To all who criticized Ben Bernanke in the midst of the U.S. financial crisis: What say you now? Bernanke looks better with each passing day because he understood the fragile dynamic of economic confidence like few others. As bear raids threatened to collapse the banking system Bernanke lowered interest rates, expanded the Fed’s lending capacity, helped to finance bailout packages, implemented QE 1, then QE 2 -- each as a way to stabilize the root cause of the crisis which was fear.
When Bernanke spoke, he was the lone voice of reason in a crowded room of worst-case scenarios. He constantly reminded the masses that recovery was not only possible but was expected. As chairman of the Federal Reserve, he was innovative during a time of need. What if we wouldn’t have had Bernanke? What if the Fed had been managed by a hard liner who refused to act in the face of disaster?
Such a stark reality is playing itself out in Europe. This has been a very bad week for Europe and it is all self inflicted by its leaders. Last Friday ECB President Mario Draghi opened his destructive mouth and said the ECB would never print money in order to support a bond market that is teetering on the brink of disaster as investors flee the market. Draghi doesn’t yet understand that his job is to do whatever it takes to instill confidence in the market. Draghi needs to guard his words carefully. There is no room for negativity at a time like this. Upholding the precedent of failed policy should not rule the day.
Draghi isn’t the only problem. German Chancellor Angela Merkel seems to be digging in her heels at the wrong time. As the European Union proposes an innovative solution of eurobonds, or stability bonds, as they are correctly labeling them, Merkel is mocking the proposal by saying things like "they have just come very much back into fashion." And "it at all, this discussion belongs at the end-so I don’t find it particularly fitting that we are now once again conducting it in the middle of the crisis, as if it were the answer to the crisis, in the long term it isn’t." She said of hopes of an immediate solution to the crisis: "I say yet again: there won’t be one."
After years of socialism, is Europe capable of producing a Bernanke-esque leader to pull them through this crisis? Or will the stubborn, pessimistic stereotype of European culture lead to its downfall? Until an optimistic leader emerges in Europe, we at economictiming.com will continue to add to our hedge positions in the NEXT Portfolio.
With Apple acting as its own asset class, we refuse to sell at lows because of the fundamental support for a bounce. The Google hedge that we purchased on November 9 with the stock hovering above the $600 level has worked out well, as the stock now trades near $570. Who’s the NEXT Apple competitor to fail? Amazon is under intense pressure after releasing its line of e-readers and tablets at price points less than the cost to make the products. Anyone who wants to compare Jeff Bezos to Steve Jobs needs a quick lesson in pricing power.
With Amazon’s deteriorating quarterly profit situation under intense margin pressure this stock, which is trading at a p/e of 100 and a forward p/e of 93, is at serious risk in the midst of European turmoil. It makes for an ideal hedge against Apple positions. We are adding a 2% allocation of AMZN April 2012 $210 puts.
Europe's escape from the suffocating grip of socialism won't be easy, and I can't turn optimistic until I see somebody emerge as a true leader. in today's world of volatility, policy is secondary and confidence is primary. Maybe Bernanke can fly across the Atlantic for a little meet-and-greet with Draghi. It's time for the next stage of European Union evolution to begin. Increased unity among the member nations is needed, and that will only happen with the adoption of eurobonds and increased monetary tools for the ECB, or else the weakest links will cause a contagion that takes down the strong.
Disclosure: I am long AAPL, and I own puts in AMZN and GOOG.