Thursday, November 3, 2011

Will the Greeks Agree to Austerity? Sure, When PIIGS Fly!!!

Sometimes I just have to chuckle when I read about our financial markets.  Somehow/Someway the markets  always find a way to get even more ridiculous than I thought they ever could.

Stocks soared today as word got out that the Greeks were cancelling their referendum on the bailout/austerity package that they had accepted from the Eurozone.

Germany and France happily breathed a HUGE sigh of relief on the news.   I am impressed with the worlds central bankers on this one.  They somehow frantically pressured Greece into cancelling their planned referendum vote.  I'm not buying that it came down to Greek politics.  My guess is the Greeks had a gun pointed at their head by the European bankers.

You might ask:  Why would France, Germany, and the rest of the EU absolutely freak when they heard this plan was going to be voted on by the people?

Ummmm.....Maybe because the plan completely pillages the people of Greece??

As I like to say, the devil is in the details and here are the details of the austerity plan. 

Let me ask all of you a question before you read the summarization of the plan:   If you lived in Greece would you vote for this???:

"Income tax threshold would be lowered from €12,000 (£10,300) to €5,000 (£4,300)

Retirement age would be raised from 61 to 65

VAT would rise from 19 to 23 per cent

Higher property taxes

Monthly pensions above €1,000 (£860) would be cut by 20 per cent

Excise on fuel, cigarettes and alcohol would rise by a third

To qualify for a full pension people would be required to complete 40 years work

Retirees aged under 55 would lose 40 per cent of their pensions over €1,000 (£860)

Public sector wages would be cut by 20 per cent

Employees of state-owned enterprises would have their wages cut by 30 per cent

A cap would be introduced on wages and bonuses

30,000 civil servants would be suspended on partial pay

All temporary contracts for public sector workers would be terminated.

Just one in 10 civil servants retiring this year would be replaced

New levies on household incomes of between one and five per cent."

My Take:

I highlighted some of the details that were the most harsh.  Folks, let's just cut to the chase, this just isn't gonna happen.  I spoke to "The Credit Trader" about this today and he explained it best: 

"Jeff, Greece will fail because the WILL to implement such evil/harsh measures on the people in Greece simply isn't there".

I asked him how he thinks this plays out and this was his answer:

"I see it going one of two ways.  Greece will reject the austerity plan and head back to the Drachma.


Greece will "play the game" and agree to the terms of the the austerity plan and then just never implement them."

He finished with this:

"Either scenario will end up with Greece collapsing.  The politicians are either going to take their medicine now and head to the Drachma or they will try and play "kick the can" until the EU stops funding them when they refuse to comply to the terms of the bailout.

I couldn't agree with his assesment more.

Of course the stock market loved the news.  The bulltards took stocks to the moon the last two days on the hopes that Greece is now "fixed".  What they don't realize is Greece can't be fixed.  Greece is broken!  Greece has about as good a chance of being fixed as Kim Kardashian's Marriage.

Just think about it for a minute.  Who in the hell would agree to the terms above without revolting in the streets.  Citizens in third world nations are treated better than this!!!

The idea that the market is buying this Greece BS is simply amazing to me.  I'll say it now and I'll say it again:

Greece is Toast with a capital T.

The Bottom Line

Stocks look very extended to me here.  Keep in mind we had about a 20% rally in October before getting pounded early this week.  This last move reminds me a lot of the Bear Stearns rally in 2008 right before stocks collapsed.

Remmber all:  HOPIUM only can last for so long before the effect of the drug begins to wear off.  Reality and the fundamentals ALWAYS matter in the end folks, and it's no different this time.

So what happens next? 

The bond markets already understand that Greece is toast so they will immediately begin focusing on Italy and the rest of the PIIGS.  In fact, it's already happening when you look at the Italian 10 year bond:

As you can see above, we are once again nearing the recent all time highs when it comes to 10 year yields.  Italy cannot afford to finance itself with 10 year yields sitting over 6%. 

Watch European bonds like a hawk in the coming days.  The market knows that the EU/ECB cannot afford to bailout Italy because the size of the bond market is close to $2 trillion Euros.  As a result, the bond traders went right to Italy from Greece because the markets love to go for the jugular.  I mean why screw with some irrelevant country like Portugal when you can go right for the throat in Italy?

That being said, I do expect to see the yields in the other PIIGS to follow suit as the fears of contagion settle in. 

Let me repeat again what I said up above:  As this crisis intensifies focus your intentions on the credit markets instead the stock markets.  Bond traders are a much more sophisticated crew of investors. They almost always get it right whereas the stock market often gets it wrong...2008 ring a bell?
So what am I doing to prepare?

Buying gold and miners again because I expect a printfest by the ECB as they try and stave off a massive bond contagion.  I also remain in some high divvy energy/tech stocks.  EXC, D, and Microsoft are my largest holdings but let me stress that they pale in comparison to my cash holdings.

The volatility in stocks has made them difficult to short so I am mainly on the sidelines except for a few short hedges.  Recently, I have increased the size of my short holdings after the October run up via some longer term option plays on the SPY that I scaled into that expire in March. 

I also currently hold some SDS, QID, and TWM because I am expecting a sharp pullback thanks to Europe.  I will sell these 3 positions on any large move down.  I am willing to take some pain on these if I'm wrong because it's impossible to time the markets.  If I eat some decay on these short ETF's due to the volatility then so be it.   Like my gold holdings, these short positions are very small in relation to my cash holdings.

All in all be careful out there folks.  These trading robots are wicked fast and they trade the news faster than the speed of light.   Trying to compete with them via day trading is a losing battle unless you own a quant yourself.

If the jobs number beats tomorrow we could see another meltup if Greece behaves. 

In the longer run buyer beware and own some hard assets.

Disclosure:  No new positions were taken in any of the names above at the time of publication.