Dublin Down

“All sins cast long shadows.”

-Irish Proverb

 

After expedited +11% and +17% rallies in the S&P500 and Greek Athex Composite, respectively, since their February 8th YTD lows, what have we learned? In the short term, we have learned that government bailouts continue to be bullish for stocks.

 

In the intermediate term, in looking at the US bailout exercise on its own, it’s pretty easy to argue that bailouts have been bullish for stocks as well. After closing just 1 point shy of its intermediate term cycle-high last night, the S&P500 is +73.5% since its March 9th low. This huge rally looks a lot like Japan’s initially did in the early 90’s.

 

In the long term, the sins associated with extending your off-balance-sheet liabilities (like the US is doing with GSE debt), remains a major concern for any analyst who considers sovereign debt for what it is. Those rightly placed long term balance sheet fears are probably perpetuating the last leg of this generational short squeeze of the short selling community. Some people just cannot reconcile why we are going higher.

 

We call this Duration Mismatch. Currently that’s what you are seeing develop between what people think is moral and “right” versus what will help you get the stocks right. These are two very different things. At Hedgeye, we try to capture the short term developments within the construct of what we call TRADEs (like Citigroup going from $2 to $4), but all the while try to maintain the sobriety of the long term TAILs (can the Pandit Bandit take Citi from $4 to $16?).

 

After making plenty of mistakes short selling things over the years, I’ve developed this language in an effort to build an investment research process that’s duration agnostic. Global markets and the information that feeds them are becoming more interconnected by the day. I don’t see any other way to adapt to such a dynamic ecosystem, yet.

 

In order to bring this investment point to a practical place, let’s consider the Duration Mismatch associated with the stock market in Ireland (all prices and dates for the Irish Overall Index):

  1. February 21, 2007 the market peaks (ahead of the US stock market) at 9968
  2. March 9, 2009 the market bottoms (same day as US stocks did) at 1916 (-80.8% crash from peak)
  3. September, 17, 2009 the global short squeeze of the Great Depressionistas gets you back to 3469 (a +81.1% return)
  4. February 15, 2010, the Irish eyes ain’t smilin’; stocks have dropped to 2862 (a -17.5% drop from the 9/09 peak)
  5. March 26, 2010, the fightin’ Irish are back after another squeeze from 2/15 of +12.2% (3212 on the Irish Overall)

Fun place for your retirement accounts or what? It’s called price volatility sponsored by a Bubble In Politics.

 

This Irish stock market story gets more interesting by the minute. In the last 48 hours, this country that the short sellers called a PIG in February has started to go down again. For the week-to-date, Irish stocks are flashing what we call a regional negative divergence (underperforming other countries in both the European region), and its doing so on very bad long term news.

 

The isn’t “new” news, per se, but everything has a price. Timing, when the long term TAIL of a “Bad Bank” plan (taking over toxic loans from dysfunctional lenders) like Ireland has imposed on their citizenry can obviously wreak some havoc on your stock portfolio. If you don’t invest alongside government-leaked inside information, your best path forward in Ireland is to wake-up every morning and understand when they are going to double down again on government debt.

 

Dublin Down is maybe a cute way of saying what happened yesterday in the Irish banking stocks, but there is nothing cute about this, ladies. Dublin based Allied Irish bank was down -17% yesterday on fears that the unknown is known again. After receiving over 7 Billion Euros in government support, Allied Irish could need as much as another 7.7 Billion Euros ($10.4B dollars) and the Irish government to take as much as a 70% stake in the company…

 

If you want to wrap all of these massive price moves in Ireland’s stock market around your head and consider what could happen to US stocks from here (if indeed the Irish continue to be a lead indicator for global leverage disease coming back into focus), you might want to get yourself a pint.

 

Look on the bright side, the Greeks have only seen their sovereign debt in default (or restructuring) about 50% of the time since the year 1800 (see Reinhart & Rogoff, This Time is Different). So, compared to that, the Irish look great from a historical and a relative perspective. Bear in mind, the Irish didn't declare independence until 1916. So give these political lads some time.

 

Yesterday, the fibbing Greek government issued 5B Euros of 7-year debt yielding 6%. That’s 3.34% more than German bunds of the same duration. How’d ya like to have some o’ that paper in your 401k!

 

Piling Debt, Upon Debt, Upon Debt may indeed make the short to intermediate term pricing of equity look good. But, in the end, the sins associated with these debts will be casting long shadows.

 

My immediate term support and resistance lines for the SP500 are now 1167 and 1175, respectively. We re-shorted the Euro via the FXE etf on yesterday’s strength.

 

Best of luck out there today,

KM

 

Dublin Down - Allied Irish Banks