Thursday, April 8, 2010

Sniffing Some Sort of Top

Wanted to respond to the comment in the previous post before mentioning a couple of other things.

Justin brought up Greece and gave the opinion on why Germany won't allow Greece to fail. He may be right. When push comes to shove at the end, Germany may acquiesce. There is the rub. The market is pricing either Germany or the IMF coming in as what sort of probability? 90%, 95%, 99%, 100%???? Probably close to 100%. I mean, we are up on a rocket ship for getting close to 2 months once the market decided Greece was fine. So if it comes to pass that Greece is fine, than who cares. No one cares about Greece anyway, so it won't matter. Already priced into the market. Personally at this point, I put a very bad outcome at a coin flip which means a good outcome is also only a coin flip. What happens if the good outcome happens? Nothing. The market expects it. What happens if a bad outcomes occurs? All hell likely to break loose. Not priced into the market at all.

The point was made that the EU regulators and EU bankers are in the ear of Germany telling them they can't let Greece go. I am sure they are. France is very exposed to Greece. Not surprisingly France has been very vocal about some sort of bailout package. But Germany is driving the bus. Think about how many stupid stupid stupid things our government has done to get reelected. Germany's Prime Minister Angela Merkel loses the next election if Greece is bailed out. Maybe it is the right thing to do (I don't think it is even if it is the chain reaction that starts the next phase of the depression) and maybe she is the type of person (like a Paul Volcker) who doesn't care and will do it even if she knows it is going to lose an election. That would be one heck of a politician and I doubt it based on things I have read she is that type of person.

To put this into perspective, think of NAFTA having a shared currency. Now Mexico is in dire troubles and going to default. Would Obama bail out Mexico if he knew he was going to lose the election over it? I highly doubt it. Same situation here except the feelings Germans have against Greeks and Greeks against Germans are not very good. Bordering on downright spite.

So than that brings the IMF, but the bailout number the IMF can bring to the table to allow Greece not to default at some point in the future is not enough. At least not likely enough.

Finally, the austerity measure Greece has "imposed" is so far a joke. Greece newspapers today annouced that something like the department of health insurance has already used 50% of its budget for the entire year in 2 months.

Anyway, the market believes Greece is fine (through some bailout at the last second) and if they aren't fine that it doesn't matter. I give 50% that Greece is fine and 30% chance that it doesn't matter.

Regardless of Greece, I am starting to feel bearish again. I have been fairly good at sniffing out tops over the last six months. I have been horrible in thinking that they were the top. Well, I think we are within 2 to 4% of a top in the markets that will once again mark a possible final top. Everything is at extremes. Some things at extremes that I haven't seen in my lifetime. If your looking at valuations, stocks are very very expensive. If you look at dividend yield stocks have only had this low dividend yield (which means the stock have been bid way high) twice. Once in 2000 and once in the fall of 2007. Technically we are extremely extended with large amounts of technical resistance just over our head. From a psychological perspective, the boat is very lopsided. Sentiment indicators are back to extremes.

The question like all previous tops (if we are indeed close to one), is this the ultimate top. I have thought twice before it was. Maybe third time is the charm.

No comments: