wrote in his article Options Hedging Hitting Extreme Levels:
- “… the Total Put/Call Ratio is presently at a 3-year high. That suggests that the level of Put activity is at an extreme relative to Call volume. And if historical precedents mean anything, we should be nearing a market bottom of some magnitude. Here is a chart showing the current extreme as well as similar historical extremes:”
- “Another look at the current extreme Put activity is that the Put/Call Ratio has been above 1.0 for 10 consecutive days. That is a level of persistency that we have not seen often … As with the 90% Down Day study, we are beginning to see signs of excessive fear and bearishness in the market. This includes the extremely elevated level of the CBOE Put/Call Ratio, which suggests a substantial amount of hedging taking place. Cumulatively, all these signals point to perhaps a tradable short-term or intermediate-term low in the next few days or weeks“
Fuel for such a rally?
- Friday – Jason Goepfert @sentimentrader – Smart money goes long ~$5 billion in index futures this week, 3rd highest of the bull market. $SPX $SPY
And,
- Wednesday -Ryan Detrick, CMT @RyanDetrick – $VIX term structure back to backwardation today. ’08 marked a major sell signal. Since late ’12, been bullish $SPY.
But are the lows in?
- Jeff Saut on Friday – “I would also note that we have now experienced two 90% Downside Days, which is what you tend to see around market bottoms. And, this morning the preopening S&P futures are better by 24 points on hopes of a last minute Greek deal and China’s overnight surge. Meanwhile, the always insightful Sentimentrader.com’s Jason Goepfert writes, “According to the CNN Fear & Greed Index, investors have become panicky. Fewer than 1% of all days since 1998 have shown the level of pessimism suggested by the index, and stock returns in the months ahead, have been significantly positive (see chart below). I think the “lows” are in “
On the other hand,
- Thursday See It Market @seeitmarket – Is That 10 Percent Correction Finally On Its Way? http://www.seeitmarket.com/investors-is-the-10-percent-correction-finally-on-its-way-14543/ … by @RyanDetrick $SPY $STUDY
A terrific timely call back on Tuesday:
- Joe Kunkle @OptionsHawk – $SPX – To keep it very simple, we bounced near a major convergence of supports, giving very tradabale levels
Kudos, we say.
5. Gold
Is useless an antonym of precious?
- Friday – Jack Damn @JackDamn – Updated: $GLD Monthly downward consolidation. 3 taps on 110 support. Should that break, watch 100, 70 (dn). 115 (up).
6. Oil
- John LaForge @Phomax – #IranDeal is big deal for world oil supply/demand balance short-term. Extra oil not welcome (chart). @NDR_Research
7. What a Photo?
- The Telegraph @Telegraph – Cheetah surprises tourist by leaping into safari jeep ttp://tgr.ph/1KRLsM4
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