STOCKS
: The European debt contagion remains in place and is growing once again, China remains on a growth deceleration curve and there are concerns are of a hard landing — while the US is showing surprisingly positive data figures. Still, the risk of Europe on creating a global recession is high, although the US is better positioned than the rest of the world, which simply means that it shall outperform yet again this year.
STRATEGY: Technically speaking, the S&P 500 remains above longterm support at the 160-week moving average at 1130; which is critical given it delineates bull/bear markets. However, prices have reached into our 1350-to-1370 zone — a bit lower than expected, but the reversal lower in the NDX yesterday puts in the top in our opinion. Therefore, a correction of -5% to -8% is to be expected...for now.
WORLD MARKETS ARE ON BALANCE “LOWER” THIS MORNING as news of the “confirmed” Greek bailout hit the airwaves. This shouldn’t surprise anyone, for the Eurozone simply wanted to show that it wasn’t dysfunctional; that it could indeed come to an agreement – even it if is a bad agreement. Greece has no hope of adhering to the agreement; the Eurozone knows this, and the markets really know this. But hey…kick the can down the road a bit further and when the time comes to for Greece to default…it may not cause much of a stir…except there will be quite a bit of money thrown down the proverbial toilet to be sure.
To this end, even the IMF, ECB and European Commission have their doubts, and this was expressed in a February 15th “confidential” document that has now surfaced. The report makes clear why the fight over the new Greek bailout was so intense very recently.
“Greece will need additional relief if it is to cut its debts to 120 percent of GDP by 2020 and if it doesn’t follow through on structural reforms and other measures; its debt could hit 160 percent by 2020.”
The report presented a “tailored downside scenario” that suggests Greek debt could fall far more slowly than hoped, to only 160% of economic output by 2020 – far below the target of 120% set by the IMF. Under this scenario, Greece would need about €245 billion in bailout aid, which is nearly twice the €136 billion under the “baseline” projections.
“Prolonged financial support on appropriate terms by the official sector may be necessary.”
Moreover, under the most favorable “baseline” scenario, the Greek economy will stop contracting next year and return to +2.3% growth in 2014.circumstances – and could
still need an additional €50 billon by the end of the decade on top of the €136 billion in new funds until 2015.
Quite clearly, the markets shall see through all of this at some point, but whether that matters or not isn’t really of consequence. What matters now is what European bond yields do in absolute terms and relative to Germany – especially Portugal, for it shall be next up on the platter of Eurozone bailouts. Count on it.
TRADING STRATEGY: The market’s resilience continues to show “cracks” – and we do believe that the highs seen in both Apple (AAPL) and the NASDAQ 100 (NDX) suggest that the rally is over for technology, and soon to be over for other market sectors. One could easily point to the rise in crude oil prices to $105/barrel and the concurrent rise in gasoline prices as being a headwind that is perhaps the “black swan” that no one is anticipating as they focus upon the Eurozone.
We are long Energy and Gold Shares; and we are short of Technology. Today, we shall get a bit less long of energy by selling Devon Energy (DVN) after its recent run and to pare back our Energy exposure just a bit. Do we think the DVN run is over? No, not really. But for now, we won’t be surprised by corrective consolidation to digest the gains seen; and we think it wise to simply moderate our exposure given the risk-reward is better for our other Energy positions relative to where the market stands at such extended short-term levels. Also, given we are exiting DVN, we are predisposed to add to our short Technology position by adding another 10% exposure to QID.
To Read the Entire Report Please Click on the pdf File Below.