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Cliff Wachtel
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Cliff Wachtel, CPA, is currently the Director of Market Research, New Media and Training for Caesartrade.com, a fast growing forex and CFD broker. He covers a variety of topics including global market drivers, forex, currency hedged and diversified income investing, and is currently working on a... More
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  • Prior Week Market Movers: Big Greek Drama, Small Price Moves, Lessons & Ramifications 0 comments
    Feb 11, 2012 8:34 PM | about stocks: SPY, DIA, UUP, UDN, FXE, ERO, URR, ULE, EUO, DRR, FXA, FXB, FXC, FXD, FXF, FXEN, FXY, JYF, CYB, GLD, CNY, USO, DUG, USL, NBO, DBV, ICI, CEW, PHYS, SLV, OIL, SDS

    Part 1 of Weekly Review/Preview: Prior Week Market Movers & Their Lessons For the Coming Week

    The following is a weekly summary and strategy guide for traders and investors, covering prior week's market movers and their lessons for the coming week for traders of all major asset classes via both traditional instruments and binary options.

    • Greek Drama Plot Summary & Ramifications
    • Four Reasons For EUR Strength & Ramifications

    Most asset markets didn't move much last week, so we can't say that there were really significant market moving events. Clearly however, the focus for the past and coming week will be on the latest Greek bailout deal. Key points to note include:

    Greek Drama Plot Summary

    Here are the key points of the big story of the week.

    FINAL APPROVAL DATE BY ALL PARTIES UNCLEAR

    Specifically, there are 4 main issues to resolve before the second bailout, worth €130 billion, is assured.

    1. The austerity measures agreed to Thursday by the Greek coalition and the troika needs Greek parliamentary approval. Voting currently scheduled for on Sunday.
    2. Greece must make an additional €325 million in spending cuts by Wednesday, when finance ministers of the euro area meet again. While this may not sound like much, it may be the last straw, as Greek junior coalition members were refusing to make further spending cuts. At last count, 5 cabinet ministers have resigned, and with Athens the scene of strikes and riots, it's increasingly possible (though still not likely) that the measure may not pass. However, our primary scenario remains that Greece will pass the required austerity budget and secure the needed bailout funding to avoid a default on the EUR 14.5 bio in bonds maturing on March 20.
    3. Athens must guarantee that these reforms will be fully implemented, regardless of who is in charge after the coming April elections. These three elements need to be in place before any decision is made by the troika.
    4. The extent of private bond holder losses - "haircut" issue - remains unresolved. Private bondholders are being asked to accept a much larger write-down than the 21% of the original second bailout agreement in July 2011. Monday is the current deadline for Greece to reach an agreement with private sector investors (NYSEARCA:PSI) on a debt swap to reduce the overall amount Greece owes. Markets continue to assume there will be a deal. However we're still missing details about the extent of participation in this agreement among the private (vs. government and ECB) bondholders, which is critical to determining if the deal is deemed a "credit event" that triggers credit default swap (CDS) payouts. There has been talk that Greece could impose a retroactive "collective action clause" (NASDAQ:CAC) that allows a majority approved deal to be imposed on all bondholders. However on Friday S&P warned that any such action by the Greeks would constitute a "selective default" (aka default), making risk of a credit event (and its consequences like rising GIIPS bond yields and possible further sovereign and bank insolvencies) this coming week a prime concern.

    There are the usual 3 primary drivers behind the difficulty and delays in reaching an agreement.

    1. The needed monetary and economic measures are just too painful for both sides to bear. Too much suffering for the Greeks, who feel unduly oppressed, and too little chance of being repaid by the angry German led Troika and funding nations. Given these pressures, it's not surprising that the two sides have very divergent ideas about both the nature of the problem and its solution.
    1. No one is really in charge or in control, which complicates coordinated action among the principal parties - the current Greek regime, the ECB, the IMF, or those representing the private creditors.
    1. Yet no one wants to bear the blame for a Greek default and the likely other sovereign and bank defaults that could follow, so no one has walked away thus far.
    AUSTERITY IS NOT WORKING

    Greece's economy is only worsening, virtually assuring that it will continue to miss economic targets of any future agreements as tax revenues and growth decline along with debt.

    Prior sharp cuts in government spending, jobs and wages, along with increased taxes, has crippled the economy. The November unemployment rate was 20.9% and December production plunged 11.3% from a year earlier. So even with a new debt agreement, the regular need for Greece to meet goals that it can't meet virtually assures that we continue to have regular Greek debt crises. Pimco CEO Mohammed El Erian stated in an FT.com column that

    I suspect all three parties to the negotiations know in their heart that their latest agreement, brave as it is, will only last a few months at best. Yet no one wants to be seen to be responsible for a change in course at this stage, fearing they could be blamed for a disorderly default and a potential exit from the eurozone.

    This much seems clear to everyone, so whether they admit it or not…

    THE EZ MAY HAVE ALREADY DECIDED IT WANTS GREECE OUT

    Despite Greece's ongoing deterioration, EZ finance ministers continue to increase to increase their demands in return for a new €130 bln aid package. The absurdity of asking Greece to do more when it clearly can't, has prompted suspicions that:

    • The EZ wants to force Greece to decide to leave the EZ. That way, the EZ leaders can blame the "disorderly" (what other kind is there?) Greek default, all that follows, on Greece once the nation finally rejects a deal that ends in a form of debt servitude.
    • The EZ wants the Greek experience to be so searing that it discourages the rest of the GIIPSfrom even thinking about getting a similar reduction on their debt. Certainly EZ leaders have been concerned about the unhealthy precedent this partial default (regardless of whether it's officially deemed as such) has for future GIIPS debt negotiations.
    ACTUAL FINAL AGREEMENT DATE UNCLEAR

    It's uncertain when all the above issues will be resolved and if Greece will get the needed cash to avoid default for another few months before this same drama repeats. If the past is any guide, both sides could continue to play to their constituencies until just before the March 20th deadline for repayment of the €14.5 EUR of bonds coming due.

    While markets have continued to assume a deal will be reached, the very minor price movements this past week reflect the continued uncertainty, and fear that a Greek default may yet be upon us.

    LIKELY RAMIFICATIONS OF GREEK DEAL

    Given the serious doubts about Greece's ability over the longer-term to avoid default, even if the Greek parliament approves the budget deal, we expect to see either

    • Another brief relief rally in EUR and other risk assets
    • An immediate "sell the news response" as markets take profits before the next bad news hits from Greece or another member of the PIIGS pen. While the next LTOR operation could spark some optimism, it may already be priced into current prices.

    There is significant risk in both directions depending on the outcome, if the Greek parliament manages to vote on Sunday. If the vote is stalled into Monday, then we would look for risk to waver until a final vote is held. Wednesday should bring the EU finance ministers meeting to approve the Greek budget package, though we can no longer expect them to simply rubber stamp whatever the Greeks present, leaving risk in limbo until mid-week at least.

    Our apologies for the inconvenience. My partners want these posts to introduce visitors to our website. Your visit helps keeps these posts coming to you free of charge. Thanks in advance for your help.

    If you want to know more about how to protect yourself against risk of crashing markets and currencies, stay tuned for details about my coming book, THE SENSIBLE GUIDE TO FOREX, SAFER, SMARTER WAYS to SURVIVE and PROSPER from the Start. It's the first book to show how prudent, traders and long term investors with limited time and risk tolerance can tap forex markets to hedge currency risk and improve returns. See my profile page for details.To save yourself further inconvenience, please subscribe to our site and receive direct email notifications of latest posts.

    DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN'T BE TELLING YOU FOR FREE, NOW WOULD WE?

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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