• November 25, 2011

    Eurozone Worries Have Wiped Out
    Nearly All of October’s Gains


    By Dennis Slothower
    Editor, Stealth Stocks

    Stocks were doomed from the start on Wednesday as Germany, the strongest Eurozone nation, failed to find bidders for nearly half of its bond auction while we were sleeping - and the market opened strongly negative and never turned back, closing at the lows of the day.

    Though not completely confirmed, it appears that stocks may have just put in the worst Thanksgiving week in history, finishing today at -2.05% for the DOW, -2.21% for the S&P 500, -2.43% for the Nasdaq Composite, and -3.15% for the Russell 2000.

    This makes for a 6-day consecutive selling streak for the S&P 500, falling nearly 8% in just over a week’s worth of trading. Given the tremendous volatility we have seen this year, 8% is not a lot until you match it with the rest of November’s sell-off.



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    Stocks have now retraced prices clear back to October 6th, leaving only three days of gains in the October rally, October 4th, 5th, and 6th. The S&P 500 closed at 1165 on October 6th and it closed at 1162 on Wednesday! Losses from the October high are now almost -10% for the S&P 500 and nearly -12% for the small cap Russell 2000.

    Not much left of the October rally, huh?

    Economic and Manufacturing Data
    Pulls Down Equity Markets


    It wasn’t just the German bond failure that equity markets had to deal with on Wednesday. Global manufacturing is signaling a strong contraction along with new orders for manufactured goods.

    On Wednesday we learned from the U.S. Durable Goods report that the economy continues to contract, as new orders for durable goods dropped 0.7% in October. Now that is really not much of a drop, until you factor in the revised downward adjustment to the September figures at -1.5%, nearly double what was originally reported. And there you have the make believe accounting showing up in the details.

    In addition to a 2-month decline of -2.2% in durable goods orders, the China growth machine suddenly reported underlying weakness on Wednesday as the Chinese manufacturing sector (China PMI) reportedly declined from 51 in October to a preliminary 38 reading for November, the lowest reading in almost three years.

    Not to be underdone, the European manufacturing sector also reported a third consecutive contracting PMI number. New orders in Europe have no fallen for six consecutive months, with the PMI at 46.4 - the lowest level since July, 2009.

    Attention Riveted to Euro Bonds

    All of these negative data (above) probably contributed to a continued sell off in equities, but it is the failed German bond auction that is most disconcerting and most responsible for a continued equity decline.

    First of all, German is the last bastion standing in the Eurozone, supposedly capable of fending off all fiery dragons that might attack the castle walls…until Wednesday. Money has been so steadily flowing into German bonds since the Eurozone credit crisis began that many thought Germany would forever have a market on any bonds it needed to roll over.

    In a huge surprise, Germany tried to auction off 6bn euro of 10-YR bunds (bonds) and was only able to attract 3.6bn in bids, leaving the Bundesbank (Germany’s central bank) picking up the remaining 2.4bn, or nearly 40% of the total amount offered!

    While this isn’t the first time for German debt auctions to fall short, it is shockingly notable when German bunds are perceived as the Euro safe haven over the last several months.

    Adding insult to pain, Ireland is now complaining about having not received the same consideration given to Greece. Remember the 50% haircut on Greek bonds? So Ireland wants either a discount on bonds from the bond holders or they want better payment terms and interest rates on their bailout largesse.

    Germany just got a double dose headache!

    And now I am going to quote myself on the night that the Euro-TARP summit ended, October 27th:

    “Who then gets the 50% haircut? Private individuals who bought Greek bonds, foreign banks who did the same, hedge funds and pension funds who also bought Greek bonds. In fact, in an ironic backstab to Greece austerity measures it appears that the Greece pension funds were not exempted and will suffer a 50% cut. This means the retirement funds for a very many retired Greek citizens just experienced some “real” austerity. We may see some violent protests once this details hits home - and the little guy takes it in the rear again!

    Now think about what this means going forward. How does Ireland feel about covering 100% of their sovereign debts when Greece gets this 50% discount?

    Germany is the largest and strongest EU country. France is next, but is on a ratings downgrade watch. Spain and Italy are the next largest EU economies. And who do you think might be next up for the bailout window? It will be Italy and then it will be Spain.

    Has a precedent been set here for 50% haircuts? What are Italians and Spaniards now expecting? Will haircuts like these for Italy and Spain destroy the financial markets?

    And the most feared but unexpressed question - what will the bond yields need to be for future European bonds with the expectation that investor capital may be cut in half before the bond matures? Will there even be a market for European bonds anymore?”

    -OnTheMoney Update, October 27, 2011


    So now I ask the question once again, “Is there even a market for ANY European bonds anymore?”

    Look, I am a little dummy hidden away in the mountains of Alpine, Utah and even I figured out what was bound to happen while the markets were celebrating the 50% haircut administered in the now infamous Euro-TARP summit.

    And what about that multi-trillion dollar EFSF fund that was supposed to be a leveraged vehicle which could be used to ensure sovereign bonds and European banks? We are supposed to hear more about it in the next two weeks. But I can guarantee you that if no one wants to buy a German bund, only an alien from another world might be persuaded to take on a leveraged and twice-removed EFSF bond. These European leaders were foolish to think they could sell leveraged bond strategies as a way to bail out sovereign debts at the same time they were decapitating Greek bondholders!


    The October rally has turned out to be nothing but fancy jawboning on behalf of a Eurozone deep-in-doo-doo.

    Friday, November 25th, 2011 at 14:12
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