Monday, July 23, 2012

Monday Morning Musings

Last week I wrote that while the news out of Europe had seemed to move to the back burner it was likely that one day we would awake to find the crisis back in our faces.  That day looks like today, as news came out over the weekend that the IMF could discontinue aid to Greece and more regions in Spain could seek additional bailouts.

Germany's Der Spiegel magazine made the comments about IMF aid, and the Vice Chancellor said if Greece can't meet its requirements there would be no more aid.  Also, both Italy and Spain enacted short-selling bans this morning amid severe pressure on European financials.  Spanish bond yields have topped 7.40% this morning.

Asian markets were also down overnight after a PBOC official said it will be harder for the central bank to cut rates and that GDP for the quarter could be closer to 7.2%. 

The euro is falling to new 2-yr lows while the dollar index is benefiting from the flight to safety.  Commodities are also lower, with oil prices falling back to $88.95 and gold prices slipping under the $1575 level.  Silver and copper prices are also lower.

There were a handful of earnings reports this morning.  Despite the large declines in the market this morning stocks like ETN, HAL, and HAS are all trading higher following their reports.  MCD missed EPS estimates and is trading lower.  Earnings season really heats up this week with some 750 companies set to report earnings, including AAPL Tuesday afternoon.

The 10-year yield continues to sink on the flight to safety trade.  It hit 1.40% earlier and is currently trading near 1.43%.  As for the VIX, it saw a huge spike in early trading all the way back to the 20 level, which is nearly 25% above Friday's closing levels.  It has now settled in around the 19 level.

Trading comment: Although the price action in the markets had been relatively positive for the last six weeks, the macro risk never went away and peripheral euro bond yields remained consistently high.  With the crisis back on the front burner, the market could easily be back in a defensive position for the intermediate-term.  The SPX is still a bit above its 50-day support which sits near 1333.  But the Nasdaq already broke its 50-day support this morning as have the mid- and small-cap indexes.  I want to stay defensive here and will look to selective add to ETF hedges if the market can't bounce.

KAM Advisors has long positions in AAPL, MCD


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