Search This Blog

Tuesday, September 6, 2011

Market Thought... what i'm waiting for

I am a bottom-up guy (probably because I like looking up the long smooth legs and seeing a nice round bottom :).  In all seriousness, I am itching to go heavy via long positions. The constant threat of a credit freeze is taxing. I hate having to be protected at current levels.  The value of specific businesses, or demand for specific products, simply do not justify it.  But logic has nothing to do with markets going down.

Almost every Market Though post in August has been about Europe, and their potential bank run.  Charts become irrelevant during a credit freeze.  A credit freeze is the destroyer of economies and countries. The current leadership saw how close we were in 2008, and Europe still has the effects of WWII etched in its memory. I strongly do not believe the current policy makers will allow for a EU driven credit freeze.  However, a credit freeze and a defaulted sovereign country are two very different things.

The global economic system can handle sovereign defaults, especially when it is so well projected in advance. The real risk is that a bank run does not take place because of the sovereign default. If large EU banks go down, credit will freeze.  For instance, Greece defaults, SocGen is done. It will cease to exist, and that may spark a domino effect of other supposedly well capitalized EU banks.

With that premise, I am looking for a few things that I think will allow for a more stable equities market:

1. The amended EFSF that can be used to capitalize large EU banks.

2. Forced bank mergers, with re-capitalization, like what happened in Greece recently.

Both these things will allow for countries to default, while preventing a credit freeze.  Obviously, a default will be a shock to the system, but at current market discounts (and CDS projections) a Greece default, with a forced capital infusion from an amended EFSF, would cause the markets to rally. And rally hard.

So, when I see the EFSF is actually amended, or more EU bank mergers (outside of Greece), I will start getting very bullish on equity markets and start making power plays.

No comments:

Post a Comment