3 Reasons You Must Pay Attention To Europe's Economy

November 23, 2011 by FreeCharts

Greetings!

We planned on getting long the bond market should it break 140 00 this past week. It appeared to me the December bonds were in a range between 140 00 and 143 00. In hindsight, which as you know is always clear as a bell, the market went to 143 04 just 5 days ago and we should have shorted the market.

The problem being the market did not come down to 140 00 but rather came down to 140 02 and then went back up. Had we stuck to our plan and looked to get long, we would find ourselves, as we do now, still on the sidelines awaiting a lower low.

I mention this to show you that you can have a plan, wait on the market, and it still does not cooperate. We were close to getting what we wanted, but as they say, no cigar.

When you do your analysis, have your trade scripted and stick to your guns. Getting into a market for the sake of being in removes credibility and confidence in your analysis.

Wait for the market to provide you the trade you want. Don't chase the markets and update your analysis to fit your trading. Instead, do your analysis and wait for the market to fit your pre-determined trading strategy. You may miss a few as I did this past week in the bonds but remember, it is better to wish you were in a trade than to wish you were out of a trade.

Patience and discipline will, in my opinion, improve your trading and give you more peace of mind and confidence in the current trade and future trades. When we start making excuses for the market just to get in, future trades will likely become easier and easier to talk ourselves into positions we probably should have watched from the cheap seats.

This may still not provide you the returns you desire, but while in a trade you will find life much more enjoyable. As traders, we have to overcome the emotions of greed and fear. Scripting trades and writing them down before coming close to executing will provide you a psychological advantage over these two account killers in my opinion.

Here Are 3 Good Reasons You and I Should Be Concerned What Happens In Europe

First, Europe imports three times the amount of US goods as China. If their economy suffers more and their banks begin to fold up, the Europeans will be buying a lot less American goods. What do you think that will do to American corporations and the American worker producing those goods? Exactly, corporations will suffer and by extension so will American labor.

This degrades the employment cycle in America and increases the burden on a cash strapped government. The government provides unemployment and other benefits to the unemployed so the employed are going to be asked to pay higher prices for their goods and higher taxes to feed and house their neighbors.

Secondly, many of the European banks have taken on tremendous exposure to their home country's and their European neighbor's sovereign debt. At present, these debts are not required to be marked to the market so they can and have assigned 100% value to the debt.

If Greece, Italy, or even France default on their debt, these mega European banks will crash. Many of the large American banks have sizeable exposure to European debt. MF Global, once the world's largest clearing firm,most recently under the leadership of the lawyered up Jon Corzine, just blew up because of positions they had taken in European debt. Why they were in it in the first place is beyond comprehension. They are a clearing firm and should clear transactions in the brokerage business. They really had no business getting into the sovereign debt game just to tweak profits. You have heard the old saying Bulls make money, bears make money and pigs get slaughtered. MF Global got slaughtered.

With MF Global being the first major US casualty to the European sovereign debt crisis, if things in Europe worsen, expect to see more fall out.

Finally, the debt itself. When it was finally recognized that Greece was in trouble, their debt to GDP was 116%. Truth be told, Pimco saw this coming years in advance and sold all their Greek exposure knowing it was only a matter of time before the world recognized Greece was no longer viable without substantial outside help. A little insignificant country like this will likely end up costing over $1 trillion and even that may not fix it.

What many may not recognize, acknowledge, or may have not been aware of, Pimco also sold all their holdings in US debt in the past 30 months for the exact same reasons as I understand.

Now we see Italy dancing on the griddle a bit. Their debt to GDP is nearly 125%. That is more than the Greek debt when they started imploding.

If this debt crisis continues to spread, and I say a big IF here, American banks will not avoid some impact. Our major banks have big exposure. The one thing that has helped American banks thus far, due to American banks who had underwritten insurance guarantees to induce investors to believe there was virtually no risk buying European sovereign debt, the debt for Greece and future "defaulters" is being written down rather than a 100% default. Being written down relieves American banks of the obligation to make investors whole.

For the moment this may save American banks, but what happens when more debt needs to be raised? No one will trust the underwriting and the Europeans will have to provide much higher yields to induce investors.

With competition for debt money, investors who may have been thinking of buying down graded American debt may buy European debt. Sure they may be taking on more risk and receive higher yields for it. On the other hand, with the dilution of the US Dollar, are they really taking on more risk?

Being paid back in diluted dollars worth 60% or 70% of the dollars invested in effect is the same as a Greek write down.

One advantage America has over Greece,Italy and France is the ability to print or create more money. Since they do not have that opportunity, they are not able to inflate their way out of debt. We can but the result long term is a destroyed currency.

How can we benefit as traders? As I have pointed out many times, as the Euro devalues, the dollar will go up. When that happens, the American stock market should go down, the bonds and metals should ultimately go up. The rise in the dollar will be temporary in my opinion and will provide a wonderful opportunity to short the stock market, the bond market, and stay long the metals.

With the CRB hitting cycle lows, I believe we could be in for another 24 to 36 months of bull market in commodities. This should provide plenty more opportunities than we can take advantage of.

Thanks again for taking the time to go through our newsletter. Next week I will be focusing on technical analysis and ways you might integrate these ideas into your trading. Please test them on paper before risking a nickel. On the left hand side of today's newsletter are links to pages in our website that will provide quotes, charts, and a great deal of information on virtually any stock, commodity, forex pair, mutual fund, or ETF.

Sincerely,

Robert Biggs
FREECharts.com
Robert@AmericanFutures.com