Stocks are rising in spite of a lack of cheerleading. Europe did very little last week at the summit and this time it seems most pundits took the time to notice that. The Bankia “rescue” is highlighting how bad the Spanish banking system is how much the country is going to need to spend on that. The crisis at the regional level in Spain has hit a point where all the debts will get passed up to the country level and the myth that guarantees don’t matter has been shattered. No one is claiming this is a good thing, yet futures are up.
Greece, I am told, is likely to leave the Euro, yet the consequences to Greece and the EU will be devastating. I cannot remember another case where the outcome is universally held as disastrous for all parties, yet the outcome is deemed a foregone conclusion. Our own analysis projects that the risk to the EU from a Grexit is very high, but we believe that the risks are so obvious and real, that some agreement will be reached to buy enough time to untangle the mess a little before the actual exit.
Even good old JPMorgan can’t seem to do anything right. After weeks of being pounded on about the whale trade they are now being chastised about the unwind. A Reuters article seems to suggest that it is bad that it is selling the available for sale bonds held by the CIO office to offset the losses. Did they not read the transcript of the conference call? That AFS book is part of the CIO’s office, and was part of the reason JPM initially entered into “hedge” trades. Expect JPM to unwind that book as they unwind the whale trade because the last thing they want is to have no “hedges” and a $200 billion book in the CIO office. Some of the abuse JPM has been taking has been deserved, but much has been over the top and suggesting that somehow it is almost nefarious that JPM is booking big profits as it unwinds this leg of the CIO’s position shows just how far the pendulum has swung against the big banks.
Is there a lot to be excited about? No. Will we have a U.S. come in fade? Probably. Should you be short this market? Not just yet. The complete lack of cheerleading is a cause for concern for being short. Stocks were up last week, yet the commentary was bearish across the board and from the tone of most of what I hear and read, you would have thought it was another down week.
Economic data remains soft, but away from Europe not horrible, and even in Europe it is becoming a bit unclear just how much is priced in. Talks of stimulus in Asia helped that market. The ECB has done nothing so far this week, but I wouldn’t rule them out, and the Fed has plenty of opportunity to try and talk up the market here with weak economic data, no signs of inflation (at least in the data the Fed focuses on) and with real pressure on bank credit spreads.
So I remain bullish here. Again, the May 11th prices are my target as I feel that everyone got too bearish after the JPM announcement on the 10th. Mere calm may be enough to get us there, but I can see easing and JPM as catalysts higher. Europe is a mess, but it has been for awhile, and if they can keep Bankia out of the headlines, that too might help enough. Also, being overlooked in the past two weeks is limited evidence that retail is pulling out of risky fixed income markets. Pro’s may be selling high yield bonds, but at this stage, retail does not seem to be joining the flight, very different than 2011.