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Minefields that can Blow-up Global Stock Markets in 2012Gary Dorsch Gerald Loeb was one of the most respected analysts on Wall Street, during the Great Depression years and through the following decades. He wrote an epic book, titled “The Battle for Investment Survival,” last published in 1965. Many of his pearls of wisdom, concerning the financial markets and rules of investing, have withstood the test of time. Yet one has to wonder though, if Loeb’s long held truths about the markets would stand up to the erratic behavior of today’s world of high frequency trading (HFT). There is also the heavy hand of the world’s top central banks that are actively manipulating and distorting market values, and in turn, upbraiding many of the traditional rules of the game of investing. Still, one of Loeb’s axioms that still rings true today, says, “There is no such thing as a final answer to security values. A dozen experts will arrive at 12 different conclusions. It often happens that a few moments later each would alter his verdict if given a chance to reconsider because of a changed condition. Even the price of a stock at a given moment is a potent influence in fixing its subsequent market value. Thus, a low price might frighten holders into selling, deter prospective buyers, or attract bargain seekers. A high figure has equally varying effects on subsequent quotations,” Loeb wrote. Nowadays, it seems as though the market is always teetering on the knife’s edge. Depending upon which way the wind is blowing on any given day, or what chatter is coming across the newswires, markets around the globe are moving at lightning fast speed. Sentiment can change instantly, with the release of unexpected economic data, market movements, or surprising actions of central bankers. The effect of high frequency trading (HFT) has turned the decades old profession of investing into a high stakes gambling operation, and more characteristic of commodity trading. Such erratic behavior on a daily basis makes it difficult, if not impossible, for analysts to formulate a long-term view, and for investors to maintain a long-term, “Buy and hold” position. “As soon as you think you’ve got the key to the stock market, they change the lock,” said long-time market guru, Joe Granville. It takes a long time for the entrenched “conventional wisdom” to lose its power of persuasion. “A trend in motion will stay in motion, until some major outside force knocks it off its course.” Along the way, there are sudden and nasty shakeouts in the markets that cause many traders to quickly lose their nerve and close their bets, fearing big losses. However, the true skill of the Macro Trader is to distinguish between daily price swings, and instead, to anticipate and correctly time, the major changes in market sentiment, that can lead to violent price moves in the opposite direction and quickly wipe-out the market’s excesses. For example, even as Wall Street was celebrating the third anniversary of one of the most powerful Bull markets in history on March 9th, - big trouble was brewing across the other side of the Atlantic Ocean, in the sovereign bond market located in Madrid, Spain. There, the mood is very different, - it’s a market filled with fear of default, and once again, beset by upward spiraling bond yields and plunging equity values. Rising concerns over Spain's economy and its ability to handle its €935-billion debts lifted its 10-year cost of borrowing towards 6-percent, sparking fears that Europe’s debt crisis is flaring up again after a brief respite. Uncertainty over Election politics and Taxes in US, It’s also an Election year in the United States, that’s adding an extra layer of volatility in the global marketplace. If re-elected, President Obama might allow the Bush tax cuts to expire, and therefore allow the long-term capital-gains tax rate to increase to 20%, plus a 3.8% investment surtax to finance Obama-Care. That 23.8% rate amounts to a nearly 60% increase from the 15% rate in effect since 2003. And that’s without his new “Buffett rule,” which would take the rate to 30% for many taxpayers.Taxes on short-term capital gains would increase by 3% across the board,and dividends will once again be taxed as regular income, plus a 3.8% tax on investment income as part of the health-care overhaul passed in 2009. For the highest earners, tax rates on most dividends, currently 15% is set to jump to a whopping 43.4% next year.
The great irony is, the post October 4th stock market rally, that’s lifted the Dow Jones Industrials to above the 13,000-level, a four high year, has also boosted Obama’s odds of winning re-election. On-line bettors at Intrade.com, give Mr Obama a 60% chance of winning re-election today. That’s up from as low as 46% six months ago, when the Dow Industrials briefly plunged below the 10,800-level. The stock market’s recovery rally has created the illusion among the gullible masses of the US-public that a sustainable and healthy economic recovery is underway. That notion was dealt a blow however, when US Labor apparatchiks reported that 164,000 discouraged Americans gave-up looking for work in the month of March, - and more than the net 121,000-workers that found jobs. During the Obama administration there’s been an huge widening of the wealth divide between the rich and poor. That’s because 80% of all the stocks listed on the NYSE and Nasdaq, now reaching four-year and 10-year highs respectively, are owned by the top-10% of the richest Americans. Thus, the top-10% has reaped the lion’s share of the wealth creation on Wall Street since March 2009, while the remaining 90% of Americans are stuck paying higher prices for gasoline, and are still saddled with chronically weak home prices. Traders on Wall Street are convinced that the Federal Reserve would come to the rescue of the stock market, with huge waves of money printing, whenever there is a nasty decline that might threat Obama’s polling numbers. According to the latest Washington Post-ABC News poll, released April 10th, it finds that if the election was held today, 51% of registered US-voters would pull the lever for Obama, while only 44% favor ex-Massachusetts governor, Mitt Romney. This is actually good news for the Romney camp, since the Republican is still within a close striking distance of the incumbent, even after a brutal primary campaign. Furthermore, the latest Washington Post-ABC News poll was published by news organizations that are aligned the extreme far left of the political spectrum. As such, the polling data was skewed for political propaganda purposes. The poll was notably tilted to Democratic respondents – the breakdown in the poll was 34% Democrat, 23% Republican, and 34% Independent. Thus, Democrats had an 11% advantage in the poll, even though Democrats only hold a 3% advantage over Republicans among nationally registered voters. The added 8% advantage is what gives Obama his lead in the poll. Otherwise, if measured according to the actual party affiliations, the race for the presidency is about dead even. History shows that the underdog, Mr Romney can still pull-off an upset victory in November. For instance, in March 1980, President Jimmy Carter led Ronald Reagan by 18% and 25% in some polls. Reagan went onto win the November election by wide 51% to 41% margin. In June 1992, Bill Clinton was running third in opinion polls. Ross Perot had 39%, President George HW Bush 31%, and Clinton just 25-percent. Clinton went onto win the November election by 43% to Bush’s 39-percent. All of these candidacies rode the waves of historical events (Oil Shock in 1980, recession in 1992) that unfolded in the months preceding the election, and had a notable impact on the final tally for the presidency.
For Mr Obama, a 7% cushion in the far left skewed opinion polls, might not be enough to ride out the upcoming storm of historical events that could derail his re-election bid. Only a true prophet can predict the future with certainty. However, gazing into our crystal ball, there are renewed signs of extreme turmoil in the Italian and Spanish bond markets, leading to sharply higher interest rates, and threatening to push the Euro-zone’s #3 and #4 economies into a deeper recession. Spain is widely considered too big to bail out: It makes up about 11% of the economic output of the Euro-zone economy. Greece makes up about 2-percent. Despite the best efforts of the European Central Bank (ECB) to calm the sovereign debt crisis and drive bond yields lower, just the opposite has occurred since the ECB’s last €530-billion LTRO injection on February 29th. The yield on Spain’s 10-year note has turned upward, climbing +110-basis points higher, to as high as 6% this week. Likewise, in a bout of contagion, the yield on Italy’s 10-year note jumped +80-bps higher since March 19th, to as high as 5.66%. That’s important, because Italy’s bond market is the third largest in the world with roughly 2-trillion Euros of debt outstanding, double the size of Spain’s sovereign debts. Italy and Spain are too big to bail-out, and would require a massive ECB rescue operation. Since peaking on March 19th, the exchange traded fund for the broader Euro-zone stock market index, ticker symbol EZU.N, has declined by -12% to as low as $29 /share, and surrendering most of its gains from the first quarter. The sharp slide of EZU, if sustained, could be the earliest warning signal of a deeper recession that’s unfolding in the Euro-zone. On April 4th, the ECB chief Mario Draghi warned, “Downside risks to the economic outlook prevail.” He warned that the central bank has done as much as it can to fight the bond crisis, and put the onus for stabilizing the bond markets on the shoulders of the politicians that rule the Euro zone’s periphery. “Markets are asking these governments to deliver,” their austerity packages of spending cuts and tax increases,” Draghi said.
The biggest threat to the global economy has quickly shifted to Spain. The Madrid stock market and Spanish banking stocks continue to tumble. The benchmark IBEX-35 index is down -10% so far this year, and is -30% lower from a year ago. Spain’s biggest bank, Banco Santander (STD.N) has fallen -18% over the past four weeks, and has dropped more than -45% over the past year. Credit Default Swaps, used to measure the cost to insure the debt of Banco Santander’s subordinated debt, for a period of five years, jumped +220-bps higher in the past two weeks to around 630-bps today, meaning it takes €630,000 to insure €10-million of STD’s debt against the risk of default. Shares of Banco Santander skidded to $6.52 on April 10th - a 3-year low. With a stated annual dividend of 92-cents, STD is yielding 13-percent. Traders expect STD to cut its dividend by as much as half, in order to preserve badly needed cash. Whenever a company is forced to cut its dividend in half to conserve cash, there’s usually a knee-jerk reaction to sell the company’s subordinated debt, sending its borrowing costs higher. The viability of Spain’s top-3 banks, Banco Santander, #2 bank, BBVA and #3 bank, La Caixa, is very important, since they collectively hold customer assets worth about $2.7-trillion. That’s nearly double the size of Spain’s $1.4-trillion economy. In other words: Spain’s three biggest banks are too big to fail. Spain's banks may need more capital if the economy deteriorates, Bank of Spain chief Miguel Angel Fernandez Ordonez warned on April 10th, reflecting fresh concerns that some might not survive a severe recession made worse by the government’s fiscal austerity drive. To read the rest of this article, please click on the hyperlink located below: http://www.sirchartsalot.com/article.php?id=163 ### Gary Dorsch 321gold Ltd |
