Monday, March 25, 2013

Monday, March 25, 2013 - We Have a Template

Mark your Calendar, April 5 & 6 and make your reservations for the 2013 Wealth Protection Conference in Tempe, AZ. For conference information visit or click here or call 480-820-5877. This year's conference features Roger Weigand, Nathan Liles, David Smith, Mark Liebovit, Arch Crawford, Ian McAvity, Bill Tatro, and I will speak on Friday. There is an expanded Q&A session with all speakers on Saturday. I hope you can attend. 

We Have a Template
by Sinclair Noe

DOW – 64 = 14447
SPX – 5 = 1551
NAS – 9 = 3235
10 YR YLD un = 1.91%
OIL -.03 = 94.78
GOLD – 3.80 = 1606.40
SILV + .09 = 28.95

This week started in the Mediterranean, on a tiny, faraway island. Cyprus has apparently reached a deal with the Troika. Cyprus' banks have been closed for the past week and will not reopen until tomorrow, or possibly until Thursday. The deal involves the Troika stealing from bank accounts over 100,000-euros, in order to prop up Cypriot banks and then burden the Cypriots with a bailout package chock full of debt. The deal involves raising $7.5 billion from senior bondholders an people with more than about $130,000 in their accounts, which is the insured amount. Smaller account holders won't be raided. Once the $7.5 billion is raised, Cyprus will qualify for a $13 billion bailout from the Troika. In return for the bailout, Cyprus must drastically shrink its outsized banking sector, cut its budget, implement structural reforms, raise taxes, and privatize state assets

The citizens of Cyprus won't get to vote on this. Last week, the Cypriot Parliament unanimously rejected the bank account theft. So, the weekend negotiations have managed to strip Cyprus of democracy and then plundered the bank accounts; and that's just the beginning.

The Dutch chairman of the Eurozone, Jeroen Dijsselbloem, announced that the  heavy losses inflicted on depositors in Cyprus would be the template for future banking crises across Europe,saying: "If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?' If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders."

These comments will probably alarm countries like Ireland and Spain that had been hoping to access the ESM bailout fund in order to restructure banks without killing off their financial sector by inflicting huge losses on investors. Effectively, the deal creates a new type of Euro currency; there is the euro held in financial institutions and subject to 10% devaluation at a whim, and then there is the physically held euro. And the money held in closed banks really doesn't have much value does it? I mean it is a bit more difficult to spend, after all.

How will this play out? Is Cyprus contained? The island nation has secured a short-term sovereign cash fix, which will do nothing whatsoever to address Cypriot public debt sustainability or the economy -other than hurt both.

Meanwhile a major taboo has been breached. The threat is that bank runs start in the margins, or in this case, the other periphery countries, based on a recognition that their bank is at risk plus a concern that they will be made to take losses, as large depositors were in Cyprus. Maybe people will be lining up at banks to withdraw money; they've certainly lined up at ATM machines; but the threat of a run has been reduced even by the fact that depositors under €100,000 were spared. However, the slow-motion departure of depositors from periphery banks is likely to resume.

We have a template.

The Federal Reserve's aggressive easing of monetary policy has bolstered the economic recovery. So says Ben Bernanke.

In prepared remarks to a group of academics in London, Bernanke said the integrated nature of the global economy meant the whole world benefits from a sturdier outlook.
"Because stronger growth in each economy confers beneficial spillovers to trading partners, these policies are not ‘beggar-thy-neighbor' but rather are positive-sum, ‘enrich-thy-neighbor' actions," he said.
In response to a deep financial crisis and recession, and subsequent weak recovery, the Fed not only lowered overnight interest rates to effectively zero but bought more than $2.5 trillion in mortgage and Treasury securities.
Domestic critics say the central bank's vastly expanded balance sheet, now topping $3.1 trillion, risks future inflation. But Bernanke has noted that inflation is forecast to remain at or below the central bank's 2 percent target for the foreseeable future.
Economic growth, meanwhile, remains more of a question mark, as gross domestic product will likely expand at only around 2 percent this year.
We hear it all the time. The Federal Reserve is pushing/manipulating/forcing the stock market higher. There are a few different ways I’ve seen this argued.The FED is improving the economy via ZIRP, QE, etc. This in turn is lifting the market.The FED is forcing people out of risk-free/low-risk assets into risky ones. Thus forcing people into stocks.The FED, buy ‘printing money’ is putting all this new money out there, which ends up in the stock market. The FED, or its henchmen in the Plunge Protection Team, is literally buying the market.

Now, the first two are legit arguments.The FED is certainly doing its part in trying to get people out of risk-free assets and into risk assets. However I also believe the economy is healing. Now, one must remember that the stock market is not the economy. It does not reflect everything in the economy. I don’t want to get too fundamental but basically the market, or at least the S&P500 reflects the conditions of the 500 companies listed in the index. So just because unemployment is high, it doesn’t mean other parts of the economy are not healing/healthy.

 Profits, Trade, and employment all have recovered or are healing. We can argue what is driving this. Market Monetarists would probably argue its all thanks to the FED. Libertarians would probably argue its thanks to the resiliency of the innovative private sector economy. It's probably somewhere in between. The FED has helped. The private sector is resilient. But that’s another conversation (the cause of the improving economy). The cause of the rising market is NOT just the Fed.

I am sure I can find other relationships that exist but correlate to a lesser degree. Yes, I understand correlation does not equal causation. But its going to be hard to argue that recovering profits, trade, and employment do not equal higher stock prices. I’m all ears if you could do that.

Now, just because a relationship exists, doesn’t mean its always going to be right. These relationships can get volatile, change, or totally lose correlation. So what might work today won’t work tomorrow. The market is more than just “The Fed!”, the Fed just happens to be the 800 pound gorilla. So, we hope for the best, without forgetting the track record.

Stocks finished lower last week, snapping a three-week winning streak. A big rally Friday, however, took the edge off what had been a much poorer showing through Thursday.  The angst among U.S. investors created by the financial crisis in the small island nation—just 0.2% of the euro area's gross domestic product—almost makes it seem as if the market is searching for a reason to correct after its quick 9% rise this year. While the pain for the Cypriot people is real, the stock market isn't worried about Cyprus, per se. The U.S. GDP "creates a new Cyprus by lunchtime,"
Cyprus was an excuse. There are many investors who say the market is due for a correction, and many who want the market to correct so they can buy in at lower prices; "When that happens, it's hard for the market to go down…There don't seem to be legs to the downside."

That doesn't mean the market can't produce a 5% to 7% correction, but that isn't likely until you see signs internally that it is weakening, such as breadth worsening or sectors not participating. With the first quarter ending next week, some volatility could come from "window dressing," as institutional investors rearrange their portfolios for their end-of-quarter statement by purchasing winning stocks and shedding losers.

If the stock market is searching for an excuse to correct, it might have to look elsewhere because the euro zone is running out of peripheral countries with huge debt problems. Of course, now, we have a template, and it is not a good one. 

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