Notes From Underground: Spanish Election Provides No Surprise

As the polls expected, the Spanish election offered no surprises as the Center Right Popular Party appears to have attained an outright majority and the socialist party has been trounced. The markets appear to want to believe that this outcome is EURO POSITIVE AND SPANISH AND ITALIAN DEBT POSITIVE BUT I WARN THAT IT AIN’T NECESSARILY SO. Did the PP win a historic election so that they can deliver MORE AUSTERITY TO THE SPANISH PEOPLE? HOW MUCH ECONOMIC CONCESSIONS ARE THE SPANISH PEOPLE WILLING TO MAKE? IF THE ANSWER IS VERY LITTLE, THEN WHAT NEXT FOR THE EUROPEAN UNION?

The outcome of the elections actually create more uncertainty than resolve any of the pressing issues and most importantly the new government will not be seated until mid-December. It is interesting that the BTP/BUND futures spread rallied both Thursday and Friday and yet the EURO did not gain much ground on the DOLLAR or the EURO CROSSES.

Some pundits were advising the buying of the BTP futures to take advantage of the high Italian yields. The idea of buying Spanish and Italian debt may be appealing and may work if the ECB is providing the short-term boost. I would not advise adding the stressed DEBT of the PIIGS to any long-term portfolios. Europe has to make some very difficult decisions about what it really wants to be and anyone who tries to catch a falling piano will be tested. Bruce Springsteen said it best:

    “Highways jammed with broken heroes on a last chance power drive

     Everybody’s out on the run tonight but there’s no place left to hide.”
***The S&Ps have opened lower tonight as it appears that the SUPERCOMMITTEE will fail to meet any type of real results on meeting the deficit reduction targets. It seems that the automatic cuts will be enacted as the 2012 elections are preventing genuine decision-making for fear of the political fallout. It is probably an even money bet that all the members of the COMMITTEE are short of equities as it seems perfectly okay that Congress can benefit from its own incompetence.
It is not certain that the SUPERCOMMITTEE is dead but that has been what the leaks that have made it into the news. Maybe if the S&Ps and DOW were to get trashed on Monday, the Washington elite would regain their focus and actually take the reins of leadership and stop worrying about reelection. A pox on both parties and their narrow-minded self-interests.
***It seems that Chancellor Merkel and Mario Draghi are the focal point of Europe for the ECB will not move to further backstop European banks until the Germans are willing to be more supportive of the ECB as the lender of last resort. German leaders want more guarantees on austerity budgets before they acquiesce to greater ECB involvement. Again, the issue is about the banks rather than the sovereigns. If there is renewed stress on sovereign debt, many European banks are going to be insolvent, especially the French banks as they are loaded with Italian and Spanish DEBT.
The German banks are also holding a great deal of sovereign debt but appear to be more insulated then the French for the moment. Just last month DEXIA collapsed and had to be absorbed by the Belgium and French states after having been given a recent clean bill of health. Things can change swiftly in a BALANCE SHEET RECESSION WORLD and all investors need to be alert, especially as we enter the HOLIDAY MARKETS.

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3 Responses to “Notes From Underground: Spanish Election Provides No Surprise”

  1. whitewavetrader Says:

    Nice piece!!

    Between the ruling elites making a buck betting agianst the system they were elected to sort out, and the MF debacle, where even guys with big years are now facing big loses, thanks to the Corzine-CME haircut, beware owning hard assets between now and year end.

    A lot of players will be in need of cash….look out below!

  2. kevinwaspi Says:

    Yra,
    Excellent piece, as usual. I am surprised though, that you have not woven the continuing rot of the CFTC-Exchange Officials lame “response” to the MF Global fall into the theme of “market uncertainties”. With the absence of clarity regarding anything coming from the G-20 (much less European Financial Officials) out of the Eurozone contagion, our own response to the fall of one clearing member firm is just unbelievable! My teaching of the differences between forwards and exchange traded futures will forever be different, given the limbo (bimbo?) way this has been and is being handled. The $600 million, $1.2 billion, “where’s Waldo” news while trading positions and collateral are still encumbered is just absolutely mind numbing! The fact CFTC and Exchange Officials did not have a “plan B” ready to run on Monday morning does not excuse the continued bumbling of what an actual “Exchange” and an actual “Regulator” should be expected to do. Where are the “occupy the executive offices” demonstrators?
    Kevin

  3. yra Says:

    Kevin–good post.The pain is all around and of course the Wahington/Wall Street connection goes unpunished.I would advise that you make Simon Johnson’s April 2009 Atlantic piece–The Silent Coup—mandatory reading.The exchange has to come to terms about the relationship between shareholders and customers and which master they are serving.The idea of pubically held exchanges and publically owned clearing firms[MF GLOBAL] in a zero interest environment needs to be examined very closely–interesting about the CFTC chairman recusing himself.

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