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Thursday, 28 June 2012

Other People's Money

Margaret Thatcher once famously said that 'the trouble with socialism is that eventually you run out of other people's money'. She was talking in a world much more centered around sovereign nations than the current one though, and there are therefore two modern solutions to this problem that she wouldn't have considered practical or even possible (or sane).

The first of those solutions is for governments to implement deficit spending and borrowing on a scale previously unknown except in wartime. At the same time central banks make this easy to finance by pushing interest rates down to almost zero, and cushion the market impact of this new sovereign debt reaching the bond markets by printing enough money to buy the new bonds themselves. In effect this is theft on a grand scale from anyone with savings in cash, pension funds or bonds, but it keeps the show on the road a while longer:
The second solution when a sovereign nation has exhausted the easy options for looting the assets of their own citizens, is to look to other still solvent sovereign nations to see whether they can now loot their assets instead. If this kind of thinking had been applied in the parable of the five wise and five foolish virgins, the five wise virgins who had prepared for the bridegroom's arrival would have shared their lamp oil with the five foolish virgins, in the hope that the lamp oil shortage would somehow sort itself out, and then all the lights would have then gone out halfway through the wedding.

This is the essence of the Eurobonds proposal that Merkel will be under intense pressure to accept this weekend, under which Germany will underwrite the majority of the outstanding debt of the other Euro states. It might work if there was a consensus in favor of austerity to pay down the excess debt over time, but there is just the opposite, with a growing consensus at the ECB and Germany's spendthrift neighbors that the breathing space secured by Germany's sacrifice should be used to implement stimulus plans and further easing to boost economic growth. Hard to see how this could end well for Germany but they might agree nonetheless. These excellent demotivational posters are courtesy of despair.com, and they hyperlink back to the posters on that site:
Eurobonds are electoral poison in Germany, and it seems unlikely that Merkel will agree to them. I hope she doesn't, as the healing process in Europe will begin, in my view at least, when the current slide towards group bankruptcy is stopped. One of the most astonishing things I saw in 2008/9 was when Lloyds TSB, a bank that was relatively unaffected by the subprime crisis, bowed to strong political pressure and took over the bankrupt Halifax Bank of Scotland in late 2008. Lloyds shares were at 279p on the date that was agreed and are trading at a touch over 30p this morning. Needless to say, in the modern way, the directors congratulated themselves on increasing their market share and gave themselves a large bonus, rather than being personally sued into bankruptcy by injured Lloyds shareholders, and investigated by the police for criminal breach of duty and possible fraud.  Germany is in effect being asked to do the same here and the only correct and honorable answer that they can give is a firm Nein!

On to the markets. I'm still leaning bearish this morning, but a little less so than yesterday morning. One reason for that is because SPX opened at the middle bollinger band and moved strongly away from it, closing slightly under key resistance at 1335. I am wondering whether I have mistakenly viewed the break below on Monday and Tuesday as a break rather than a test of the middle bollinger band. If so then this move looks bullish, with an upside target in the 1359-63 range on a break above 1335. Support today is at the middle bollinger band at 1320:
There are two other reasons to be leaning more bullish today. The first is that SPX is currently making higher lows and highs, and as long as that lasts that is bullish, and the second is that there is a decent looking rising wedge forming on SPX from the low that would fit well with the reversal IHS that was damaged but not killed off by the last swing down on Monday. The last short term high on SPX was at 1337.82. Below that level I'm leaning bearish. If SPX breaks over 1337.82 and then holds 1335 as support, then I will be increasingly be leaning bullish. Here's the pattern setup on the 60min chart, including the possible early stage rising wedge:
However I'm still leaning bearish overall. I wouldn't generally expect to see an H&S pattern which rebroke the neckline with as much vigor as the current IHS to make target, and I regularly see H&S patterns form in the opposite direction as those fail, and we are seeing that here. The high yesterday was at 1334.40, just under the ideal 1335 right shoulder high target I gave for the H&S yesterday morning, and SPX broke the rising trendline from Tuesday's low late yesterday on negative RSI divergence, which looks bearish. If we are gong to see a reversal downwards, yesterday's high was the obvious place, and that looks encouraging so far:
TLT is pinned in a range which gives little clue to direction. Back holding the old support trendline from the April low at the moment:
EURUSD continues to make new lows and as I said yesterday the obvious next move is to the 1.20 area. Positive divergence on the 60min chart is fading:
I posted the CL chart earlier this week showing the technically perfect double-top setup on oil there. On a break below support (holding so far), the downside target is in the early 40s where I have long term rising support. This may well break down and if it does, it will most likely fall a long way. This is linked to the silver test of rising support from the 2008 low as if one breaks down, then most likely they both do, and I would expect both to fall a long way from current levels. Worth keeping an eye on IMO as that would most likely be in the context of a bearish backdrop on equities:
The last chart for today is the ES 60min chart, where there are now three active possible H&S patterns in play, which is really not helping determine direction here. I've not shown the large reversal IHS, but I've shown the smaller bearish possible H&S, and an even smaller reversal IHS from the last high. This is mainly about key support and resistance in my view. A move below the Mon/Tues lows would be very bearish. a move above the 1335 SPX neckline would look pretty bullish. We'll have to see:
There is a lot of potentially market-moving news today. GDP, the healthcare ruling, Europe statements as always. The odds of a gap fill are decent. The direction is leaning bearish, but very hard to call here.

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