What I’m Watching This Week – 25 March 2013

Ides of Cyprus (yeah I just invented that)

On the Roman calendar, March 15th marks the day of the assassination of Caesar, thus the Ides of March became a turning point in Roman history.  The 25th of March shall forever now be known as the day of last-minute rescue to prevent a complete collapse of the Cypriot economy.  The Eurozone has agreed to a €10B bailout in which the country’s second-largest bank, Laiki, will be closed and its operations merged into Bank of Cyprus.  Those with deposits of over €100,000 ($130,000 US dollar equivalent) will be assessed with a hefty tax, perhaps 30% or more, while those below that level will be left unscathed.  Laiki’s senior bondholders will be wiped out, while Bank of Cyprus’s creditors will also be affected.  That’s a heavy cost to those who stashed their cash in the countries banks.

Much of the cash deposited in the country’s banks belongs to wealthy Russians; some say the Russian mobs, which are expected to lose billions of dollars of ill-gotten gains.  I think it’s safe to assume that the Russian gangsters probably aren’t very happy with this situation, as the banks will remain closed and accounts frozen until sometime next week to delay, what almost unavoidably, will be a run on them.   The deal also calls for Cyprus to radical modification its banking sector, privatize state assets, and slash their austerity budget even further.   Call it what you will, but ultimately this is essentially the EU and IMF making an example of Cyprus without the catastrophe of having the Euro imploding, at least for an interim period.

I remain optimistic.  Back on this side of the ‘pond’, the end of March is screaming at me to prepare to switch strategies.  Your own specific situation and risk tolerance will define how you proceed, but April has historically been a great month to be in the markets, since 1950.  But before jumping in with eyes closed and adding to bullish positions, cautionary measures must be taken into account.  Stocks have generally peaked during the month of April before pulling back over the next few months.   So far in 2013, the stock market, in my opinion, is an overheating radiator; hopefully you’ll have a couple of gallons of water stashed in the trunk and are prepared to spend some time on the side of the road, letting things cool off.   Uninspiring fundamentals and the renewed threat of crisis from Europe, demand a reassessing of exposure to many large cap, value stock and technology sectors.  As I mentioned last week, if stocks do peak in April (if not earlier) and sell off over the next few months, have confidence to take some profits off the table and wait it out.  I expect it to be a short and shallow pullback-not a full-blown correction.  If the market turns on a dime and goes higher, you’ll have missed out on some performance but if it does not, you’ll be in position to offset some or all the losses in positions more effected by market swings.  If the S&P 500 moves more than 5% to the downside, I’ll expect a few thank you letters for the warning.   I’ll remain optimistic, cautious and aware that the Ides of March (Cyprus) mark a historic transition, and one to be acutely aware of.

Have a great week!

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What I’m Watching This Week – 18 March 2013

Back to the Big Picture

I’m back after a self-imposed hiatus.  Call it a brain break where I took out the tissue, gently massaged it and placed it back into residence.   It was a long overdue.  And now back to our previously scheduled program.

All eyes are on Cyprus this morning as the proposed tax on savings accounts (10% on accounts over 100K euros and 6.75% on accounts below 100K) has brought the European debt crisis back into focus.  Who has culpability in this situation?  Guess who… the banks.  Leading the parade, are the banks in Cyprus.  With the banks in Greece and the Euro Zone coming up quickly behind; but wait, this is turning out to reveal a parade to rival Macy’s Thanksgiving in length, pomp and circumstance.   So what’s the knee jerk reaction to a tax imposed on deposits?  Ahem, you are sitting down aren’t you?  Since the banks are closed in Cyprus today, the citizens can’t dash to the bank and take their money and run.  Some other day perhaps but not today fortunately; and what if other EU countries decide to adopt this type of tax in order to get help from the Euro Zone, aren’t bank runs in other countries a serious probability?  Ultimately, March Madness has been redefined and this is what the week will be all about.  Brace yourself ladies and gentlemen; we are only witnessing the pre-game warm up.  Tip-off is just around the corner.

The U.S. market is a bit extended and susceptible to a necessary pullback, I don’t think we are entering into correction territory.  Why?  We may be looking at going on the offensive while Europe plays defense.  There will be movements of capital into the safest areas.  The EU doesn’t seem to be that warm and fuzzy place today; Switzerland maybe and the U.S. definitely.  How does this affect you, the small investor?  You have two choices:  Door number one – Bet that the pullback will be short and shallow for the near term and ride it out (but smartly take some of your profits off the table).  Door number two – prepare for a deeper and longer corrective action.  I’m going with door #1 along with moving some assets into the alternative space as a hedge (insurance in case something goes bad).  Yes, if the market turns on a dime and goes higher, I would have missed out on some performance but if it does not, I’ll be in position to offset some or all of the losses in positions more effected by market swings.  If the S&P 500 moves more than 5% to the downside, I’ll consider door number two but I don’t see a confirming trigger to set my hair on fire (I’m darn near bald anyway) and run for the hills, carrying all the gold, guns and canned goods I can.  Plus my time in the US Army completely ruined the whole camping aesthetic for me.   I’m no longer a fan of living underground, digging holes and living with moles.

I remain optimistic.  I’m keeping my eye on the big picture of the American economy continuing to improve, Washington has become a rather large speed bump, but growth is there, regardless of the political mayhem.  The new European worries are unsettling and deserve a watchful eye as we observe the EU react but I’ll remain steadfast, cautions but entirely optimistic.  Have a great week!