Merkel Wagers EU Pact On Semifinals, Thoughts On RIM And Steel

 |  Includes: BBRY, MT, X
by: Stephen L. Weiss

I have three theories as to why the EU provided the market moving agreement overnight:

1) Wagers between the Mayors of competing teams in the World Series or Super Bowl usually involve food - lobsters, steaks, etc. The EU has taken this to an entirely new level. As such, I wonder whether Merkel wagered Germany's approval of the pact on the outcome of the previous day's Euro 2012 Championship Semifinal match.

2) Merkel is the anonymous GP of a very large hedge fund with lagging performance. Her lock-ups expire July 1st, so she needed a big end of the quarter mark-up on her portfolio.

3) Merkel has been diagnosed with a very rare, life threatening disease and is not expected to live out the European ratification process, thus allowing her to stay true to her pledge "not in my lifetime."

I have been neutral in terms of market exposure, cautious of the greater risk than reward, unwilling to bet that the 19th time is the charm. While this agreement has some of the characteristics of the others - execution and final details to be worked out - it exceeded both my expectations and the markets'. Nonetheless, I do believe the rally can continue, despite continuing trouble on the earnings front - Nike (NYSE:NKE) and Ford (NYSE:F) being the latest - until we reset over the next few weeks from earnings reports. Within a relatively neutral exposure to equities, I have been initiating small positions in some fairly beaten up names such as Joy Global (NYSE:JOY), Total (NYSE:TOT) and Abercrombie & Fitch (NYSE:ANF), and covered shorts in steel over the last few days, closing them out recently, as a couple of steel companies reported EPS, and the stocks rallied. While the actual metrics on these companies are different than my shorts in U.S. Steel (NYSE:X) and ArcelorMittal (NYSE:MT), I didn't believe the market make a distinction. Should they rally much from here, I will return, because the issues remain, and the steel business has very high barriers of EXIT. Unlike coal, capacity has increased as prices have declined, due to softening end demand. I don't see this changing with China continuing to slow.

The rally in materials and energy, with extremely high short interest, is going to make next Wednesday's fireworks look like a Sputnik launch.

With European bank balance sheets still in disrepair and lending non-existent, unchanged in any meaningful way by the recent announcement, JPMorgan (NYSE:JPM) should pick up significant share helping to offset the governor on earnings provided by tighter regulations and low interest rates in the US. Wells Fargo (NYSE:WFC) has also started to expand beyond these shores, albeit in a not particularly meaningful way.

Thus, the only questions are "have stocks sufficiently discounted the slowing global economy?" and "is this just another false start by the EU fueling a quarter end short covering rally?" To the first, the easy and correct answer is that some have and some haven't. To the latter question: Yes, for now, but doesn't mean we can't rally for the next week or so. I'm not going all in, that's for sure.

About Research in Motion (RIMM) - the Dean of Harvard Business School has likely sent a Thank You note to the BOD at RIMM, thanking them for providing the material for the best case study they have seen in years. The death blow here is not the quarter, but the continued delay in the release of the BB10. Developers will not invest much in new apps for this device, thus making it DOA (dead on arrival).

Disclosure: I am long (ANF), (TOT)