Global power shift in our lifetimes....

Market  Commentary:

European crisis continues to be the focus of global markets.  Soon we can expect the US debt crisis added to the headlines.  I spent the weekend researching into european bond yields.  As you can see from the headlines, italian bonds are now the target of bond vigilantes, with the 7% mark seen as the symbolic level, which was hit last week. I expect this to be continued focus of markets over next few weeks. So,  I thought of an idea of correlating this 7% signal  with past incidences of 7%  yield level hit on greece/ireland/portugal. 

On friday, i discussed with some of you,  this idea of seeing how the time lines evolved from this 7% signal day  into the point where these countries had to take bailout fund from the ECB/IMF/EU.  Because this would tell us when we can expect  some kind of resolution (through bailout) for italy. Someone in the email group was kind enough to give me a web link, where another person had thought of this same idea and published his analysis. Even though i do not agree with his conclusion that we can expect italian bailout to happen around christmas time, i liked his research. Rather than presenting my own analysis, i give you the link to his research here. If you are interested in  what we can expect over the next 2 months, check this webpage at http://ashraflaidi.com/articles/charting-euro-macro-yields-libor-spreads.asp.

Paul  krugman of Princeton University said "This is the way euro ends - not with a bang but with bunga bunga". I find it to be an appropriate assessment, and looked further into the debt levels of  European banks and countries.  Rough estimates are 26T of bank  assets in europe and 10T of  government bonds.  With a simple assumption that some of these banks will fold (like dexia), we are looking at losses of trillions in banks, without even considering the 50% haircut of greek bonds.  So, to cover these losses, how much have the political leaders have come up with ?  1T of  funds in EFSF,  combined with a few hundred billions in  ECB and IMF.   During last G20 meeting, france requested china to contribute. China may give 100B, according to current rumors, but only if western powers agree to elevation of  china in  world power (3 different options have been put on table by china towards this, in past few years). They might drive a tough bargain on this demand, going  into  the next few G20 leaders meeting. So currently there is no help from G20.   Even if they contribute, there is a huge gap between the trillions needed and less than 2T in credit available from all sources (EFSF, ECB, IMF, G20).  In summary, this presents the gravity of the situation going into 2012.  This structurally weak economic situation  of the western nations can not be rectified with  monetary band-aids.   In my opinion, we are witnessing global economic power shifting  from the west to east, until a proper balance is reached in economic and trade realities (through currencies), hopefully over this decade.

Naturally, top economists and strategists agree that ECB needs to print euros sooner or later, to cover the rest of the debt. ECB printing only means that germany and france would bear the burden of  this as the strong countries.  There is strong opposition in germany against these forms of help to other countries. Without external funds (read china, G20, ECB), in the long run, there is no way to get out of this bad debt situation. 

The only other option is a smaller  EU, without the weaker economies, which is currently being discussed.   So, in either case,  the pundits conclude that euro is going down, in value.  Market seems to be highly short euro, already.  Now, if we want to join the bandwagon, at what point in euro should we join these big speculators ? I took a look at euro chart, and decided to take some long term position of short euro, as this is as high probability as it gets, in trading a long term trend.  I will publish my euro chart in the next blog by tonight.

Meanwhile, here at home, earnings season has ended. While earnings this quarter have been better than expected, beating the expectations of past 3 quarters, the revenues have fallen dramatically overall.  Also, i noticed that since 2009, this is the first time earnings overall have been guided downwards by companies.  This shows that the majority of companies are likely to see their earnings come down in 2012 (recession fears in europe showing  up in international company balance sheets).

Technical analysis of ES: 

S&P 500 is near its 200DMA which is monitored by lot of long term retail investors and smaller money managers. All of  spx stocks are near overbought area, in my opinion.  I spent some time searching into analyst expectations for year-end target of spx.  Since earnings season just finished, these numbers came out just in last 2 weeks, as updates. They range  from 1250 to 1325 in the sample of about 11 institutions that i looked into.   I am guesstimating a consensus of around 1290 (throwing out extreme numbers).  My weekend analysis, has this assumption, built into it.   This number can be fine tuned as we progress week by week, since news out of europe will trump everything else into the year end.

Short term chart shows resistance at 1292, 1273 areas.

Short term chart shows support at  1247 area and 1232, in the green zone area. 

So, 1273 will be the stop loss area for my call last  thursday/friday (short around 1266). The initial target for these shorts are around 1247 and 1232 as high probability.  Given this projection, if monday morning session rises up above 1271, i can take bearish bias and if  monday is a downday going towards supports, i can take a bullish bias, either monday close or tuesday.   Going into the week, i obviously have a slightly bearish bias, as per my call last friday.  I see high probability(80%) for reaching my support levels during the week, and low probability(30%) for exceeding 1292.

Keep in mind that my record over the last 4 weeks is 2-2 on the weekly calls, at a reduced win ratio of the prior 11 weeks (90%).   Also, my daily calls have been over 60% inaccurate, due to market volatility, and have performed worse than my weekly predictions. I will publish my euro chart in the next blog by tonight, for a long term trade.