Spring has come early here in southeastern Pennsylvania. As I stood outside this morning, breathing in the cool 50 degree mid-February air, I couldn't help noticing about half a dozen robins frolicking in the nearby trees. My grandmother always told me that spring was here when you saw the first robin. Spring has come early for southeastern Pennsylvania and the markets.
There’s an old adage that says, "Sell in May and go away." This suggests that about six weeks into springtime you should close up your books until September. But we're having an early spring this year, and when spring does roll around on March 20 (coincidentally, the same day Greece has €14.5 billion in bonds due), it may be too late.
In a surprising move yesterday, the ECB agreed to swap out its €50 to €60 billion in Greek debt holdings for new bonds. That sounds like really good news, because the ECB would end up taking the same hit as the private sector. This would reduce another €15 to €25 billion from the newly repackaged Greek sovereign debt burden.
But alas, 'twas not the deal that everyone thought. The ECB is swapping out its debt holdings for the exact same amount of Greek debt, with one caveat: the new bonds issued to the ECB would not be subject to the "collective action clause" (CAC).
For those unfamiliar with the term, a collective action cause would allow Greece to force restructuring on all of its creditors whether or not they agreed to the terms. Once you bring that force into play, the restructuring must be considered a default -- and a hard default at that.
Now you have to ask yourself, “Why would the ECB suddenly want this new provision?”
This simple answer is that CAC is coming to a Mediterranean nation near you.
Despite this rather obvious and ominous conclusion, the markets rallied. Perhaps the market believes that Greece finally defaulting is a good thing. Nothing makes markets more uncomfortable and jittery than uncertainty. Once uncertainty is resolved -- either positively or negatively -- the market tends to quickly price this information in by discounting this one-time event and moving on to price in future growth.
Of course the other possibility may have been that the markets expect Greece will get its second bailout of €130 to €145 billion over the weekend. Greece, in its typically vague terms, has magically come up with €325 million in savings to meet the last of the Troika’s demands. The technocratic government claims to have found an extra €100 million to cut from defense, €90 million (or around there, really unclear on this number) from cutting public sector wages sooner, and €135 million from operating expenses in the departments of interior, health, and labor, possibly through cutting sacred pensions in the labor department.
If you thought the riots in Athens were bad last week, implementing these additional austerity measures may bring about the “Hellenic Spring” -- it was this time last year that the Arab spring began.
Ah, spring with stocks in bloom and the smell of money being shuffled among banks and technocrats to create the illusion of sunshine; it's a beautiful time.
My guess is that the Troika approves the second bailout over the weekend; I’ll give that a 75% probability. However, like the last bailout package, it will be delivered in tranches, and the next round, which would be likely scheduled for June, will be tied to discernible proof that Greece is implementing its austerity measures and -- this is going to be the really tough part -- Greece's economy showing signs of life. This will be tough, because piling austerity on a country in depression is not a growth strategy.
As we've seen in the past, these measures have been taken positively by the market, even though this is the tried and true -- and getting old -- method of kicking the can down the road. This may get Greece through to the March 20 date, but it will be just in time for European elections in Greece and France and possibly Italy. This will bring in to question Greece's commitment to austerity, its ability to get the next tranche, and the ability of France to maintain its policy continuity.
The bottom line is that all these wrangling and postponements have given the markets an early spring. When spring does come on March 20, investors may find it time to engage in some pre-May selling.
Readers of The Tycoon Report are well aware that there is a consensus among the editors that the market is overbought but that the rally may not be over. It is even possible for an overbought condition to be resolved in a sideways fashion. Either way, it seems that the delay of the inevitable will be just enough for the markets to hold on to year to date gains for a few more weeks, possibly even setting a new 52 week high.
But as Costas mentioned yesterday, both investors and advisers are excessively bullish, strengthening the overbought argument.
The point is that investors need to be extremely cautious when playing from the bull side at this point, either by using options strategies or using tight stops. The next pullback may be a great buying opportunity or it could be the beginning of an ugly summer. At these levels, caution remains the word.
Price Shock Trader