Don’t Poke the Bear!
It looks like the rally has lost some steam. We should never expect anything to go straight up, so look for a slight contraction in the equity markets in the coming days. There is some support, so will this be a good time to buy? We have the FOMC meeting coming up (March 18-19) and that will certainly set the tone going forward. A reprieve in the taper could give this market a short-term boost, so expect some volatility.
Don’t Poke the Bear!
The black clouds remain fixed over Europe. Nothing has really been solved with the debt in the socialist countries. In fact, it has only gotten worse as they continue with the can-kicking routine. Greece’s debt-to-GDP ratio was 105% in 2008, but is now at 157%. If you look at Spain, Italy, Portugal and the rest of the Club Med countries, their debt has only climbed. The bailouts have only bought them time, while at the same time ballooning their debt to astronomical levels. In the near future austerity will not be a choice, it will be forced on them if they are not able to get control of their balance sheets. There can be only so many bailouts before they ultimately fail. Every time they are bailed out the story moves to the back-burner and we forget about it. Sort of like those people that pay-off one credit card with another, it buys them time, they forget about it, never address it and then in a year they have to face the music. Well that problem is still there and getting bigger. This risk will have more to do with currency risk and inflation.
Courtesy of ventism
The question going forward is how does the ECB and collective governments respond to the bubble that is building? We have already seen an ideological break-up in Europe, among both the EU members and nonmembers. Germany is certainly the most conservative and wants nations to start saving, paying down debt, and reduce expenditures as they see the debt-to-GDP ratio continue to expand. Their own debt-to-GDP ratio has increased from 65% to 85%, thanks in part to continued bailouts. Should Germany risk their own balance sheet to save the fiscally irresponsible nations in the South? Switzerland has reverted back to their more neutral stance and anti-involvement. They just voted and passed an anti-immigration legislation and are taking a stronger stance against demands from the US and the West on their banking. The Nordic countries are also shedding their socialist ways and turning rapidly to privatization and free markets, as they are trying to lower their debt-to-GDP ratio. They only had to look at the southern Socialist nations collapsing under debt and being forced to seek bailouts to know that at some point a government can’t continue to mount debt forever. However, as the North becomes more fiscally conservative, the South continues to yell “unfair” and a ground swell of Socialism and even Communism has been gaining steam. For them, it is “Ask not what you can do for your country, but what can your country do for you?” as we see economic stress force more to become reliant on government social programs. Eventually it will not be ideology the rips the EU apart, it will be debt. One only has to look throughout history and it is debt and economics that are the force that has destroyed countries and even brought forth wars. I can’t help but wonder if Germany wasn’t destroyed by debt in their own great depression and the Treaty of Versailles. Would Hitler even have had a chance to come to power and start the National Socialist Party (NAZI) or would Japan would have attacked Pearl Harbor if we hadn’t taken over their oil supplies and forced a strict embargo on their nation (which caused austerity measures and economic distress on the import reliant nation)? I am certainly not giving Germany or Japan a free pass for their actions in WWII, I am simply pointing out how economics had been a major factor in their motivation and helped give rise to socialism and eventually totalitarianism. I don’t think that will happen today, but certainly Socialism is on the rise as Europe is under economic distress.
Ukraine Boiling Point
With all the economic problems in the EU, there is another pot boiling, the Ukraine-Crimea-Russian situation. I have heard some ask, why is the Ukraine such a bigger deal than some of the other problems we have seen in Georgia and other ex-Eastern Bloc states? The Ukraine is a major gateway for energy (oil and natural gas) to Europe, so it plays a very crucial role. Remember, as I pointed out above with Japan, when cut off a nations energy supply you will see them quickly respond. It is those pipelines that are the link between the East and West, which makes the Ukrainian situation all the more important.
Courtesy of bit tooth energy blog
In a previous Market Preview I pointed out that the Ukraine has historically been divided. The South/East speaks almost exclusively Russian and has supported Russia in conflicts – even back in WWII. While the North/West speaks almost exclusively Ukrainian and has historically sided against Russia. In WWII the Ukraine joined with the Nazis and even had a Ukrainian SS division and turned over many Jews to the Nazis. Ukrainians and Russians killed each other on the Eastern Front and thus the differences and hatred runs deep. One only has to look at the electoral map from the 2010 election to see how divided the nation is. They elected a President from the Russian side of the Ukraine who obviously accepted a bailout deal from Russia. Meanwhile, the EU and the West was hoping to BUY Ukraine with a bailout and open the door to a trade agreement. It should have come as no surprise that pitting a nation against itself (given the history that the Ukraine has) would turn into a coup and perhaps a civil war, if not quickly brought under control.
Courtesy of wikipedia
The South/East (Crimea), which has been an autonomous Republic, has sided with Russia. While they are a protectorate under the Ukraine, after the ouster of their elected President they passed a referendum to become part of Russia and exit the Ukraine. Normally, I don’t think this would be a big problem with the EU, US, or even the West; however, if you look on the map all the pipelines as well as many oil/gas fields line the South/East of the Ukraine and part of Crimea. It means that if the Ukraine becomes part of the EU, they will be at the mercy of those pipelines. Additionally, Crimea has a solid foothold in the Black Sea with a Russian port. If the Crimea referendum holds we could see the larger part of the Ukraine’s Russian ethnics side with Crimea, which would further split the Ukraine almost along the voting map (Russian vs. Ukraine speaking).
Europe faces two problems. First, the current debt problem, which will impact both inflation and the currency exchange. Second is the Ukraine, which has already impacted energy and trade, further applying pressure on the debt situation.
President Obama is to meet with the NEW Ukraine Prime Minister, which is to show that the US supports the new Ukraine government (which was installed after a coup of the legitimate elected government in 2010). It is understandable that Moscow is upset, the US and Europe are supporting a rebellion in a democratically elected government and a newly installed Prime Minister. It’s ironic how our nation voices our support for democracy; however, if we don’t like who was democratically elected then we support any Rebellion of a democracy if they side with the West. This is why Putin calls us hypocritical and, while I am certainly no fan of Putin, I can certainly understand his view. I wonder how China and other nations view us as we consistently support Rebels that overthrow democratically elected governments (Egypt most recently).
How does this impact the market? Well, it will certainly put upward pressure on gold, silver, oil, gas, and energy. It could also boost the dollar against the Euro if we see it escalate. A rise in oil/gas prices will trickle over into shipping and that will trickle over into cost and squeeze margins, forcing importers to raise prices to help offset the costs.
Support & Resistance
We are coming down and I think we could get there this week. We could see 16,150 in intraday trading if we see any panic arise out of the Ukraine situation.
We are looking to come down to touch this support, but I think we could see a jolt down to 3600 in a higher volatile situation.
The SPX could hit 1850 as early as today, looking at the pre-market futures. I would look at 1840 as a lower support. The VIX should break 15 and possibly 16 this week as the situation escalates in the Ukraine.
The RUT has come down sharply yesterday and again we should use the RUT as the broad measure of order flow. We need to see if it holds 1180, if not I would look at 1160 as the next level of support.
Don’t Poke the Bear!
The Ukraine situation will be in the news as the Crimea referendum moves forward and Obama openly meets with the newly installed Ukrainian government as an affront to Moscow. This intervention by the US will only escalate Putin and Russia’s position further and I don’t see Putin as a guy that backs down easily. Putin has beaten Obama in international politics again recently with Syria. Putin knows that the US people are war weary, Obama talks tough but has not backed it up, Obama is willing to deal with Iran and let Iran continue to make enriched uranium, he sees Obama as weak. That means this could be a big face-off. Obama has looked weak in the eyes of Putin, China, and others – this is no longer a de facto indirect battle like Syria or Iran, this is face-to-face. Putin has nothing to lose, has troops in the border, and has half a nation on his side. We are now in Putin’s backyard and historically anyone that has poked the bear in his den has not walked away unscathed. How far will Obama go? We all know how far Putin will go – that is not in question.
Obama has not been the great foreign leader and diplomat our nation needs and I have a feeling this will get ugly before it gets better. Do NOT poke the bear – it WILL BITE!
Courtesy of Infowars