Sunday, March 17, 2013

Cyprus? Where is that? Oh $#!+... Weekend Trading Notes

A curse of the third week of March. If market needed a reason to sell off - it has one now. Time for the bears to take a victory lap, albeit a short one (pun totally intended).

Just when you thought it was safe to go back in the water... For months they told us that Europe was fixed. And now they drop this bomb on us. Unbelievable to many, but not surprising to some. If you knew anything about Cyprus, it has served as a money laundering heaven for many years. While "funny money" will treat the 10% levy as a fee for "doing business", the other depositors who had nothing to do with money laundering will lose a hefty part of their hard-earned savings, as the little honest guy (with deposits less than E100,000) gets hit with 6.75% levy (now maybe 3% as I write). Most interesting is the fact that absent the criticized bailout, many of the banks in Cyprus would be defunct, resulting in much bigger depositor losses. Still, the unintended consequences (a little different perspective on this later in the post) will add fuel to the fire already engulfing the dysfunctional continent. Regular folks will revolt against local banks in Cyprus at first via old-fashioned bank run, but then will proceed to give it to the central planners who assessed the levy in the first place. (Hence the scared politicians are walking back the levy now.)

One should face the reality, this has been going on for a while - the emotional and financial suffering of the regular folk, I mean. Portugal, Ireland, Italy, Greece, and Spain have seen their fare share of austerity brought upon the people who cannot bear any of it at all - far greater than 3% pay cuts, retirement age increases, layoffs, and social program reductions. The ensuing revolt, peaceful demonstrations along with violent unrests, resulted in quick market corrections, steep at first, but mostly shallow ones at best now. If you think that Cyprus will bring this bull market down, think again. Just three weeks ago, a government election snafu in Italy, which is the largest source of perpetual Eurogeddon fear due to its ginormous sovereign bond market, eked out a 3% pullback on SPX. So let's give Cyprus a 2% market pullback possibility, not because of its measly E70B total bank deposits, but based on the aroused fear of cascading peripheral Eurozone bank run, which I think will subside in days. This takes Dow Jones Industrials back to 14,200 for a backtest of the breakout above the former all-time high, which I fully expect to hold, as discussed here. This does the trick of the gap fill on SPY, as discussed here. I expect a bounce on SPX at that point with aim for 1600 - 1611, as discussed here. Let's look for something else that has a bit more weight on the market sometime in April. This leads me to the concluding part of my weekend trading notes.

As promised above, a little different perspective on unintended consequences. Here, stateside, Fed is pressing $85B print button monthly. As the geniuses sitting on FOMC blow bubbles out of a thin air in the stock market and housing (while trying to juice the economy), they are punishing the depositors by lowering the savings rate down ever closer to nonexistent. How many people think of keeping their money in U.S. bank for the purpose of earning the interest any more? Banks here have pretty much become safety deposit boxes. Since U.S. banking system is considered the safest and most stable in the world (never mind the fresh memories of the Great Financial Crisis), one cannot possibly imagine Cyprus-like levy here. But when U.S. savings accounts earn annual interest of close to 0% (and that is compared to the ones in Cyprus at up to 11% on some long-term CDs, of course that 11% sounded too good to be true, and now will be trimmed quite a bit through account balance shrinkage), it will not take a lot to send the depositors running for the exits, as the incentive to keep their money here is nil. One has to wonder what could set off such an event. It seems that Fed figured out the exact details of possible banking crisis in its latest stress test, with the results hurting the pride of the best domestic bank - JPMorgan Chase. How ironic... It was J.P. Morgan himself, who was involved with inception of the Fed in 1907, resulting from the bank runs back then. Later it was Fed's inappropriate monetary policy that was a part of the Great Depression from which the worst bank runs in history of U.S. resulted. We are still yet to find out what the outcome of Fed's unprecedented QEInfinity will be. Will Fed cause the next financial Armageddon? Many investors think so, yours truly among them.
Two-day FOMC meeting is on Tue. and Wed. of this coming week. Do you think scared central bankers are going to say anything about a remote possibility of scaling back QEInfinity (due to improved U.S. economic data) just two days after Cyprus fiasco elevated stock market risk? Not a chance, as it is all about keeping the stock market up. Bernanke is walking around with QuoTrek in the palm of his hand. He is the modern Paul Tudor Jones. He is the manager of the biggest hedge fund in the world. He is a trader. He is one of us. LOL!!

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