Bull by the Tail
Research for Online Investors

01/05/12

Tuesday’s market was a great surprise to start the year.  Pundits are quick to reference the first few days of trading in a new year setting the tone for the rest of the year.  We don’t know about that, but the price action told us the market was ready to break higher and rally.

Here is a chart of the S&P 500.  We have drawn in the lower and upper trendlines that have defined the market for the last six months.  We have been trading inside this “wedge” as the spiral got tighter and tighter.  We had lower highs and higher lows.  Eventually something had to give, and it did on Tuesday.

Tuesday the market decisively pushed through resistance of 1266.  This was where the market had failed just before Christmas.  We were above the upper (downward sloping) trendline, but needed to break the resistance to feel bullish.

Tuesday did it.  We had volume, and we closed well above the resistance line that had stopped the market three different times in the last two weeks.  Wednesday was a consolidation day, and this morning was scary.

We had a nice surprise in lower Unemployment Claims than expected and ADP Non-Farm Payrolls better than expected but news out of Europe wasn’t very reassuring.  France was able to sell $10.3 billion in 10 and 30 year bonds.  Yields were up only 9 basis points, which was a relief after all the bad news since the last French auction on Dec. 1st.  France had a two to one coverage ratio indicating buyers wanted the debt.

Germany was able to sell $5.25 billion dollars in ten-year bunds this morning with good coverage.  Italy’s UniCredit is reeling after their failed equity offering this week.

Headlines out of Europe caused the market to test support this morning but we have reversed and are moving higher as we go to press.  We have drawn some target levels for the bull’s advance in on our chart.  The market advance may be cut short by news out of Europe or China but it looks strong for now.

News this morning indicates the eurozone debt crisis reaches into the U.S.’s biggest banks.  These banks have released information they are “only minimally exposed” to European government debt.  These debts would have to be reported on the bank’s balance sheet.  CNN says the largest U.S. banks have been buying and selling Credit Default Swaps (CDS) on eurozone debt.

This all stays under the radar as unreported.  CNN published a Fortune article from the Jan 16 issue, reporting that the biggest six U.S. banks may hold up to $200 billion dollars in CDS on Italian debt alone.  This is according to just released European data.

Who is writing the CDS?  European banks.  The same banks that are under pressure to raise capital requirements to 9% by European banking authorities.  French bank BNP Paribas has sold $4 billion dollars of CDS on French debt.  Italy’s Banca Mone dei Paschi di Siena bank has sold $3 billion dollars worth of CDS on Italian debt.

Does anyone believe insolvent banks that are under orders to raise capital could pay off the liability of these contracts if Italy or France defaults?  Fortune calls their article Europe’s ticking time bomb: Credit default swaps.  Somehow, this ticking time bomb will blow up, just like all the others in the past.

Hold on, we have a bull by the tail.  We think the ride will last longer than 8 seconds, but it will come to an end.  Nothing has changed from last year.  The eurozone is guaranteed to come back and haunt the world’s markets in 2012.

Mailbag:
This gets worse and worse.  Sounds like that CFPB is written like the Federal Reserve Act---no congressional approval of what they do!  This keeps getting scarier.  And, to think our congress passed the Dodd-Frank Act, another law without reading it.---subscriber T.M.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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