The Island Of Cyprus Cannot Stop This Bull Market ... Can It?

Includes: SPY
by: Louis Navellier

Last week delivered a fascinating new drama beginning with the surprise announcement that eurozone leaders would try to partially fund a bailout of Cyprus by imposing a hefty tax of 6.75% to 9.9% on bank deposits. This attack on bank depositors eclipsed news out of the latest Fed meeting, the President's trip to Israel, and other normally newsworthy events. By week's end, stocks fell microscopically (-0.01% in the Dow index), but the market could be whipsawed by the next stage of the Cyprus drama.

Imagine facing a 6.75% haircut on your bank account or a 9.9% tax if your savings account surpasses $130,000 (100,000 euros). It's no wonder that the Cyprus Parliament formally rejected the eurozone's draconian tax. Officially, 36 members of Parliament voted against the controversial bank levy and 19 others abstained. Not a single member of Cyprus' Parliament voted in favor of the proposed bank levy.

Another reason for their clear veto is that much of the money in Cyprus comes from mysterious Russian sources, perhaps even the mob. No member of parliament wants to risk a personal "accident" by voting the wrong way. Clearly, the eurozone did not intend to guarantee deposits from Russian mobsters, but that damage has already been done. Gold shot above $1,600 per ounce after Cyprus spooked the markets.

In the meantime, the banking business in Cypress has inevitably been damaged and will remain closed through today when a run on bank deposits is expected to ensue. Then it will be interesting to see if Cyprus will default or restructure (i.e., partially write-down) its debt, like Greece did over the last year.

The European Central Bank (ECB) officially issued an ultimatum demanding that Cyprus agree to a new restructuring agreement; otherwise it would lose 10 billion euros in aid from the ECB and IMF. Eurozone ministers are also openly talking about pushing Cyprus out of the European Union, meaning that the banks in Cyprus would have to embrace another key reserve currency - like the Russian ruble?

Here's another fascinating angle to the Cyprus crisis: There are huge (reportedly $400 billion) natural gas reserves sitting off of the coast of Cyprus, so the Finance Minister of Cyprus was in Russia last week negotiating for billions of dollars in immediate aid in exchange for stakes in its banking industry and energy assets. In order to capture Cyprus' natural gas reserves, the Russian energy giant Gazprom* has offered a restructuring deal in exchange for exclusive exploration rights. Since the Russians have been successful in "persuading" Cyprus officials and politicians to vote against bank deposit taxes, I suspect Gazprom will help Cyprus avoid a technical default, but the eurozone could lose control over Cyprus.

The Latest FOMC Meeting Shows No Change in "QE" Policies

Buried in all the news over Cyprus, the Federal Open Market Committee (FOMC) met last week. As usual, there was no real news to report, just the small details of changes in the wording of the Fed's post-meeting announcement. In short, the Fed said it will stick with its $85 billion per month program of Quantitative Easing (QE). The FOMC also said the U.S. economy is growing at a "moderate" pace, but there are still "downside risks." Rather than openly discuss its infighting over the effectiveness of its asset purchases, the FOMC implied it would "review" the costs and benefits. Translated from Fedspeak, this means the FOMC will let the hawks and doves dispute the details in private for now.

On the employment front, the Fed also clarified that it does not expect the U.S. unemployment rate to fall below 6.5% until 2015, with the rate possibly dipping to 7.4% by the end of 2013 (it was 7.7% in February). Interestingly, the Fed also lowered its 2013 GDP forecast to a range of 2.3% to 2.8%, down from a previous range of 2.3% to 3%. Most (13 of 19) Fed members do not expect any key interest rate hike until 2015, and only one lone dissenter predicted the Fed would raise key interest rates in 2014.

The bottom line is that the Fed will definitely cling to its 0% interest rate policy, but it might scale back its $85 billion per month in quantitative easing if the economy perks up and the jobless rate falls faster. The only hint that the Fed may change its policy happened when Fed Chairman Ben Bernanke hinted that the Fed could "vary" the pace of its asset purchases, depending on the economic outlook. When pressed as to when the Fed might begin to "tap on the brakes" by reducing QE buying totals, Bernanke hinted that it may begin to vary its asset purchases in the third quarter if the impact from the sequester cuts do not slow down overall employment growth. Translated from Fedspeak, the "full money pump" will last at least another six months, while the "variable money pump" will likely continue in 2014 and maybe 2015.

Stat of the Week: 8 of 10 Leading Economic Indicators Rise

Despite the Fed's cautionary outlook, there was plenty of new evidence of improving economic growth released last week, including this series of encouraging reports, all released last Thursday:

  • The Conference Board announced that its index of Leading Economic Indicators [LEI] rose by 0.5% in February, a bit stronger than economists' consensus estimate of 0.4% and the third straight monthly rise. Fully 8 of the 10 LEI components rose - a good sign that our economic growth is broad-based.
  • The National Association of Realtors reported that existing home sales rose 0.8% in February to a seasonally adjusted rate of 4.98 million, the highest sales pace in four years. Median home prices rose 11.6% in the past 12 months, reaching $173,600, fueling a revival of the "wealth effect."
  • The Labor Department announced that new weekly jobless claims remain at a five-year low, and the four-week moving average dropped another 7,500 to 339,750, the lowest level since February 2008. Economists also noted that there has been a sharp decline in layoffs, but not necessarily a rapid rise in hiring, which may explain why the Fed insists it must continue its Quantitative Easing efforts.

Meanwhile, global manufacturing activity continues to rise, led by China and the U.S. HSBC announced that its preliminary Purchasing Managers Index [PMI] for China rose to 51.7 in March, up from 50.4 in February. At the same time, Markit announced that its U.S. PMI rose to 54.9 in March, up from 54.3 in February. The only setback was the eurozone's preliminary PMI, which fell to 46.5 in March, down from 47.9 in February. Even mighty Germany's PMI slipped to 48.9 in March from 50.3 in February.

Disclosure: I am long OTCPK:OGZPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.