Archive for May, 2010
European Debt Worries Send Markets Lower
Posted by Jody Eisenman | Filed under Uncategorized
The Dow and S and P continued its’ descent today. A combination of European debt problems, the Gulf of Mexico oil spill, and dropping commodity prices sent the Dow down to a close of 10,066. Just three weeks ago, on May 3, the Dow closed at almost 1100 points higher at 11,154. Right now, if you look at most equity charts other than gold and silver, they look like they are falling off a cliff. General market sentiment on CNBC seems to be mostly negative, which is almost a 180 degree turn from a month ago, where it was tough to find a bear in the bunch.
The debt crisis in Europe is real, but it is tough to say how bad it will ultimately be. On the hand, there is the very legitimate fear that the Greece situation will spread. As I stated last week,
http://www.jodyeisenman.com/2010/05/1931credit-anstalt-2010greece/, there are several countries in Europe that are so heavily in debt that the IMF may be forced to do additional bailouts. Over the weekend, the Bank of Spain took over a smaller failing bank. Sound familiar?
On the other hand, most crises, as bad as they may seem at the time, tend get resolved. In other words, betting on a global financial meltdown is a high risk bet that is almost always wrong. You also only get to be right once!
I think the market direction is now somewhat negative, but I expect there to be volatile spikes in both directions.
A Tumultuous Week
Posted by Jody Eisenman | Filed under Uncategorized
The stock and bond markets concluded one their wildest weeks in a long time. Almost every index jumped up and down like a leaf on a windy day. By the end of the week, the S and P 500 had lost over 4%, with the major decliners included the financials, commodities and emerging markets. A good indication of how volatile the markets have become was the trading of the VIX volatility index. The VIX, which bottomed below 16 last month, soared to over 40, after trading above 48 on Friday. The last time the VIX traded this high was over a year ago, right around the market bottom.
Clearly, the European debt crisis (and potential resolution) has driven markets, as traders reacted violently to any potential news. Although Treasury Secretary Timothy Geithner believes that this will not hinder a global recovery,
http://www.bloomberg.com/apps/news?pid=20601087&sid=azodJi50uU.U&pos=3
many traders feel differently. The question is, what’s next?
I honestly don’t know. I can see the market going either way here. What I do see is that the volatility will continue for the near future. In addition, I would be concerned about the skittishness of the market, which is now reacting with alacrity to any bit of news on the horizon. It’s a great trading market if you are savvy enough to call the tops and bottoms. As such, I would remain cautious until the picture becomes clearer.
1931:Credit Anstalt 2010:Greece
Posted by Jody Eisenman | Filed under Uncategorized
There is a saying that history repeats itself. Could it be happening again? The stock and bond markets are beginning to show signs of weakness, largely driven the events in Europe. Just what exactly is happening there that is causing so much concern here?
In order to understand this, one must go back in time about 100 years. Prior to World War 1, the Austria-Hungarian Empire was considered to be perhaps the most solid economy in Europe. With the conclusion of the War in 1919, the empire split up into several countries such as Austria, Hungary and Czechoslovakia. Austria’s biggest bank at the time was called Credit Anstalt. In 1931, Credit Anstalt, which had taken it a debt laden rival bank (sound familiar?), found that it could not get out of debt as the Depression hit. As a result, the bank found it had a run on its’ hands, as everyone ran to get their money out. The run spread to Germany, which blew into a full scale bank crisis. With the German and Austrian populations fed up from the after effects of the war and harsh economic conditions, Adolf Hitler and the Nazi party rose to power, eventually plunging Europe into the World War Two. Now, what does this have to do with Greece now?
Although conditions are different due to the European Union, Greece is so severely in debt that they were forced to be bailed out by its’ fellow Union countries. The problem is, many of these countries are staring at severe debt problems themselves. As readers of this blog know, there has never been a situation where so many of the industrialized nations are running such severe debts. The Euro is collapsing, and many people feel that it is just a matter of time before this currency ceases to exist. The Rydex Euro ETF (FXE) has dropped from around 150 last December to under 124 now. The general concern is twofold:
1. Could this “contagion” spread to other European countries? If so, could the governments afford to bail them out? Could this lead to political instability?
2. Could this spread to the United States? We are heavily in debt, and its’ getting worse. A failed treasury auction or a significant rise in interest rates could lead to a massive increase in our debt load. Look what happened when all these adjustable rate mortgages reset to much higher rates. Buyers couldn’t pay, and just walked away from their homes. While the US government could not just “walk away”, this could certainly lead to some severe pain, or possibly a healthy rate of inflation.
Could the markets settle down and recover? Absolutely. However, the scenarios above are what keep a lot of bankers up at night.
