The Bounce and the Waiting Game

As predicted, the “very much overdue” bounce arrived last week. But because volume fell, the rise in prices seems to be only that….a bounce within a new downtrend that began several weeks ago. While volatility eased back, it never really reached the crescendo levels almost always associated with climax selling and longer lasting upturns. This also suggests that the downturn and the selling are not over.

On the macro front, existing home sales missed. The Richmond Fed manufacturing survey also missed. New home sales beat expectations, but these are near record low levels, so any modest upturn still leaves mew home sales far from pre-crash levels. The big number of the week was durable goods orders, which missed badly, coming in well below expectations. And ex-transportation, durable goods were a disaster: instead of rising 0.7%, they fell 0.6%. Finally, initial jobless claims were still near 2012 highs at 370,000.

The technicals are still suggesting that the S&P is slightly oversold on the daily charts. In other words, there’s more room for a bounce before the expected selling resumes. From a weekly perspective, the picture is still very bearish. There is far more room for the S&P to drop. And the next test will be the 200 day moving average, which is now near 1,282 on the S&P. Should this not hold then a move down all the way to under 1,200 would be measured level, based on the earlier 2012 peaks near 1,420. So as mentioned last week, the 200 day will be the critically important test.

And in Europe, the waiting game is beginning. Retail deposits are starting to pour out of not only Greece, but now Spain, Ireland, Italy and Portugal. While not yet a full bank run, it’s being described as a bank “jog”. For now, the ECB and national central banks are replacing fleeing money with interstate borrowing. In effect, Germany and its central bank is filling the hole left by fleeing depositors in these periphery states.

The question is how much longer will Germany continue to let this happen. Because if, or now more likely when, a periphery state defaults and/or suffers a chaotic banking crisis, then Germany will be stuck with hundreds of billions in potential losses.

The banking system in the periphery states is insolvent… are the governments of these states. And while the policy makers have been treating the problem as a liquidity crisis, sooner or later the true solvency problem will rear its ugly head.

The policy makers will soon run out of road to further kick the can. This moment appears to be fast approaching.

And the one true solution—where Germany agrees to formally backstop all periphery debt with Eurobonds—looks politically unrealistic, especially in the time needed before the periphery blows up.

So we’re reduced to waiting…..waiting for another liquidity BandAid that buys a little more time until we go KaBoom, or waiting for the actual KaBoom.

In the meantime, many European equity markets are already pricing in the implosion. Spanish and Italian equity markets are at or below their crisis lows of 2009… So investors are able to buy many Spanish and Italian assets at 50% to 70% below peak prices.

If Euroland collapses, then prices will likely fall further, but some of the best bargains in the world are available NOW in Europe.

Much of Europe is on sale today.

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