Sunday, June 10, 2012

Could this fix US/European deficit spending?

Welcome back guys, and what a crazy past couple weeks we have had. The macro data that I posted 2 weeks ago really put the markets in a tailspin. We saw the S&P 500 go from 1,318 on May 25th down to an intraday low of 1,267 on June 4th. The unemployment numbers that came out on June 1st fell way short of expectations, less than half of what major economists and analysts had expected (69K v. 150K). That was not the only reason, Europe was still crashing daily on concerns of Greece, Spain, Portugal, Italy. Government bond yields were soaring, investors were not sure if they would be solvent within a short period of time.

Though just this past week, we saw a big reversal. With Europe out of the picture, and England not trading for a few days due to the Queen’s Jubilee that kept the markets fairly quiet. Lack of US macro data and light volume also gave us the 180 reversal many were probably looking for.

This Saturday we learned that Spain got a 100B Euro bank bailout (equivalent to 1.5T dollars in terms of percentage of GDP). We have known for a while now that things there were in pretty rough shape, the EU was meeting and there was speculation something would get done. I can say that this is not fixing the problem but putting a band-aid on yet another seeping wound. You teach a man how to fish, you can’t keep giving him fish, he will always come back for more without working. This was Spain’s problem; they had a fiscal crisis, no one wanted to negotiate, so they got a bailout. What will happen next? More bailouts?

We, as humans need to act intelligently and figure out the problem. The citizens voted for these people to not beg for more aid, but put in endless hours to protect the good of the people. Government in Spain, Greece, and the US have not done their job, it is time to throw them out. With the Greek elections next weekend, I expect to see some major reform happen, if there is no fiscal plan, I’m just plainly saying they will go bankrupt. Germany basically has had them and the rest of the insolvent countries on life support for quite a while now, and they want no more.  

I promise I’m not going to go all Peter Schiff here but the US does have its share of fiscal issues as well. If the tax cuts do not continue through ’13 we could basically see catastrophe in the stock market. The problem is we spend too much, and as we continue to spend like we do, debt will continue to grow higher than GDP and we MAY end up like Greece, Spain etc. The thing is, the US treasury market is still in high demand right now, telling bond buyers that our debt is safe. We don’t know of a plan or what the plan is to cut out spending down over the next few years but something has to be done.

My plan is to simply say: ok we messed up, we need to cut spending right now AND increase taxes. Yes, both need to be done, but this will not last forever, maybe only a few years, enough to balance the budget and decrease debt to a more desirable level; below 100% of GDP. Install a flat tax rate; simply put everyone is paying the SAME RATE on EVERYTHING. So, this would solely depend on your income (those who make more pay more, those who make less pay less). I would impose this on consumable goods, federal, state…anything with a tax, quick and easy. As the national debt (hopefully) goes down and the budget (again hopefully) gets balanced, the rate can be adjusted. Also, to encourage consumer spending, I would use 1 day a month as a tax holiday.

We cannot keep growing our debt, here or in any other country, it will eventually become unattractive to creditors. Those creditors who bought will lose over time, they have a chance at not being repaid. The most honest way is to default, clean up and start over again. Yes, it will hurt but it WILL get better. Inflation is the more dishonest way, too much liquidity flooding the system would harm anyone who was not involved directly in the default (bondholders, gov’t employees) by decreasing the value of their savings.

Off that topic now, as far as US equities/oil/dollar this is what I’m seeing the setup this week:
-Thursday I bought TZA, sold Friday midday to close out position flat
-TZA is Direxion x3 bear on the Russell 2000, so it trades inverse to the market x3 (if the S&P was down .5% this would be up 1.5%)
-I did not want to go in short over the weekend, was thinking something big might happen this weekend which did.
-ES_F futures opened up 1% Sunday Evening
-I believe rally won’t sustain, and will fade throughout the week (need to hold 1335 in the ES_F short term resistance, then 1,363 is next up)

A look at ES CL and 6E

Macro data out this week could also make a significant difference in what happens:

-7:30AM EST NFIB Small Business Optimism Index Prev. 94.5 Consensus 94.2
-8:30AM EST Import and Export Prices Export Prev. 0.4 % Consensus 0.1 %
Import Prev. -0.5 % Consensus -1.1 %
-2:00PM EST Treasury Budget Prev. $59.1 B surplus Consensus $-125.0 B deficit

-8:30AM EST Producer Price Index Prev. -0.2% Consensus -0.6%
-8:30AM EST PPI less food + energy Prev. 0.2% Consensus 0.2%
-8:30AM Retail Sales Prev. 0.1% Consensus -0.2%
   -Less autos: prev. 0.1% Consensus -0.1%
   -Less autos and gas prev. 0.1% Consensus 0.4%
-10:00AM EST Business Inventories Prev. 0.3% Consensus 0.3%

-8:30AM EST Consumer Price Index Prev. 0.0% Consensus -0.2%
   -Less Food + Energy Prev. 0.2% Consensus 0.2%
-8:30AM EST Jobless Claims Prev. 377K Consensus 375K

-8:30AM EST Empire State Manufacturing Prev.  17.09 Consensus 13.8
-9:15AM EST Industrial Production Prev. 1.1% Consensus 0.0%
   -Capacity Utilization Prev. 79.2% Consensus 79.2%
   -Manufacturing Prior 0.6% Consensus -0.3%
-Michigan Consumer Sentiment Prev. 79.3 Consensus 77.5

No big earnings news out this week, but will be fully trading and watching markets.

Catch me @peter_eller10 on twitter for updates.

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