Watch out for falling PIIGS....that is to say watch out for Portugal, Ireland, Italy, Greece, Spain.
In my year end prognostications presented eslewhere on this site, I noted that 2010 would be all about interest rates. True enough.... and now we can add one more dimension to this forecast. 2010 will be all about interest rates and sovereign debt levels.
Through much of 2009, the story was the US Dollar. It was collapsing, nobody wanted it, America was doomed, buy Gold, buy Gold,Buy Gold.
As a former commodity broker, I can tell you that in past I have seen some dramatic turnabouts in the US greenback. With each of these reversals in the Dollar, my clients used to ask of me " why would the Dollar rally given all the structural economic issues in America?". My answer - America is politically stable, the printing presses are well oiled and in top running condition. Hence, in times of trouble, capital will seek out the sanctity of the US Dollar. In addition, America enjoys monetary and political union. In times of crisis, the Gov't via the Fed will step in and bail out troubled institutions. Compare this to the European Union where you have one Central Bank and a rag tag collection of independent countries that all set their own political agendas.
Well, we now find ourselves at the crossroads of yet another crisis a mere 3 weeks into the New Year. And the strange thing - we all saw it coming from a mile away. I speak of the situation in the PIIGS countries, especially Greece, and the potential of this mess to spill over and slosh across the entire Euro Zone. Do a Google search on Greece and you will find mention of this brewing problem dating back several months.
When the EU was formed amid much heraldry and fanfare, the rules of the game stated that in order to belong to this vaunted club, deficit spending could not exceed 3% of GDP and total debt could not exceed 60% of GDP.
Well, someone forgot to explain that in great detail to the PIIGS. Greece now sits with a deficit of well over 3% GDP and a debt load that is nearing 113% of GDP. Ditto for Spain, Italy, Ireland and Portugal who have now all exceeded their total debt : GDP thresholds.
In response to the fast approaching dark storm clouds, capital is now predictbly gravitating towards the US Dollar. At this time of writing, the US Dollar Index has risen from 76 to 78 in the past 5 days. The effect on commodity related stocks and commodity futures has been harsh. The commodity weighted TSX Index in Canada has been slammed hard.
So, where do we go from here ? The European Union and the IMF must take a stand quickly. For if they do not, speculation will run rampant about the next soverign debt failure. Volatility will be extreme on global markets as speculators try to figure out which country will hit the wall next.
What is unfolding in the PIIGS nations is not about the global banking system failing, it is not about Lehman Brothers and Bear Stearns imploding. It is not about Merrill Lynch getting bought up by B of A. Yes these countries will have to restructure their debt and they will. Yes the pain will be uncomfortable. But these nations will survive and capitalism will endure.
Meanwhile, countries like China, India and Brazil keep pressing ahead. China is reportedly growing at 10% and Brazil is forecasting 5.2% in 2010 while India is touting a 7.5% figure. These growing, emerging populations will continue to need commodity goods. Commodity related stocks, while taking a bruising right now under the weight of a rising US currency, will recover in the very near term. The US Dollar Index is pressing tight up against its 200d moving average. From here, I can see a bit of a move higher to maybe 79.5. The Euro is oversold and while it still may have downside, we are close to a bottom. Support will come from those nations seeking to diversify some holdings away from the US Dollar. And what betetr opportunity to buy the Euro than at a firesale price ?
As we all sit around waiting for the EU to implode and go to zero, before you reach for the knife to slit your wrists, I invite you keep your wits about you and take a look at the following stocks that are close to some very compelling entry points for those of us that trade the markets:
Barrick Gold (TSx:ABX), Central Fund of Canada (TSX:CEF.a), Kinross Gold (TSX:K), Silver Wheaton (TSX:SLW), Thompson Creek Metals (TSX:TCM),
Palladin Energy (TSX:PDN), Exeter Resources (TSX:XRC), Cameco (TSX:CCO), Goldcorp (TSX:G), Equinox Minerals (TSX:EQN).
For some good junior stock action, take a look at these:
Nebu Resources (TSXv:NBU), Galway Mining (TSXv:GWY), Encanto Potash (TSXv:EPO), Potash ONe (TSX:KCL), Semafo (TSX:SMF), Rusoro Mining (TSXv:RML), Geovic MIning (TSXv:GMC), Nord Resources (TSXv:NRD), Apoquindo Minerals (TSXv:AQM), Avalon Rare Metals (TSXv:AVL).
Stay focused, don't be skittish, don't buy into the gloom and doom scenarios being spun by the media. Watch the charts, look for oversold technical conditions, look for areas of support on the charts. And above all....when you take a position in any of these stocks, you are not doing so to buy and hold forever. You are there for the trade. Get in, make a gain and get out. Then look for the next trade...
2010 promises to be a year to remember for traders. Stay tuned....
