This note was originally published at 8am on October 06, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“I don’t have to be careful, I’ve got a gun.”
It’s only a matter of time before the likes of Jon Stewart and Matt Groening (creator of The Simpsons) start mocking this European Gong Show for what it has become – a gong show.
Groening made his debut in Wet Magazine in 1978 with a cartoon called “Life in Hell.” That might be a better way to describe how a money manager feels about dealing with La Bernank et Le Trichet’s concepts of Keynesian “price stability.” Today’s game of Globally Interconnected Risk is being driven by rumors of Barroso’s Bazooka.
Does Jose Manuel Barroso (President of the European Commission) have a bazooka? What’s the timing on its deployment? Who supports it? Oh the drama…
What we do know is that the IMF, ECB, EU, and Timmy Geithner are working on it, feverishly. These are the said leaders of our lives who are going to centrally plan our way to long-term prosperity. What would we do without them?
On the topic of the bazooka, this is what Geithner had to say yesterday:
“Europe needs a more powerful financial backstop.”
This, of course, comes on the heels of Christine Madeleine Odette Lagarde saying she (or the 187 countries she now represents on behalf of France and The DSK at the IMF) has ze “infinite resources” to print ze ammo for Le Bazooka.
Or is it La Bazooka?
Maman, pardon mon francais, but this is what a Yale education has reduced me to. I’m now just a man with a keyboard and a tweet machine fighting the Socialists of the world who are putting another bailout gun to capitalism’s head.
Back to the Global Macro Grind…
With the SP500 up +4.1% from its Monday closing low of 1099, the pain being felt in the hedge fund community is much greater than that.
You see, if you shorted the immediate-term TRADE oversold bottom (Tuesday morning) of 1078, and you’re staring down the crosshairs of the S&P Futures indicated up another 10 handles this morning, you are feeling the bazooka of the Pain Trade yourself.
Obviously whoever shorted the low instead of seeing it for what it was – a Short Covering Opportunity – does not Occupy Hedgeye as part of their risk management process. Shorting low and covering high isn’t cool.
So what do we do now?
The thing about this Barroso Bazooka is that it’s real. Weeks ago we did a 52-slide presentation outlining what the size of the bazooka could be and we’ll go over this again for clients on our Q4 Macro Themes Call next Friday (email sales@hedgeye if you want in), but here’s our headline math (slide 42):
- 1.25-1.75 TRILLION Euros to Recapitalize European Banks
- 0.75-1.25 TRILLION Euros to Fund Future Deficits
- = 2-3 TRILLION Euro-TARP Bazooka
Now, to be clear, as our Director of Research, Big Alberta, often reminds me – size matters. But there are still some other things about this bazooka to consider:
- Timing – there is no timing. That’s a problem.
- Coordination – to deploy a bazooka that big, herding politicians of the world will be like herding cats.
- Markets – remain real-time. Tick tock.
So… on with our risk management day.
Instead of sending our Senior European analyst, Matt Hedrick, back to France to pose as one of two-eggs-side-by-each on Lagarde’s breakfast meeting plate, the best we can do is let Mr. Macro Market tell us what to do.
The German DAX is breaking out above our immediate-term TRADE line of resistance (5439) again this morning. So the 1stthing we do is don’t short European Equities. Wait and watch.
The 2ndthing we do is watch the Euro/USD currency pair. If the Euro can close above $1.34, then the short squeeze in almost everything inversely-correlated to the US Dollar can continue (EUR/USD drives USD Index). If the Dutch come out intraday and vote down the size of Barosso’s Bazooka (and the Euro fails again at $1.34), there is no support all the way back down to its 2011 lows of $1.29-1.30.
In the end, like you are seeing with US money-center banks post the 2008 Geithner/Paulson TARP1 Bazooka, there will be an end … and piling more short-term debt-upon-debt on insolvent banks and their incompetent political advisors will end badly. Very badly.
But, back to the immediate-term, if you’re not the one with the gun – things can end badly for the pig-headed short seller too.
My immediate-term support and resistance ranged for Gold, Oil, the German DAX, and the SP500 are now $1601-1673, $75.86-84.59, 5439-5767, and 1099-1172, respectively. On Tuesday morning, I cut our Cash position from 73% down to 67%, taking our asset allocation to US Equities up to 6% (versus 0% at this time last week).
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer