Another year is in the books here at the University of Michigan, but European leaders are getting no such rest, as the sovereign debt crisis contagion is spreading from Greece and the periphery into the core (sov debt crises are proving to be more contagious than chicken pox). As we speculated, the Greek “bailout” is merely buying time for the inevitable– default, whether structured/planned or not. Meanwhile, Euro nations with similar debt and deficit proportions to output are coming under pressure as well, namely the rest of the PIIGS nations. But the real issue here is beyond the periphery– France has over $780B in exposure to PIIGS, Germany over $500B, the UK with its own deficit crises and a stunningly high debt/GDP, and, lest we forget, the massive CEE exposure in the core Euro banking system. Indeed, France, UK, and Germany were the highest net notional deriskers in CDS space this past week, as per the DTCC. We have been short French, Italian, and Spanish ETFs since mid to late April.
The (so-far-exclusive-to-the-Eurozone) sov debt crisis has brought back the risk aversion trade, and, as we had been calling for since late fall 2009, the return of the USD rally. The safe haven trade has additionally boosted precious metals prices, which we have been bullish on since early winter 2008.
As far as risk assets, the USD bullishness is putting commodities prices under pressure, with crude oil back below $80/bbl and approaching a potential 200DMA break after failing to breakout through $87.50. Liquidity tightening in China and the Australian mining super-tax are further important catalysts for commodities selling, particularly in copper, which in our view is currently in a bubble. Indeed, copper prices are down over 15% in the last month or so. Meanwhile, the “draconian” measures out of China to curb housing price appreciation and speculation are sending property and property-related names plummeting (we have been positioned short Chinese RE via the TAO ETF since April 18). Equities are seeing decoupling, particularly in the US vs Europe, but we don’t expect that to continue in perpetuity. The trend in American equities remains up, but there has been massive churning and distribution in the month of April, and the old adage “sell in May and go away” may prove to be prescient in 2010, unless the dip-buyers come back out in full force. The 200DMA will be an important level to watch– if this is taken out this summer/fall, we expect a resumption of the bear market started in 2007 and the grander-scale bear started in 2000. We would like to reiterate our assertion that the most important indicator to watch, both economically and financially, remains the AUD/USD. A 200DMA breakdown in that important FX cross is extremely bearish for commodities prices going forward, and we expect that selling would also find its way into equity. However, for now, the trend remains up in equity space, and commodities are choppy, though not downtrending.
Our Trades have been performing quite well since last update, with notable booked and unrealized profits listed below:
27.32% gain on our Netfilx (NFLX) long
18.30% gain on our AK Steel (AKS) short
15.58% gain on our Iamgold (IAG) long
10.25% gain on our VMWare (VMW) long
10.13% gain on our Novagold (NG) long
53.62% gain on our US Dolllar/Swiss Franc (USD/CHF) long
47.77% gain on our US Dollar/Japanese Yen (USD/JPY) long
22.63% gain on our Perfect World (PWRD) short
21.19% gain on our Rino (RINO) short
20.82% gain on our iShares Spain ETF (EWP) short
20.53% gain on our Societe Generale (SCGLY) short
14.89% gain on our Blackrock (BLK) short
13.33% gain on our iShares Italy ETF (EWI) short
13.17% gain on our Monsanto (MON) short
12.68% gain on our Credit Suisse (CS) short
12.17% gain on our Australian Dollar/US Dollar (AUD/USD) short
10.53% gain on our iShares France ETF (EWQ) short
9.36% gain on our Deutsche Banc (DB) short
8.66% gain on our Vanceinfo Technologies (VIT) long
8.65% gain on our Claymore China Real Estate ETF (TAO) short
A reminder to new readers: we update the Trades watchlist/spreadsheet DAILY (and often multiple times a day), so it is a great tool for shadowing/tracking our trades and ideas.
As readers are well-aware, we remain fundamentally quite bearish both domestically and globally, but it is important to note that we were positioned net-long for a while until earlier this week (in US equity), underscoring the importance of charts and the trend in making timing and entry/exit decisions. We will not be shorting US equity in size until a variety of confluencing factors manifest.
Good luck trading.