Archive for October, 2011
Stock Market Explodes, Euro Bonds Yawn
Posted by Jody Eisenman | Filed under Uncategorized
Although Monday is the official end of October, the US stock markets have turned in their best month in 27 years. Right now, the S & P 500 is up about 14% for the month, wiping out the horrendous third quarter. Much of the gains were due to the apparent resolution to the Greek crisis, albeit a temporary one. Additionally, roughly ¾ of all companies reporting this past week have beat analysts’ estimates according to Bloomberg.com. Stocks have now been up four weeks in a row with the VIX now dropping all the way back to 24.53. The volatility index had peaked above 45 on October 3.
However, the European plan is somewhat short on details. First of all, if the Greek debt holders are going to take a 50% haircut, isn’t this essentially a default? Well, not according to ISDA (International Swaps and Derivatives Association). Remember how a CDS buyer is entitled to his money in case of a default? The ISDA has decided that since this plan is “voluntary” on behalf of the bondholders, this does technically constitute a default. There are a lot of angry Greek CDS holders out there. By the way, even with this write down, the Greek debt load is still expected to be 120% of GDP in 2020. It is hard for me to believe that it’s just a question of time before they default anyway. Meanwhile, the price of Spanish and Italian bonds barely moved, perhaps signaling that there is still significant doubt over how effective this plan will be. In fact, Italy sold 10 year bonds at a rate of 6.06% via auction on Friday, up from 5.86% last month. This was a new all-time high on rates since the euro was created in 1999. As I have stated many times, it is simply an unsustainable model to have most of the industrialized world heavily in debt with no method of repayment, other than continuing to borrow more and more. There will eventually come a time when investors are unwilling to buy bonds. When this happens, all hell will break loose.
Boomerang
Posted by Jody Eisenman | Filed under Uncategorized
Although this could describe the US markets this month, it is actually the title of a new book by the very talented author Michael Lewis. First, let’s briefly review the stock market. Since making a low of 10,655 on October 3, stocks have rallied impressively to close the week at 11,808, a gain of over 1100 points. This is the highest close on the DJIA since early August. The VIX has now declined precipitously, closing at 31.32 after dropping below 30 briefly this month. Much of the gain may be due to Europe, where it appears that the ECB may have finally agreed on a comprehensive plan to bail out Greece and the continents’ weaker banks. Although critics would argue that this is more of just “kicking the can down the road”, equities have feasted on anything even resembling some sort of plan to calm investor fears. Which brings me to….
I read a terrific book last week called Boomerang by Michael Lewis. Lewis may be best known to moviegoers for “Moneyball” and “The Blind Side”, but on Wall Street, he is considered to be a superb financial writer. Lewis’ first book was called “Liar’s Poker”, which is the story of his experiences as a young bond trader at Salomon Brothers (the firm has since been absorbed by Goldman Sachs). After several other books, he shined with “The Big Short”, about how a few hedge fund guys like John Paulson made a fortune in the subprime collapse. His newest book is about Kyle Bass and the coming potential crisis in Europe. Bass believes that the subprime situation was only the tip of the iceberg, and the real crisis is yet to come in Greece, Ireland and other overleveraged countries. Lewis takes us of a tour of each country, with additional chapters on Germany (the ultimate decision maker in the ECB) and California. Lewis has an excellent ability to put difficult financial concepts into a format that the average reader cannot only understand, but find interesting. I highly recommend it!
An Amazing Rally?
Posted by Jody Eisenman | Filed under Uncategorized
When we last left off, the market was continuing its’ swoon, with volatility extremely high. However, since a close on the DJIA of 10,655 on October 3, the Dow has staged an impressive 9 day rally which has sent the index up almost 1000 points. This is the markets’ highest close in over two months. Although the European problems remain, hope for an amicable settlement via a bailout fund has eased worry, at least for now. Meanwhile, the VIX has finally closed below the magical 30 level after spending an incredible 50 straight days above it. Since peaking at 45.45 on October 3, the VIX has declined nice days in a row.
Unfortunately, I do not believe we are out of the woods just yet. Last week, the ratings agency Fitch warned that some of the world’s largest banks were on watch for possible downgrade, including names like Morgan Stanley, Goldman Sachs and Barclays. Some major companies will be reporting earnings shortly, with Apple, General Electric and a slew of banks due to report this week. Meanwhile, interest rates have started to move higher, as investors began to take on more risk as opposed to the safety of treasuries. Ten year treasury yields have moved from a low of 1.70 to 2.23 currently. Still, these yields were over 3.5% this past spring. The coming earnings reports and news out of Europe will go a long way to showing whether or not this stock rally can be sustained.
