Sunday, May 13, 2012

Mother of All Risks in 2012?

Happy Mother's Day to all moms out there. We had a brunch with my mom over at my brother's house where we talked about Greece and markets. So, let me go over some risks that are preoccupying investors nowadays and show you why I maintain that the cyclical bull market remains intact and why smart money will be buying this pullback.

The Greek tragedy: Let me begin with Greek politics. Last Sunday, I discussed Europe's golden dawn and clearly stated:
What I find more worrisome than the rise of Golden Dawn is the rise of leftist parties, including the anti-bailout party Syriza and the communist party (KKE), which respectively garnered 16.8% and 8.5% of the votes. All these parties want to rewrite the rules of the bailout.
I know what I'm talking about. There is nothing more frustrating than watching my ancestral home being subjected to ridicule as Greek political leaders, all vying for power and glory, make complete asses of themselves.

The latest 'power broker' is Alexis Tsipras, the 37 year-old leader of the radical leftist SYRIZA party. Ekathimerini reports that Greece’s chances of forming a unity government that would negate the need for new elections were hanging by a thread on Sunday night after a long day of talks between President Karolos Papoulias and party leaders foundered on disagreements between the groups:

Papoulias saw Democratic Left chief Fotis Kouvelis late last night in the final meeting with the heads of parties that were elected to Parliament in the May 6 polls. Kouvelis could hold the key to the formation of the new government as he put forward a format that both New Democracy and PASOK have approved.

Kouvelis’s proposal is for parties to combine their forces in a unity government that would aim to keep Greece in the euro, draw up a plan for its gradual decoupling from the European Union-International Monetary Fund loan agreement and which would remain in place until 2014, when European Parliament elections will be held.

Democratic Left, which received 6.1 percent of the vote last on May 6, has insisted that it would only join a government with New Democracy and PASOK if the Coalition of the Radical Left (SYRIZA), which surged to 16.8 percent in the elections, also took part.

“Participation is the key,” Democratic Left MP Dimitris Chatzisokratis told Skai TV. “Another issue is the personalities that would be appointed in such a government.”

SYRIZA leader Alexis Tsipras came under pressure during his meeting with ND chief Antonis Samaras and PASOK head Evangelos Venizelos earlier on Sunday when the three politicians held talks chaired by Papoulias. Sources said that Venizelos and Samaras asked Tsipras to either join a unity government or to at least give it a vote of confidence.

PASOK and ND have just under the 151 seats needed for a parliamentary majority. A coalition with the Democratic Left would raise this to 168 seats, but the three parties are worried their administration would lack political legitimacy without SYRIZA’s participation. There is also concern that as an opposition party, SYRIZA would seek to capitalize on the anti-memorandum sentiment in Greece.

Tsipras rejected the appeals for his party to join the others during the 90-minute talks and later accused the three parties of looking for an accomplice. “They are not just asking SYRIZA to agree, they are asking it to be complicit in crimes and we will not do that,” he said.

Tsipras said he asked Papoulias to publish the minutes of the meeting so “citizens can draw their own conclusions.”

He accused PASOK and ND of ignoring the outcome of Sunday’s elections, which dealt their parties huge losses and elevated SYRIZA to second place.

“The parties that governed us not only have failed to heed the message from the elections, they are also blackmailing us,” he said. “Their demands for SYRIZA to take part are unprecedented and illogical.”

SYRIZA’s stance led to Samaras and Venizelos accusing the leftists of blocking any attempt to form a viable government.

“I made very effort to form a government but SYRIZA does not want to listen to the mandate from the Greek people,” said Samaras. “I honestly don’t know where they are going with this,” he added.

“Mr Tsipras told us that holding new elections would not be a disaster,” said Venizelos. “Despite the impasse during the meeting with the president of the republic, I maintain some hope that a government can be formed. But despite that, we are preparing for new elections,” Venizelos told party members.

Papoulias also met with Panos Kammenos, the head of the Independent Greeks, Communist Party (KKE) General Secretary Aleka Papariga and Chrysi Avgi (Golden Dawn) leader Nikos Michaloliakos on Sunday night. None sought a part in a unity government. Papariga said she expected Greece to head to new elections.

Ekathimerini also reports that Democratic Left Slammed Tsipras:

Democratic Left responded strongly on Sunday afternoon to statements made earlier in the day by Coalition of the Radical Left (SYRIZA) leader Alexis Tsipras, who said after the collapse of talks for a unity government that Democratic Left has already reached an agreement with New Democracy and PASOK to support the memorandum.

"Up until yesterday, he [Tsipras] called on us to remain steadfast on our well-known position and not to participate in a government without SYRIZA. Today, after the meeting, he is saying that we have agreed with PADOK and ND for a pro-memorandum government. Shame,» Democratic Left said in a statement, adding that Tsipras «has surpassed every limit of political wretchedness."

"His obvious inability to explain his stance does not mean he can resort to libel and lies. This is political immorality,» the statement by Democratic Left, which is led by Fotis Kouvelis concluded.

For those of you who do not know Alexis Tsipras, he used to be a leader of a student movement that routinely organized sit-ins where teachers got paid as students did nothing. He's never worked a day in his life. He is a product of the Greek system.

This is the guy who is now threatening Germany, promising to "tear up the bailout agreement in front of Merkel" the day after winning the elections. He has a point about destructive nature of austerity, a point that Nobel-prize winning economist Joseph Stiglitz eloquently wrote about in an article in Project Syndicate, After Austerity.

But Tsipras is a political buffoon who is basically showing his true colors. Just like Samaras, all he cares about is power, and he will stoop to any level and say anything in true Greek demagoguery form, to obtain that power.

While Greeks have every right to be fed up with savage austerity, they're not alone, and they have to figure out a way to bring about change in Europe in a more constructive way. Making threats to rest of Europe won't achieve anything except isolationism.

Having said this, as Bloomberg reported earlier this week, Greeks hold a $510 billion trump card in renegotiation and they know it. Over the weekend, Zero Hedge reported that Troika is willing to change the terms of the Greek bailout and then cited an article from Spiegel stating that Greece will continue getting aid even after it exits the eurozone.

I will repeat what I have written many times. Neither Greece nor the rest of eurozone can afford to live the consequences of a Greek exit. If Greece leaves, it will only be a matter of time before Spain and Italy exit too, and then chaos will ensue.

The biggest loser of a euro breakup will be Germany. And don't kid yourself, Germany has been the biggest winner of the euro crisis. Their exports are up big, their leading indicators are all up and shares of their banks are bottoming here. They simply can't afford to play Russian roulette with their economy. Nobody can which is why I believe cooler heads will prevail in Europe.

JPMorgan's $2 billion blunder: By now, everyone knows that JPMorgan Chase lost $2 billion in six weeks. I laugh at the coverage this is getting in mainstream media and even in financial blogosphere (like Zero Hedge). People who are calling for Jamie Dimon's head still don't get it. Never ever mess with a Greek bankster, especially not someone as powerful as Jamie Dimon.

I guarantee you in six months time this is old news, buried under the same rug where other massive losses experienced at other big banks are buried. We can argue about better financial reform, but the banksters own Washington and if you saw the ending of that PBS documentary on Money, Power and Wall Street, 85% of the over-the-counter derivatives market remains unregulated.

There is a reason why this market will never fall under the watchful eye of regulators, too much money is involved and the financial lobbyists will kill or severely water down any reforms to this lucrative market.

To Jamie Dimon's credit, he didn't hide this blunder. He admitted it, owned up to it, and is now addressing it head on. Bloomberg reports that the entire London staff of JPMorgan Chase & Co. (JPM)’s chief investment office is at risk of dismissal as soon as this week.

If I were Dimon, I'd fire them all. Gone, goodbye. And then I would tell my remaining staff: "You have six weeks to make up those losses or else you're all fired too." I can pretty much guarantee you that's exactly what Dimon is going to do.

As far as JPMorgan shares, I can guarantee you the smart money is buying this pullback, betting on Dimon and the bank to recover. And if you're smart, you'll do the exact same thing. Never mind all the scare mongering on massive regulatory reform. It won't happen, not under Dimon's watch.

When risk-free turns risky: Michael Gayed, chief investment strategist at Pension Partners, LLC. ,wrote another excellent article on the risks in the bond market:

I have admittedly been early in the "Spring Switch" call, which is the idea of money coming out of bonds and into stocks as investors begin to believe that the rally in risk-assets is real. The distrust over a rising stock market likely will only dissipate when headlines begin to say "Dow Jones Industrial Average (DIA) Hit All-Time Highs." Whenever that day comes, I suspect there will be a collective moment of cognitive dissonance given the belief in the negative narrative, and the price action of equity averages.

I continue to believe very much in the "Bear Paradox" which relates to the idea that bond yields are so low that any kind of a deep correction will make stocks more attractive as dividends, which keep getting increased by various companies, makes the yield on stocks even more attractive compared to panic low-yielding bonds. I spoke about this on a Bloomberg segment earlier this week in what many have said has been my most logical and best media appearance yet on Europe, bonds, stocks, and market psychology (see interview below).

Having said that, as I have noted numerous times, our ATAC (Accelerated Time And Capital) models we use for managing client accounts have kept us in defense mode, primarily in bonds, since the first week of April. Meanwhile, stocks have been resilient in the U.S. in the face of stunning bearishness by investors believing in the negative narrative. Germany, the U.S., and many others have seen such strong demand for "risk-free" debt that it is not just a U.S. phenomenon that 10-year yields are near record all-time lows. The longer the entire world is at these levels, the more likely the Spring Switch occurs.

In my last article, I noted that the catalyst for stocks to rally is no catalyst at all, and that time could be the ultimate reason for the "Switch" out of bonds and into stocks to take place. We may be very close to that as we near a technical ratio level in the bond market which could turn the notion of "risk-free" bonds into a "risky" investment. Note from my interview that there is no such thing as a "safe" investment — rather there are times when certain investments are relatively safer.

Take a look below at the price ratio of the iShares Barclays 10-20 Year Treasury Bond ETF TLH +0.47% relative to the iShares Barclays 3-7 Year Treasury Bond ETF IEI +0.11% . As a reminder, a rising price ratio means the numerator/TLH is outperforming (up more/down less) the denominator/IEI. For a larger chart, visit .

An uptrend means longer-duration bonds are outperforming (yield curve flattening), which generally coincides with a "risk-off" environment out of stocks. A downtrend means the opposite (yield curve widening coinciding with a "risk-on" environment for stocks). Rising ratio = deflation scare. Falling = inflation positioning.

Notice that the ratio on the far right of the chart is nearing a key ratio resistance level. What this means is that we are entering a period where the yield and yield-curve flatness is making further gains from these levels a real uphill battle. In the meantime, stock earnings are strong, dividends are rising and bearish sentiment is immense.

This likely explains why stocks continues to straddle the Dow 13,000 level and remain resilient. One could either begin to bet that the yield curve may begin to re-widen, sending longer-duration bonds yields higher, or could play potential weakness in bonds to come by going long stocks. And while I don't know exactly when the Spring Switch will get flipped, and while our own models remain defensive, the likelihood of the Great Re-Allocation is getting higher by the day.

Michael isn't the only one warning of risks in the bond market. Leo de Bever, President and CEO of the Alberta Investment Management Corporation (AIMCo), recently came out warning that the end of the 30-year bull market in bonds is near and that it's going to be more attractive to take risks in stocks.

More and more investors are shifting out of bonds, into high quality stocks (like JPMorgan) that pays them an attractive dividend which is much higher than anything they can get in the bond market.

Sure, there are risks with stocks, but the US recovery is ongoing, you'll see better employment reports ahead and once confidence comes back, the shift out of bonds into stocks will be vicious. In my opinion, this is the Mother of all risks.

China's hard landing isn't that hard after all: The final risk I wanted to discuss is the ongoing discussion on China's hard landing. I've already written on why investors bracing for a hard landing in China will be sorely disappointed. At this writing, Bloomberg reports that Asian stocks swung between gains and losses after China cut the amount of cash banks must set aside as reserves to boost economic growth.

Pay attention to all the central banks easing around the world. they're basically pumping more liquidity into the system, an unprecedented amount of liquidity. As central banks pump up the jam, big banks prop desks and elite hedge funds will be making a killing trading risk assets, profiting off money for nothing and risk for free.

That's why I'm not paying attention to news out of Greece, euozone, China, and why I couldn't care less if JPMorgan lost $2 billion or more in their "hedging'' activities. I remain more bullish than ever and think smart money will be buying this pullback in financials, tech, basic materials and energy. This is what you should be doing too.

Below, a recent interview with Michael Gayed. Don't agree with his comments on Greece exiting the eurozone, but listen to his other comments on stocks, bonds, and the US economy.

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