Is Greece, Bear Stearns

As I write this, the Euro $EURUSD short squeeze is percolating, hedge fund managers who have record short positions in the Euro will be scrambling for the exits today and tomorrow.  I called a short term top in the US Dollar $USDX this weekend, I’m confident in my call there.  It’s time to start looking at rotation into energy names, especially in the mid cap oil service sector.  I’m reticent to look at gold and other materials plays just yet, I think they need more time, but then again, the gold trade has been hard and the boat may have already left without me.

The situation revolving around Greece is starting to feel eerily similar to that of Bear Stearns mid 2007.  As we know now, Bear Stearns was really only the tip of the proverbial ice berg when it came to the amount of crap the banks were in, the fundamental picture of the housing market, and the losses yet to come in many asset classes.  The panic selling in the equity market during the Bear Stearns crisis was heavy and dramatic.  You may not remember it well now, because of the “liquidation event” that took place during the Lehman Brothers crisis which dwarfed it in scope and scale, but it really was a fearful time.

And when it was over, many sounded the all clear siren.  It seemed as if we had been through a crisis and come out the other side, those who had bought the dip would be rewarded for their bravery and view that the Bear Stearns event was in fact the singular event of the housing sell off.

This was obviously not the case.  Bear was in fact just the beginning, it was the first casualty, it was the warning bell that should have been ringing in everyone’s head.  The housing market was broken, the economy was cracking, and if you looked under the hood, market technicals were deteriorating even after the recovery from the Bear Stearns sell off.

Fast forward to today.  We have known for some time that there are fundamental cracks in the sovereign debt market, similar to the view held by many in early 2007 regarding the housing market.  We got a shot across the bow in late 09′ in the form of Dubai.  And now, in early 2010 we have seen a real crisis in Greece which has taken the equity market at one point 10% off its highs, the Bear Stearns crisis sold us off a little more than 11%.  From a technical perspective these two events seem to have produced a similar pattern, and now, the equity markets have recovered and look poised for an assault on the highs.  Back in 07′ they did eventually make new highs, but on lighter volume, breadth, momentum, and many other technical indicators.  As the market recovered and investors breathed a sigh of relief that Bear Stearns was behind us and taken care of, the iceberg sat submerged.

It’s time now to think about Greece in terms of Bear Stearns.  Is Greece the first punch to the gut in a larger fight as was Bear, or is it a singular contained event?  We know there are other nations in bad shape economically and which have rising debt to GDP ratios, the PIIGS.  And back during the early stages of the housing crisis we knew there were other sick banks and hedge funds.  How far will this crisis spread and is it a systemic issue as was the subprime mess of the US housing market.

I don’t have these answers, and to be honest, I’m not qualified to be examining the sovereign debt market closely.  I will be doing an extensive amount of reading over the next few weeks on this topic and I urge you to do the same.  Many believe that commercial real estate will lead the next leg down, and although I am fundamentally bearish there, I think the government has the situation contained.  The sovereign debt crisis though may be bigger than anyone can handle, and it may be in its first stages.  I need to do a lot more work here, and will be keeping a close eye on what’s under the market’s hood over the next few months as we test the highs.

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