Germany Bails Out Greece Again, Case-Schiller Report, Debt Ceiling

The stock market gapped higher on the news that Germany would yet again bail out their EU counterpart, or should I say deadweight, which immediately caused a surge in the Euro. Market psychology escapes me on this one. They must create reserves at an interest rate that is now 125 bp’s. These reserves are then lent to Greece so that they may pay off their debt and circulate the newly issued currency. In other words, the Euro has been devalued and despite this investors bought the Euro after the news, though fundamentally this action must be inflationary and ultimately bearish for the currency.

The only explanation that makes sense in this case is that somehow the market anticipates a default anyway due to the need for the bailout. I don’t think that Trichet will be the one to deal with this and it may prove to be all too easy for the ECB to kick the can to their soon-to be successors who will take their places this fall.

Adding to the confusion was this morning’s Case-Schiller Housing Prices Index. From the report:

“This month’s report is marked by the confirmation of a double-dip in home prices across much of the nation. The National Index, the 20-City Composite and 12 MSAs all hit new lows with data reported through March 2011. The National Index fell 4.2% over the first quarter alone, and is down 5.1% compared to its year-ago level. Home prices continue on their downward spiral with no relief in sight,” says David M. Blitzer, chairman of the Index Committee at S&P Indices. “Since December 2010, we have found an increasing number of markets posting new lows. In March 2011, 12 cities – Atlanta, Charlotte, Chicago, Cleveland, Detroit, Las Vegas, Miami, Minneapolis, New York, Phoenix, Portland, Ore., and Tampa – fell to their lowest levels as measured by the current housing cycle. Washington, D.C., was the only MSA displaying positive trends with an annual growth rate of +4.3% and a 1.1% increase from its February level.

“The rebound in prices seen in 2009 and 2010 was largely due to the first-time home buyers tax credit. Excluding the results of that policy, there has been no recovery or even stabilization in home prices during or after the recent recession. Further, while last year saw signs of an economic recovery, the most recent data do not point to renewed gains.

According to Case-Schiller, housing has “confirmed” a double dip, which is an indicator of a recession. That is yet another divergence that debunkes the rally in the stock market, and naturally, the Euro. If housing has entered into a double dip yet the stock market continues to rise, then it is clear that POMO has had the effect of nothing more than devaluing the dollar and forcing certain asset classes higher. Once QE 2 ends, there will be no support for the stock market and the dollar will continue on the cyclical bear market rally that it has recently started.

Finally, the House of Representatives passed a 318-97 vote to not raise the debt ceiling. Simply put, not raising the debt ceiling disallows the creation of new debt by the Treasury to fund the central government’s activities. This, like the housing data stated above, is deflationary and bullish for the dollar index.

Fundamentally the dollar should be in good shape for a rally in the coming months though though remember that the stock market is historically flat to positive for both the last week in May and the first week in June, but has an average return of -2% for the following 2 months. In other words, I won’t allow for headfakes and knee-jerk reactions to change my strategy until I see tangible evidence that the fundamentals have changed.

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

One Response to Germany Bails Out Greece Again, Case-Schiller Report, Debt Ceiling

  1. Pingback: Germany Bails Out Greece Again, Case-Schiller Report, Debt Ceiling » Greece on WEB

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