Forget Debt Ceilings, It Was Always About ISMs, GDPs and PIGs

by Dan August 2, 2011 9:07 am • Commentary

Even-though the debt ceiling debate was a full on side-show, and the result was a forgone conclusion,  the drama merely drew attention from the continuing troubles in Europe and the weakening pace of our own recovery.  All of this came at a time where the majority of  U.S. corporate earnings came in better than expected.  There are cross-currents abound and some of them don’t make a lot of sense as we try to gauge the mood for the balance of the year from an investment perspective.  

As I write at 9am, Asia closed down about 1%, European indices down about 1%, S&P futures down about 1/2%, Gold making record highs, Dollar rallying vs the Euro and yields on the 10 year are making new lows for the year.  Basically the sky is falling, and technical support levels in most things I look at are being breached.

Yesterday I highlighted the breakdown in the DAX, as I think this is significant from a sentiment standpoint as Germany’s economy remains one of the few bright spots in the world recovery.  I fear that the SPX which has held the March low is very likely to test it soon and if we go through we could see a quick move to 1200.  Chart below demonstrates recent under-performance of DAX vs SPX.

[caption id="attachment_3721" align="aligncenter" width="300" caption="1 Yr DAX vs SPX from Bloomberg"][/caption]


As I suggest caution I am not actively pressing the market, I am Long SDS, and Short the Euro through FXE Aug Put Flys (here) and looking to be tactical in how I deploy capital. Frankly I don’t see a lot of great opportunities in such a murky environment.  I am likely to put out some shorts on a rally, maybe similar to the weekly Put Spread I did last week (here).

Economic data has been fairly dismal starting with last weeks Q2 GDP, yesterday’s ISM and all eyes will be on Friday’s payroll number which will likely be disappointing.  With most S&P 500 earnings out of the way we are back to watching Europe and our data…..and don’t forget about China and Brazil.  Growth is slowing in both countries and all eyes are on their ability to orchestrate a soft landing for their economies……China likely to raise rates again later this month and some feel there is an impending credit bubble to burst……..

The Bovespa, the major Brazilian equity index could be signaling the end for the “global growth” story, and how this all may end.  The index has officially entered bear territory down a little more than 20% from the high made late last year.

[caption id="attachment_3722" align="aligncenter" width="300" caption="2 Yr Bovespa Chart from Bloomberg LP"][/caption]


So I guess the message here is similar to well always, don’t be stubborn on cutting losses and move your feet, don’t be afraid to take some profits when you have them and always look to reduce risk in uncertain periods, LIKE NOW.

Don’t press shorts into extreme pessimism, wait for a rally and put them out if you are convicted.