The EU meetings tomorrow should open with a reading from De Vita Caesarum by Suetonius in AD 121: "Ave, Imperator, morituri te salutant", or "Hail, Emperor, those who are about to die salute you." Then at least we'd know they understood their predicament. Because as it stands now, it's fairly clear that despite all the talk of closer fiscal union, ECB rate cutting, and EFSF leverage, the leaders of Europe just don't get that they are about to die. Not literally, but as a functioning, unified, growing economy, they are done. As we enter the holiday season, it's more likely that Santa Claus is going to come down my chimney with gifts for my girls than it is that somehow the EU is going to get all 27 EU members, or all 17 Eurozone countries, to agree to anything quickly. There are serious doubts that the EU can fast-track anything that cedes individual national control over budgets to a central authority – instead, each of the member states will have to get parliamentary approval for changes, and some will need a referendum as well. For more information on the 28 changes to the EU treaty that would need to be made, see this interesting article by a member of European Parliament and this article on the Euro issues by Paul Krugman.
The downward spiral has begun (and I don't mean the Nine Inch Nails album unfortunately). Europe's sovereign bonds are untouchable for private market buyers (aka, non-governmental buyers), except for those banks based within an issuing country that are getting a royal arm-twisting to buy their own countries' debt – which is just more deeply embedding the virus in the banking system and making it more likely that a banking crisis will hit various European countries in the next year or two. Mutual funds, money market funds, and non-European banks are avoiding these bonds like the plague. But why you ask? Aren't they going to "fix" things? Oh, they fixed things alright – this virus germinated when Merkel insisted on "private market participation" in the Greek crisis and then called it "voluntary", which had the fatal effect of voiding the credit default swaps on that same debt. Think of it this way: if someone puts a gun to your head and demands your wallet, were you robbed or did you make a "voluntary" charitable donation? Does the thief have to snatch it from your hand for it to be a robbery, or because I handed it over to him, even under gunpoint, was that then voluntary? What the #$%@^?
Look, it's simple: change the rules, cancel contracts, and rig the game in favor of governments and against markets and the private market buyers will take their ball (ie, their cash) and go home. Non-interest bearing deposits recently reached $2 trillion in US banks according to the Financial Times – want to guess what was sold to create that much cash? If investors are going to lose 50%, they can go buy stocks or junk bonds and get a better return upfront – why bother with govvies at all? Playing with a bully who changes the rules in the middle of the game isn't fun. You really did learn all you needed to know to be an investor in the fifth grade…
Something else to keep an eye on for stock markets is Russia and the aftermath of the elections there this past week. Did you ever watch those National Geographic shows with the cute rabbit in the middle of a snow covered field, nibbling away on some winter grass while a mountain lion lurks at the edge of the woods? Ever see him suddenly perk his ears up when he though he heard a twig snap or crunch of snow, only to look around, give a proverbial shrug (can a rabbit shrug?), and then go back to chomping away on the grass? What happened next? He was dinner. That crunch of snow was the first sign that he was done. Cue flailing rabbit in the mouth of the mountain lion here. This Russian election could be the first sign of social unrest in Russia. Now if I was a betting man, I'm betting on Putin taking care of business and keeping a lid on uprisings with some well-timed protest crushing. But ignore this at your own peril. Don't be the rabbit.
In our last article we said that for the SPX 1246/1250 has a lot of resistance, with a little at 1255 and a big level at 1264/1266. Well the SPX stopped right at 1266 before starting to roll over. Good enough for government work. For this week, Support and Resistance levels for the S&P 500 (SPX) are:
Support: 1230/1232, a little at 1216/1218, then 1203/1205. Below that its 1170/1175.
Resistance: 1266/1267 continues to be tough to get through. Above that is 1283/1285, then 1306/1308.