This note was originally published at 8am this morning, November 26, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“In the confrontation between the stream and the rock, the stream always wins.”
Global equity markets are a riskier place than they were 48 hours ago. The North Koreans are calling this an “escalated confrontation.” The Europeans are calling this post Thanksgiving trading day a mess.
Since the Fiat Fools in Europe introduced their 750 BILLION Euro rescue plan in May, the confrontation between the Fiats and those of us who loathe leverage has been crystal clear. Some people call this debate political. Some people think it’s ideological. I think it’s a marked-to-marked battle between The Stream and The Rock.
If Piling Sovereign Debt-Upon-Debt is the stream and Big Keynesian Government Intervention is the rock, we think those levered to the liability side of this trade are going to eventually get wiped out.
Spain’s Prime Minister of a leverage-fest gone global, Jose Luis Zapatero, begs to differ with the Thunder Bay Bear on this matter. This morning, as Spanish 10-year sovereign yields (5.24%) hit a record wide spread versus German bund yields (+258 basis points), this is what Mr. Zapatero has to say:
“I should warn those investors who are short-selling Spain that they are going to be wrong and will go against their own interests”
Gee, thanks for the warning.
Markets, as we like to say at Hedgeye, don’t lie; politicians do. So let’s look at our expert network called Mr. Macro Market for the score:
- Spain – stocks on the Spanish IBEX Index are down another -2.1% this morning, taking their cumulative losses since October 22nd to down -13.0%. For the YTD, Spain is down -20.4%.
- Italy – stocks on the Italian MIB Index are down another -1.9% this morning, taking their cumulative losses since October 21st to down -9.4%. For the YTD, Italy is down -15.8%.
- Greece – stocks on the Greek Athex Index are down another -1.3% this morning, taking their cumulative losses since October 25th to down -13.1%. For the YTD, Greece is down -35.2%.
Pundits may be quick to point out that I didn’t use Ireland’s unequivocal disaster to make my point. I don’t need it. The big boy talk that’s going on with the Euro in the market today (the Euro is breaking my intermediate term TREND line of support of 1.33) has a lot more to do with the big nuts of European sovereign debt (Spain and Italy) coming down the stream than the rock that is another compromised Irish politician.
I say this every other morning on the Hedgeye Morning Macro Call to our clients, but I think it’s worth repeating in print today – I think Italy and Spain will be the biggest sovereign debt concerns in the world for the next 3-6 months.
In terms of 2011 share of Eurozone gross investment debt for 2011, Italy, Spain, and Greece represent the Top 3:
- Italy = 23%
- Spain = 9%
- Greece = 4%
Nope, that Italian number isn’t a typo. Neither is the fact that Italy has the highest labor costs in the Eurozone by a country mile (second place on that score goes to Mr. Zapatero’s Spain).
Next to Japan, Italy is also the oldest country in the world today. These people are old, levered, and expensive. If you were looking for a company to invest in, I don’t think this place would be your rock.
Sure, there are plenty of issues sacking markets from Portugal to Hungary this morning as well (Hungary’s stock market is down -3.5% this morning and its Fiat Currency, the Forint, is down a full -1.2%, after the government issued an ultimatum to it’s citizenry to move their pension savings to the state’s accounts!), but The Stream of sovereign debt that’s piling up in Italy, Spain, and Greece override all of that.
Interestingly, ECB hawk Axel Weber said in Berlin this morning that, while he considers it “inconceivable”, if they needed to re-finance the entire wad (Greece, Ireland, Portugal, and Spain), they’d need 1.07 TRILLION of EU bailout moneys.
Nope, Weber leaving Italy’s mother-load of liabilities out of this calculation isn’t a typo either. And, from Capua to California, no matter where conflicted and compromised charlatans of government leverage go this morning, there it is – The Stream.
My immediate term TRADE lines of support and resistance for the SP500 are now 1173 and 1209, respectively. I re-shorted the SP500 (SPY) into Wednesday’s extremely low-volume rally.
Best of luck out there today and enjoy the rest of Thanksgiving with your loved ones,
Keith R. McCullough
Chief Executive Officer