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Correction -vs- bear, Leuthold, mistakes, BP, thoughts

Recs

27

June 11, 2010 – Comments (34) | RELATED TICKERS: BP , SPY , QQQ

Well folks, this might be a longish post, I apologize if its a bore. 

The market has some issues.  We face some very identifiable headwinds:

1.  The European Debt situation.  The concern here is that austerity measures and debt problems in general will lead to a European recession that will then spread to the rest of the world.  The real risk here is that we get a debt deflation.   A deflationary spiral starting in Europe (or perhaps also in China, see below) and inevitably spreading.  Greece, Spain, etc., pass austerity measures to get their deficits under control.  This passing of measures results in recessions in these countries, which reduces tax revenue, thwarting the goal of reducing the deficit.  Defaults result, resulting in a banking crisis in Europe, resulting in... etc.  A deflationary depression would be the worst case, as GMX has called for for years here.  

2.  The China situation.  Is China the bubble to end all bubbles?  Will it eventually pop?  Real estate bubble popping there leading to a banking crisis?  The whole GDP figures enron-scale fraud?  The concern here is that if China is forced to endure a big slowdown, due to (bubble popping, massive economic slowdown due to so much of the economy being sort of unnecessary building of unneeded capacity, etc.)that the shock to the worlds economy would be huge, resulting in a negative situation...

3.  The BP and GOM oil situation.  If BP goes broke the ramifications would be significant, etc.

4.  Fear over volatility, late day swoons (or  booms), the flash crash and fear of a repeat of it, etc.  

5.  Financial regulation casts a shadow on the future of wall street itself.

6.  Various other headwinds  including:  mutual funds are said to have low cash positions at last report, which means redemptions can't come out of cash if they are sizable.  The last jobs report was dissapointing, the ECRI leading indicators have been dropping for a while, will the US double dip?  etc. etc.  Goldman getting sued, etc.

Basically a crapload of negativity and a crapload of things to be legitimately worried about.  Offsetting this, really, is basically just some generally good economic news (ISMs here and abroad, wages, hours worked, etc.) and corporate earnings which appear that barring a big slowdown are on their way to a "V" shaped recovery.  And, offsetting also, is the fact that we have just experienced one of the 20 biggest drops in the stock market since 1930.  This means that a whole lot of stocks are a whole lot cheaper than they used to be.  Declines of 20, 30, 40% have happened in many-a-name.  There are bargains out there to be sure.

You read that right, folks, this correction (to date, assuming it doesn't go any lower) is one of the 20 worst in the last 80 years.  So its bad, and if you feel anxious its not for nothing, its because we have had a really bad 6 weeks in the market.  

The real question for all but truly dedicated buy-and-hold investors is this:

Is this a new bear market or a correction in a bull?   I will try to offer some thoughts on that.  My tendency is to lean bullish in general, keep that in mind whenever reading my mojo.  

Doug Kass, he of emminent and probably matchless bottom calling ability (basically always close to spot-on in the 15 months or so that I have been reading him.  Surreal, almost) posted some data from Steve Leuthold.  If anybody is unfamiliar, Leuthold runs a $5 billion fund bearing his own name, is a devoted student of market history that delivers research to other funds.  He has a long string of "one could make you famous" calls including calling in the early 80's for 10 year treasury yields under 5% at some point in the future, telling people ot get out of his Grizzly short fund on March 4, 2009, calling in March 2009 for S&P 1100 in 2009, and calling for stocks to rally this year before experiencing a vicious correction.  He has, like everybody, some bad calls also including being bullish pre-lehman with the S&P down 20% or so from its 07 highs.  

Anyway, Leuthold apparently tracks 4 indicators to give him warning as to whether the market is about to sour, these are 1) a dow transports warning, 2) a dow utilities warning, 3)  NYSE advance/decline warning, 4) VLT momentum warning. 

In 15 severe corrections (12% or more but not 19%, which he classifies as a bear market) that didn't morph into bear markets, the average number of warnings before the decline was 1. In the 15 bear markets the average number of warnings was 2.7.  Indeed only 2 bear markets began with less htan 2 warnings, one in 1938 (very shortly after a severe crash/rebound) and 1980-1982 (our only double dip incident). 

This time we had just 1 warning.  So barring a double dip this seems to imply that this is just a correction.

I acknowledge that there are legitimate concerns, and I am not as excitedly bullish as I was in March 09, July 09, or February 10.  I would note that in general, the world is always ending, has always been ending, and may well always be ending.  It was ending in 2002, it was ending in 1982, it was ending in 1974, ending ending ending.  Yet it carries on.  The following things give pause to my creeping bearishness:

A)  its extremely rare for a market to crash significantly twice within 2 years.  

B)  corporate america seems to be in extremely good shape.  balance sheets are hugely better than they were pre-crash in 2008, profits are recovering at a terrific rate

C)  a huge amount of money is already "out".  The last month has seen the hedge fund industry "de-risk", mutual funds have seen outflows in 08, 09, and 2010.  A whole lot of weak hands are shaken out here.  

D)  sentiment is wildly negative.  "we are witnessing the failure of keynesian economics" is a reasonably common headline, a deflationary recession is widely accepted as inevitable, panic and blood are everywhere in the streets, people are overwhelmingly negative.  The memory of 2008 has given the markets very little confidence in the face of negativity.  This probably leads to overreaction in the same way that the 5 year bull leading up to 2008 led to underreaction then.  

I haven't any idea where the S&P finishes the year, but I will say that its by far not a foregone conclusion that we crash anew.

 

Beyond that,I think BP is going to live.  Along with RIG, APC, and the rest. My reason for this is 

1.  my general assumption that outcomes are generally more normal than anybody anticipates during dramatic times

2.  the world economy and markets would take quite a shock if BP was to go bankrupt, nobody wants that right now

3.  BP is a big deal in the UK

4.  BP is cooperating and, bankrupt, would not be able to pay for all this, but functioning it could.  

5.  The outcome of the spill is, like everything, quite likely to be less severe than most onlookers predict.  Nothing, but nothing, that I have seen in my lifetime is as over the top and willing to depart from reason as the cries of the environmental faction of the US.  They are amazing.  

6.  BP has $30B of pre-tax cash flow a year.  That will pay for a whole lot of cleanup, folks, a whole lot.  

That isn't a recommendation to buy BP, do that at your own risk, but BP will live and I may start buying it like there's no tomorrow one of these days.  

And my last thoughts will go into a reply to this!

34 Comments – Post Your Own

#1) On June 11, 2010 at 2:31 AM, checklist34 (99.72) wrote:

Beyond that, and I am going to make a seperate blog about this soon, I am not doing as well in 2010 as I did in 2009. 

In 2009 my biggest positions were a laundry list of the markets best stocks and I made far, far more than 3x my money from S&P 900 to S&P 1100.  

In 2010 it seems like my head is up my arse to some extent.  My tinkering with European banks has led to sizeable losses (~3% on my portfolio in total, I haven't calculated it exactly).  I jumped in to those situations with loose understandings.  And that would have been ok, except those are complicated situations and a thorough understanding would have been better.  In each case I bought, rode a stock up a ways, and watched it crash in the last 6 weeks.  AIB, IRE, and NBG are the names.  

When the markets were wildly negative in early 2009, it was very, very correct to think simply and not over-analyze.  When DOW and GE are crashing to $6 and $5 respectively, the correct analysis was to sit down and say "really?  dow chemical and general electric are going broke?  really?  not".  

Ditto myriad insurance stocks at 1/10th of book value, BDCs and more.  

But when the markets are optimistic... thorough analysis is a must when looking at beaten down stocks.   Because if the markets turnnegative, those stocks may be the ones that fall the worst. 

Lesson learned, painfully.  I still hold the names and plan to make a decision on whether to cut losses and take the tax-write-off, double down, or just sit and watch.  

Beyond that, several of my favorite names have basically been dead money for a really long time:  RJET, CNO, and HIG are these.  XL too.  

I am just sitting on those.

 

And lastly, I sold out of ASH largely at $50 and the last shares when my cheapest tax lot 10-bagged in the high $50s.  And watched it go fully 10+ bucks past my sellout point.  

I told a whole lot of TCK in the low $40s and I wonder if that thing isn't worth $60.  

I sold out of ACAS in the high $4s and it never looked back.  I held my last lump of shares to 10 bag, selling it in the high $5s. 

I sold everything too early.  And beyond that, the big boring dividend stocks I pumped the cash into ... well, they tanked in this correction too.  pfe, lly, t, vz, all fell appreciably.

I have outsmarted myself considerably, and I just wanted to acknowledge my own failures in public. 

I think that if one plans on selling a stock, and it hits your target price, selling is never bad.  But if its on a straight vertical rocket ride...  sitting around and waiting a day or a week, raising your trailing stop as it goes, wouldn't kill you.  It would have made me several percent on my portfolio, easy, in just ACAS and ASH.  

hope everyone is well and I have a proposal for the group for later.

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#2) On June 11, 2010 at 9:05 AM, ozzfan1317 (82.83) wrote:

Nice Post good stuff +1

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#3) On June 11, 2010 at 9:07 AM, JakilaTheHun (99.94) wrote:

Great blog, Checklist, as always!

I agree with a lot of your sentiment.  I want to buy in and buy in heavily, but the macro stuff really worries me right now; more so than it did in late '08/early '09. 

The whole "failure of Keynesian economics" thing might end up being like predictions that 'the housing market is merely suffering a correction.'  European austerity measures, combined with the structure of the Euro go against Keynesian economic thought in every way.

Keynes, being a critic of the inflexibility of the gold standard, would probably also be a critic of the inflexibility of the Euro within the various member states.  Moreover, he would probably suggest that austerity would decrease aggregate demand, exacerbate recession, and thereby, increase the debt burden of these European nations.  I might not be totally right on that; but my understanding of Keynesian economics suggests that Europe is going 180 degrees in the opposite direction.  

I don't know if Keynes was right on everything, but I'm pretty sure he wasn't wrong on everything.  Spain/Portugal scares me more than anything else right now. 

What's really unclear to me is how this all will affect the US.  Will we be able to rough it out even if the Eurozone enters a depression?  Or do we get dragged down, too?  

 

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#4) On June 11, 2010 at 10:36 AM, portefeuille (99.61) wrote:

Will we be able to rough it out even if the Eurozone enters a depression?  Or do we get dragged down, too?

Or does the Eurozone do just fine? Not entirely unlikely it will ...

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#5) On June 11, 2010 at 10:43 AM, portefeuille (99.61) wrote:

-------------

Bundesbank Raises German Economic Growth Forecasts

June 11 (Bloomberg) -- The Bundesbank raised its growth forecasts for Germany, as the economy profits from a pick-up in global demand.

“The economic recovery noticeably gained pace” after a “moderate” start in the winter, the Frankfurt-based Bundesbank said in its bi-annual economic outlook today. Gross domestic product will expand 1.9 percent this year and 1.4 percent in 2011, the bank said. In December, it predicted the economy would grow 1.6 percent in 2010 and 1.2 percent the following year.

“Main driving forces” will be exports and a positive impact from inventories, the Bundesbank said. Inflationary pressures will remain moderate “despite the euro’s depreciation,” the report said.

While budget cuts across the region may crimp economic growth, German factories are ramping up production to meet booming export orders. Still, the euro has plunged more than 15 percent against the dollar since the start of the year on investor concerns that a Greek deficit crisis will spread across the 16-member euro region and the monetary union could collapse.

...

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a similar article from December 2009.

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Bundesbank Raises German Economic Growth Forecasts

Dec. 4 (Bloomberg) -- The Bundesbank raised its growth forecasts for Germany, Europe’s largest economy, saying the outlook for the next two years has “brightened perceptibly.”

Gross domestic product will rise 1.6 percent next year and 1.2 percent in 2011 after dropping 4.9 percent this year, the Frankfurt-based Bundesbank said in its bi-annual economic outlook today. In June, it predicted the economy would stagnate in 2010 after contracting 6.2 percent in 2009.

“The outlook for the German economy has brightened perceptibly in recent months,” the Bundesbank said. The recovery is being driven by “extensive” monetary and fiscal stimulus,” it said, adding that exports, business investment and private consumption will gain in importance as those measures wane.

The economic revival in Germany is helping the 16-nation euro region shake off its worst recession since World War II, giving the European Central Bank room to scale back its emergency stimulus measures. The ECB yesterday said it will reduce its long-term lending to banks next year in an exit strategy that some economists say paves the way for eventual interest-rate increases in the second half of 2010.

...

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#6) On June 11, 2010 at 10:49 AM, JakilaTheHun (99.94) wrote:

Port,

Growth over the next 12 months is irrelevant.  It's after that where things begin to get iffy.  You mention that better growth forecasts for '10, but the growth forecasts for '11 are moving in the opposite direction.  

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#7) On June 11, 2010 at 10:49 AM, portefeuille (99.61) wrote:

I think "German manufacturing business" will have entered the "boom" quadrant according to the next time the ifo survey results (i.e. June 2010 survey results, to be published in a few weeks).



enlarge

(from here)

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#8) On June 11, 2010 at 10:51 AM, portefeuille (99.61) wrote:

You mention that better growth forecasts for '10, but the growth forecasts for '11 are moving in the opposite direction.

No, the Bundesbank mentions both forecasts and both have been "revised upwards" (see comment #5 above).

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#9) On June 11, 2010 at 11:08 AM, portefeuille (99.61) wrote:

also see comments #9,10 here. The gap in GDP growth rates for the U.S. and the Eurozone might not be as large as they appear were both to use the same methodology (and for a change one that does make more sense).

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#10) On June 11, 2010 at 5:53 PM, rexlove (99.55) wrote:

Great post checklist. I'm fairly bullish on the market here too - for many of the same reasons.

1.  Follow -through: As witnessed by todays market action - we had nice follow through from yesterdays big up-day. This was especially surprising considering todays weak retail numbers. I can only imagine how much more the market would have been up if the retail numbers came in at expectations or higher.

2. Sellers are done: the weak retail sales numbers did very little to get people to sell into this market. Barring any devastating news this market can only go up from here.  

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#11) On June 11, 2010 at 8:55 PM, simplemts (< 20) wrote:

2. Sellers are done: the weak retail sales numbers did very little to get people to sell into this market. Barring any devastating news this market can only go up from here.  

and what is to stop devastating news from coming... ?  Such as continued high unemployment claims, poor retail sales, leading indicators continuing down trend, housing starts down, mortgage applications down, etc. etc.

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#12) On June 11, 2010 at 10:56 PM, awallejr (79.37) wrote:

Personally I think the "euro question's" importance is over rated.  Greece restructuring debt will sink the world?  Seriously?  The only real economies of concern in Europe are Germany, France and England.  And with the Euro falling, that actually helps Germany and France.

Stronger dollar will hurt some US companies (those Euro centric), but help domestic companies.  Future profitability issues are still overall positive.

This is a SLOW recovery, which I have argued since day 1 of the crash.  It will take time, and over time things are going up at least.

The easy money has been made.  You aren't going to see GE and DOW at $6.  But that doesn't mean you can't find value, or start looking at stocks hitting the 52week low list for longterm turnaround plays IF you are patient.  Sheesh look at the integrateds, for example,  Many are flirting near levels when oil was selling for $30 (i.e., TOT, COP).  Thank BP for that I suspect.

Personally I have been sticking with dividend yielders, and there really are plenty to choose from with nice yields:  T, VZ (yeah they aren't appreciating but telecoms are late to the cycle not early), PVR, PSEC, ARCC, HTGC, MPW, AB, GLAD, JPS, BX, AGNC, even SCCO just to rattle a bunch off the top of my head.

Now should interest rates start heading higher then some of these picks should be replaced, but I really do take Bernanke's statement of keeping rates low "for an extended period of time" to mean exactly that.  Years not months.  Because it is going to take years to absorb those lost jobs back into the economy.

There will ALWAYS be things to worry about.  ALWAYS.  But that doesn't mean the bull is dead.  It is just going to be slower.

I am still in the "this is a needed correction" camp.  Of course time will tell if I am right or wrong.  But I am investing as if I am right ;p

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#13) On June 11, 2010 at 11:27 PM, dragonLZ (99.41) wrote:

Relax people. THE CORRECTION IS OVER. We reached the bottom (S&P at 1040) on 5/25/10.

I'm serious.

p.s.

Beyond that, several of my favorite names have basically been dead money for a really long time:  RJET, CNO, and HIG are these.  XL too.  

checklist, I know much less about the stock market and investing than you do, but I think you just need to be patient. I think CNO and HIG are very good stocks. XL is good too (I'm not sure about RJET). Their time will come again. Sooner than you think. JMO.

Good Luck!

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#14) On June 11, 2010 at 11:39 PM, Momentum21 (41.20) wrote:

checklist - give it some time man...2009 was once in a lifetime...a pick like RJET or NBG is not going to get resolved overnight and my guess is if the Euro stabilizes some picks like that will outperform in a big way through the balance of this year (I own both!). 

the global currency volatilty caused a good part of the 2009 US equity liftoff and has in turn led the charge on this correction. 

I bought heavy into the teeth of this correction and it has made me ill along the way. We definitely have challenges to contend with but I am a believer that recovery has set in and we will see slow but steady job improvement. 

Call it what you want but I am long and I at least believe that we have time on our side. Hope all is well man...good to hear from you. 

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#15) On June 12, 2010 at 12:07 AM, awallejr (79.37) wrote:

Port I do consider you as THE most chart and link happy person on this site but after a few scotches hell if  I can understand that chart in comment #7.

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#16) On June 12, 2010 at 1:58 AM, Tastylunch (29.35) wrote:

>>Beyond that, several of my favorite names have basically been dead money for a really long time:  RJET, CNO, and HIG are these.  XL too.

This is the primary peril of value investing. You may find stocks you know that the market has priced improperly, but you critically don't know when it will price them fairly! It can take years and years. Only during the first year of a bull market do you see lots of quick action in value stocks reliably. At least in my experience value investing typically takes a lot of patience.

To make matters worse you also don't know if the market will get even more mistaken in the mean time...

anyway that is one of the allures of momentum trading.Which has its' own fault and perils to be sure, but done correctly it does provide nearly instant gratification.

I feel your pain this year checklist. I have done ok this year not great, but I also do know year 2 of any rally is really tough to navigate. 2004 was one of my worst years ever.

JakilaTheHun

>>What's really unclear to me is how this all will affect the US.  Will we be able to rough it out even if the Eurozone enters a depression?  Or do we get dragged down, too?

If eurozone enters into a depression I am 99% confident we will quickly follow. Many of our biggest companies have significant cash flow from eurozone, but it's not as if that would be the primary problem. Our trade balance would rapidly worsen and China would panic as they are very heavily dependent on the EU market. Goodness knows what they would do. Something drastic I'd fear.

a euro falling to parity would be severely disruptive to the entire global economy. We are just all too interconnected to not have any one major economic engine drag down the rest. Or conversely pull up.

I'm not certain eurozone will actually fall into depression though or have to devalue that much. I still think they have a chance to evade it but I'm not that hopeful given their single currency/multiple gov't problem.

 If I were the Germans I'd be missing the Deutschmark about now :(

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#17) On June 12, 2010 at 2:28 AM, checklist34 (99.72) wrote:

momentum, my comments about mistakes was not related to the ultimate fate of those stocks, but to the fact that I jumped in without really digging deep into the nitty gritty of it all. 

Awall & Porte, good comments as always.

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#18) On June 12, 2010 at 2:54 AM, Tastylunch (29.35) wrote:

Hmm this is interesting

Jim Rogers is now cautiously bullish on the Euro, due to over sold conditions

http://jimrogers-investments.blogspot.com/2010/06/jim-rogers-it-looks-like-now-is-good.html

considering his relationship with Currency killer George Soros and his own track record that is an opinion worth noting imo.

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#19) On June 12, 2010 at 3:31 AM, checklist34 (99.72) wrote:

tasty, yeah i was not feeling forlorn about it, just being appropriately (imo) self critical in observing that I haven't exactly been a picture of market perfection the last few months.  lol

Part of the reason for that is just disinterest and lack of real participation, which I am about to blog about.  

momentum again:  the last jobs report wasn't actually that bad.  ultimately, its hours and wages that are more important than the jobs #, I hear what you're saying.  

 

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#20) On June 12, 2010 at 3:43 AM, checklist34 (99.72) wrote:

CAPs is at this point in time, besides the yahoo message boards (which are their own breed of insane, and it tkaes a long, long time to sit and dig through all the jibberish to get to some real content...) the only place where you can read a reasonably balanced view on markets and hear bullish and bearish commentary. 

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#21) On June 12, 2010 at 3:55 AM, checklist34 (99.72) wrote:

tasty, I saw that one also.  Rogers is bullish on the euro.

rumor has it (from Doug Kass on real money silver) that Goldman Sachs is long the euro like nobodies biz

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#22) On June 12, 2010 at 10:33 AM, portefeuille (99.61) wrote:

a euro falling to parity would be severely disruptive to the entire global economy.

I don't think so. Have a look at these charts (provided by the most chart and link happy person) ...



enlarge

 

USDDEM.



enlarge
 

(from here)

 

Using 1.95583 DMark as a "proxy for the euro prior to its introduction" (1.95583 DEM were converted to 1 EUR when the euro was introduced) you get

1 USD = 1.372 DEM -> 1 "EUR" := 1.95583 DEM  * 1 USD / 1.372 DEM ≈ 1.4255 USD and

1 USD = 3.363 DEM -> 1 "EUR" := 1.95583 DEM  * 1 USD / 3.363 DEM ≈ 0.5816 USD.

So as the world apparently had no problem dealing with "EUR"USD of around 0.5816 in February 1985 it is unlikely to end when EURUSD is around 1.

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#23) On June 12, 2010 at 10:34 AM, portefeuille (99.61) wrote:

If I were the Germans I'd be missing the Deutschmark about now :(

I am German and I don't.

 

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#24) On June 12, 2010 at 11:16 AM, portefeuille (99.61) wrote:

#15

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The Ifo Business Climate is a widely observed early indicator for economic development in Germany. It is based on ca. 7,000 monthly survey responses of firms in manufacturing, construction, wholesaling and retailing. The firms are asked to give their assessments of the current business situation and their expectations for the next six months. They can characterise their situation as "good", "satisfactorily" or "poor" and their business expectations for the next six months as "more favourable", "unchanged" or "more unfavourable". The replies are weighted according to the importance of the industry and aggregated. The balance value of the current business situation is the difference of the percentages of the responses "good" and "poor", the balance value of the expectations is the difference of the percentages of the responses "more favourable" and "more unfavourable". The business climate is a mean of the balances of the business situation and the expectations.

An example to illustrate how the balance values are calculated:

Of 100 responding firms, 40% appraise their business situation as satisfactory, 35% as good and 25% as poor. The firms that assessed their situation as satisfactory are considered to be "neutral" and do not affect the results of the business-situation appraisal. The two remaining percentage values (35 - 25) are now balanced. The resulting value of 10 percentage points is the business-situation appraisal, i.e. the first component of the business climate in the form of a balance. The six-month expectations are calculated the same way.

...

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(from here)

 

So to get a point inside the "boom" quadrant the number of respondents saying saying that their "current business situation" is "good" must be greater than the number of respondents saying  that it is "poor" (resulting in an x-value greater than zero for the point in the chart) and the number of respondents saying saying that their "expectations for the next six months" are "more favourable" must be greater than the number of respondents saying  that they are "more unfavourable" (resulting in a y-value greater than zero for the point in the chart).

So to get a "boom" result for the "manufacturing industry" June survey the balance value of the "expectations for the next six months" must be slightly higher than they were in the May survey (unless that May point is already inside the boom sector. hard to tell ...).

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#25) On June 12, 2010 at 2:18 PM, portefeuille (99.61) wrote:

than they were

than it was

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#26) On June 12, 2010 at 8:38 PM, Tastylunch (29.35) wrote:

portefeuille

>>So as the world apparently had no problem dealing with "EUR"USD of around 0.5816 in February 1985 it is unlikely to end when EURUSD is around 1

True but the currency markets are much much more tightly interwoven now than 1985. Plus in general most of the super powers balance sheets were in much better shape. Many of our economic superpowers had far lower debt to GDP levels than they do now.

I'd say 1985 is not a very useful comparison for the current currency environment.

If (and it's still a very big "If") the Euro is devalued that much in this environment there is a very good chance it would start a massive devaluing war. The potential issue here is not the raw valuation but the rather the potential speed and size of the move.

China is no position internally domestically to lose that much export competitiveness to the EU that quickly and would likely have to devalue their currency would which effects would spill over into Austrialia, Brazil and the US etc.

I know you don't like long talks but this podcast by Yves Smith (of naked capitalism) at disciplined investor I think lays out the problem  pretty well

http://www.thedisciplinedinvestor.com/blog/2010/06/06/tdi-podcast-164-yves-smith-naked-capitalism/

you can skip to about 14 minute mark for the beginning relevant part of the discussion.

anyway I agree the world would not end but a world wide slowdown in the event of collapsing Euro seems a highly likely outcome to me.

In any event I would not bet against the Euro right now, it's pretty oversold.

That's how I see it. But I've been wrong before!

If you have some additional insight into why that interpretation might be incorrect, I'm all ears.

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#27) On June 12, 2010 at 9:02 PM, portefeuille (99.61) wrote:

the currency markets are much much more tightly interwoven now than 1985.

Not sure what you mean by that. There is just one "currency market" and the exchange rate ac between currencies A and C is always determined (up to a small arbitrage opportunity) by the exchange rate ab between currencies A and B and the exchange rate bc between currencies B and C via ac = ab * bc if the currencies A,B and C are "convertible". So the market is perfectly ("up to arbitrage opportunities") interwoven.

So I guess you must mean something else. Just not sure what that is ...

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#28) On June 13, 2010 at 4:04 AM, Tastylunch (29.35) wrote:

portefeuille

>>Not sure what you mean by that.

ARGGh You're right! Holy moly that was a bad gaffe on my part.

 anyway what I was trying to get at in my befuddled sleep deprived ramblings

was that now that there is one currency for the EMU for what used to be several, that  the currency system doesn't appear to me to be as stable. It's more efficient now perhaps but less stable.

In the past if say the Franc plunged I don't think it would have as large as impact on the US dollar as the Euro would now just due to the Euro's sheer size and the fact it was part of a larger network of other currencies in the Eurozone might counterbalance it.

Now the EMU is like one big giant gold standard and I think that is the real source of their problems.  One currency but several polticial bodies and policies seem like a rough entity to keep stable.

If Greece still had the drachma their options for handling their crisis would likely be less serious for Germany et al. 

Furthermore  all the world economies are now much more tightly interwoven through trade comapred to 1985.

In my unprofessional opinion it's the degree of interconnectedness that is the problem, just as it was for the banks (which probably could be more rightly be said to be too interconnected to fail instead of too big to fail). A major shockwave in Europe will transit the globe extremely quickly.

Just my two cents that hopefully were more logically coherent this time.

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#29) On June 13, 2010 at 10:40 AM, portefeuille (99.61) wrote:

#28 Yes, makes more sense now, hehe ...

And people often talk about "what is going on in the currency markets" and on google "currency market" wins only slightly vs. "currency markets", but at least wikipedia appears to agree that is more or less just one.

http://en.wikipedia.org/wiki/Foreign_exchange_market

Okay, so let's put Germany, The Netherlands, Belgium, Austria and Luxembourg into one group (A, "D-Mark bloc") and the rest of the current "eurozone countries" into another one (B).

The exchange rates between currencies "officially used" in countries in group A were almost constant between 1984 and 1998 and the exchange rate between those currencies and the euro was fixed "on December 31, 2008" (see here).

The GDP of group A has been larger than that of group B since at least 1984 (I think) and trade between countries in group A and countries not in group A was certainly larger than that between countries in group B and countries not in group B.

charts of the exchange rates between some European currencies including the ECU (later called euro, see here, also see here).

 



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(from here)

for the currency codes see here.

http://en.wikipedia.org/wiki/ISO_4217#Obsolete_currency_codes

also see this for some history.

http://www.aede.eu/traineurope.html

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#30) On June 13, 2010 at 11:25 AM, portefeuille (99.61) wrote:

Germany, The Netherlands, Belgium, Austria and Luxembourg

Germany, France, The Netherlands, Belgium, Austria and Luxembourg

 

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#31) On June 13, 2010 at 11:35 AM, portefeuille (99.61) wrote:

#29 



enlarge

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#32) On June 13, 2010 at 11:46 AM, portefeuille (99.61) wrote:

That last chart is the one that shows how the group A currencies were more or less fixed "long before" the introduction of the euro. So the "EUR"USD rate of 0.5816 in February 1985 is still relevant. If the EURUSD exchange rate drops to 0.5 or so you can start worrying again. Right now the "weak euro" is great for the eurozone ...

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#33) On June 14, 2010 at 1:23 AM, Tastylunch (29.35) wrote:

>>Right now the "weak euro" is great for the eurozone ...

I agree with that, I'd even go so far as to say a weak euro is a necessity the eurozone at the moment. They will need it to handle the PIIGS situation.

but a weak euro is most decidely not good for everyone else  who exports to Europe especially China.

 And that's where I see a problem. China is being crushed by high inflation, a real estate bubble in tier 1 cities and rapidly rising wages, they are quickly becoming a less competitive exporter which is the cornerstone of their economy. A weak euro only exacerbates this problem and if the euro falls enough I think they will be forced to act by lowering their own currency, which would likely spark  the US et al to follow suit. Which would the EU back where they started and would likely try to weaken the Euro further,

everyone wants to net export no one wants to import. Well it can't work that way....Both sides of the ledger must balance...

this could be a chain reaction of devaluations worldwide...

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#34) On June 22, 2010 at 12:51 PM, portefeuille (99.61) wrote:



enlarge

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