Greece Drops a Bomb on Europe

By The Sizemore Letter

What's he smiling about?

Well, the Europeans thought they had a deal.  Yet it appears that Greece had other plans.  Proving yet again that Greece is not worthy of EU membership and is incapable of handling the responsibility that comes with using the euro, Prime Minister George Papandreou threw last month’s grand debt bargain to the whims of the fickle Greek electorate by calling a referendum in January. 

The move appeared to catch all major parties to the deal–including Mr. Papandreou’s own finance minister–completely by surprise and drew harsh criticism across the board.  World stock markets collapsed on the news as investors are left to grapple with the question: What happens now?

What happens if Greek voters say “no” to the terms of the bailout? 

This is The Sizemore Investment Letter’s analysis of the possible outcomes:

  • A “No” vote will mean that aid from the various organs of the European Union would immediately cease, forcing Greece into a “hard” default rather than the negotiated “voluntary” restructuring.   Though it would be unprecedented and there is no process in place for it, Greece would most likely be expelled from the Eurozone and quite possibly the European Union itself. 
  • A “Yes” vote might preserve the fragile status quo.  But at this stage, it might not matter.  Papandreou’s move confirms Northern European (and primarily German) worst fears about Greece’s credibility as a negotiating partner.  Good faith has been shattered, and European leaders will not not risk embarrassment by trusting Mr. Papandreou or his successors again.
  • The referendum might not happen at all.  Mr. Papandreou’s own party is in open revolt over his unilateral decision and is demanded that he resign.  Of course, a snap election would throw additional political uncertainty into the mix, which–again–points towards an unruly hard default.

Greece is due to receive an €8 billion euro bailout payment in mid-November, but that would now seem to be at risk.  Why would the Europeans throw an additional €8 billion when default is now all but guaranteed? 

The next 24 hours will be telling.  If Papandreou resigns and is replaced by a “national unity” government, there is an outside possibility that last week’s deal can be cobbled back together.  But at this point, it is more likely that Greece is thrown to the wolves and left to fend for itself. 

If Europe’s leaders move quickly and send an unambiguous message that the crisis stops with Greece, Europe can avoid a meltdown.  But it will involve a rigorous implementation of the remaining planks of last week’s agreement.  The European Central Bank will have to step in to support the Italian bond market and to act as a lender of last resort to Europe’s banks.  And the monies that were to be used to prop up Greece should be used to support Europe’s banks, which will still need to be recapitalized. 

In the meantime, get ready for more volatility.  And you can forget about the “risk on” trade that I mentioned last week.  While I recommend using any volatility as an opportunity to accumulate high-quality European and American dividend payers that will survive Armageddon–crème de la crème blue chips like Sizemore Investment Letter recommendations Unilever (NYSE: $UN), Telefonica (NYSE: $TEF) and Nestle (NYSE: $NSRGY)–I cannot in good faith recommend more speculative sectors like financials or commodities. And once the dust settles–which might be a while–you might also revisit those Three Greek Stocks to Consider AFTER a Greek Default.

Hang on tight, dear reader.  2011 promises to have a wild finish.

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How Do You Get from Dow Theory to Elliott Wave Analysis?

Happy 160th Birthday, Charles Dow

By Elliott Wave International

If you are interested in Elliott wave analysis, odds are that you have also heard of Dow Theory, whose best and longest-lived proponent is Richard Russell. (Best wishes to Richard as he recovers his health.) This excerpt from Prechter’s Perspective explains how Elliott wave analysis and Dow Theory are connected. We wanted to run it now in honor of the 160th anniversary of the birth of Charles Dow, which the Market Technicians Association celebrates on Wall Street on Thursday, November 3, 2011.

* * * * *
Excerpted from Prechter’s Perspective, 2004

Q: What was R. N. Elliott looking for in the stock market data in the late 1930s? Did he have a model or theory about price behavior?

Bob Prechter: Elliott had no basic premises, just a mind that was open to the idea that the market might be patterned, which he may have adopted from the then relatively new Dow Theory, which was a set of very few and far more general observations about market behavior. Though the Dow Theorists formed only very rough concepts, they broke ground, tremendous ground, in merely coming up with their observations that market behavior was non-random and tied to investor psychology. That was probably the germ of the idea that kicked off Elliott’s research.

Q: What was his procedure?

Bob Prechter: He did what every good researcher must do. First, he recorded the data that reality provided. He looked at the movements on chart paper and wondered, “Can I find forms that occur over and over again?” His answer was, “Yes.” He found that they occurred on hourly moves, daily moves, weekly, yearly. He even plotted moves that were decades long and noticed that they were following the same form. Likewise, the specific market did not matter. It could be the stock market, the gold price, interest rates or any other market. Then he organized the data, which was his talent. He began recognizing recurrences in the data, so it became clear that there were indeed repetitive patterns, which he ultimately organized into concepts.

Q: What exactly is Dow Theory and how does it relate to the Wave Principle?

Bob Prechter: The Dow Theory was developed by Charles Dow in the late 1800s. One of the tenets of Dow Theory is that, in general, a primary bull market runs in three upward phrases. In the initial phase, there is a lot of disbelief, and the markets are at very depressed levels. The middle phase is a kind of recognition phase when people begin to realize that the fundamentals are improving, and the markets are rising in harmony with them. The final stage is when the euphoria and the gambling come in. Elliott discovered that this basic formula of three steps up, separated by two intervening corrections, making five waves, was applicable not just to a primary bull market but to any degree of advance. He then observed that corrections take a different path: a three-wave shape or variation thereof. Then he observed that these cycles were not independent of each other but part of the market’s larger structure, which in turn developed according to these principles.

Q: It is through Charles Collins that we know about the genesis of the theory. He more or less sponsored Elliott’s introduction to Wall Street and helped him think through various aspects of becoming professional. In fact, he was the ghostwriter of a good deal of Elliott’s first important book, The Wave Principle, which came out in 1938. Did Collins make any contribution to the theory itself?

Bob Prechter: Yes. The catalyst for tying the Wave Principle to grander natural forces was Collins’s discovery that the number of waves in Elliott’s idealized pattern reflected the Fibonacci sequence. Collins wrote Elliott during the development of the theory and said in essence, “You ought to read this book by Jay Hambidge on Fibonacci ratios and spirals, because I noticed that when you count the waves through lower and lower degrees of trend, you find the Fibonacci sequence.” That sent Elliott off on the track to his grand conclusion. It is comforting to know that he did not start with the Fibonacci sequence or a theory based on it and then force nature to it. Nature showed its law, and these two men observed it.

Q: Is Fibonacci really that crucial to the theory?

Bob Prechter: It is not crucial to the what, but it is crucial to the why. First, Elliott observed the Wave Principle operate. Then he took the next step and asked, “Why does it exist?” He concluded that there must be some progression that human beings go through as they move overall from a state of deep pessimism to extreme optimism and back again, because they continue to trace out these patterns. His eventual conclusion was that it was a natural law of human behavior, that human beings were part of the natural world, and just like trees and wolves and lemmings and anything else you can name, they have certain ways of acting. It shows up in the charts vividly, making it clear that mass psychology is structured. The unifying conclusion, that mankind’s progress follows a law of nature exhibited by countless forms of life, is a profound and reasonable explanation that fits the facts.

Learn about R.N. Elliott’s Wave Analysis with The Basic Tutorial — Free from Elliott Wave InternationalNow you know how R.N. Elliott did his research. Next, learn how to analyze price charts using his form of analysis. The Elliott Wave Basic Tutorial is a 10-lesson comprehensive course with the same content you’d receive in a formal training class — but you can learn at your own pace and review the material as many times as you like!

Get 10 FREE Lessons on The Elliott Wave Principle that Will Change the Way You Invest Forever >>

This article was syndicated by Elliott Wave International and was originally published under the headline How Do You Get from Dow Theory to Elliott Wave Analysis?. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Forex Market Outlook 11/1/11

Do you remember last week when I said that with regard to the Euro debt crisis resolution, the devil is in the details? Well it looks like that prognostication was prescient as new information is coming to light. At the time I noted that while the plan sounded good, how they would actually enact it would be more important. Now there is sentiment that the process could be derailed as unforeseen issues are starting to materialize.

Case in point; in Greece yesterday the government announced that they would be putting the debt deal to referendum and would be holding a confidence vote for Parliament. This is dangerous for two reasons, as for starters this unpopular deal could be unwound by a public vote and then secondly, the majority who voted for it could be replaced by those who are against it thereby rendering it ineffective. While this is a nice idea by the government to be democratic, it is very bad for the markets as now there is increased uncertainty about the deal. If politicians put every unpopular decision to referendum, nothing would ever get accomplished.

The second potentially disruptive news from the Euro debt deal is that China is publicly stating that they will not bail out Europe so their participation in the expanded EFSF and the SPV may be limited which would reduce the firepower the Europeans thought they had. This is not a good thing as bond yields continue to rise, most notably in Italy.

Speaking of China, they reported lower than expected PMI manufacturing figures posting a reading of 50.4 vs. an expected 51.8. This could mean that China is slowing and if they continue to slow, where will global growth come from?

This feeling was not lost in Australia, as the RBA took action by lowering interest rates by 25 bp citing, you guessed it, slowing global growth and a reduced outlook for inflation. Australia has a keen insight as to the health of China as China is the largest importer of Australian raw materials so the Aussies get a little bit of an advance warning.

However growth is not slowing everywhere as in the UK, GDP figures came in better than expected posting a gain of .5% for the quarter vs. an expectation of .3%. While this is definitely not robust growth by any means, the repairing of the UK balance sheet through government austerity may be better in the long run. PMI figures however came in lower than expected posting a reading of 47.4 vs. an expected 50 with index of services lower as well.

So there is massive risk aversion taking place in the market in a continuation of yesterday’s afternoon sell-off. Stocks are down around the globe, with the German index off some 4%. US stocks are set to open markedly lower, and commodities are selling off as well with gold crashing through $1700 and oil retreating below $90.

Japanese yen intervention appears to have had little effect vs. the Euro as it is trading back to pre-intervention levels, though it is maintaining weakness vs. USD just above 78.

US ISM manufacturing figures are due out later this morning though they are unlikely to produce enough gains to reverse this market.

Today’s selling may make tomorrow’s FOMC meeting interesting as Bernanke yet again attempts to jaw-bone markets higher with his free-money pump. But will it work this time? Is the hint of QE3 enough to overcome all of the global turmoil and slowing growth?

At some point, Bernanke’s rhetoric is going to backfire horribly and it is just a matter of time before the markets realize that free money isn’t the answer. The global economy is in jeopardy of a major slowdown and every threat of this occurring send the market spiraling lower.

The Euro debt crisis resolution was supposed to calm the markets, not inflame them further so someone needs to tell Greece to get their act together. Will Bernanke save the day tomorrow or exacerbate the crisis further?

Stay tuned!

By Mike Conlon,

How to Pay Less and get More: Discount Broker vs Professional Management Fees

By Ulli G. Niemann

How do you invest? What do you really pay? At the end of the day, what are your real results? These are questions smart investors should be asking themselves (but usually don’t). In this era of more fees, misc. charges, holding periods and back end redemptions, even at discount brokers, how are you really making out?

Working with a new client brought this all to my attention. I know what I found may not apply to everyone; however it will apply to many and very likely apply to you.

I need to preface this by saying that, unlike the majority of registered investment advisors, I have built my practice over the past 15 years by dealing with “small” investors. Many of them are first timers because my minimum account size is only $5,000.

I targeted this group because I enjoy the educational part of my business. A happy side benefit has been that by providing million dollar service to these so called “small” investors, they naturally refer me to parents, relatives, friends and business associates, often with considerably more assets than the original client. What a happy consequence.

Having set the stage, here’s what happened with my new client who we will call John. John was 26, newly married with a one year old son. His wife was taking care of the child and John had a good full time job. After selling his house in California and moving to Florida he had $6,000 left for starting a long-term investment program.

Though he had been reading my newsletter for about a year, John decided to manage his 401k on his own. It was a noble effort but provided less than desirable results.

He then attempted to set up a brokerage account at a major discount broker. With his $6,000 he was told that the quarterly fee would be $45, and, of course, if he sold any mutual fund within the first 180 days, there would be an early redemption fee.

$45 per quarter would be equal to an annual fee of 3% of his starting balance. John called me somewhat frustrated and said that he’d be willing to set up an account with me, but how would it make sense if in addition he’d have to pay my advisory management fee?

That was a good question because it certainly doesn’t make sense to have an account in any type of market environment and pay about 6% in fixed annual fees.

However, what John didn’t know was that if you have an account with a registered investment advisor who is affiliated with custodial broker, the fee structure changes.

What did that mean to him? It meant that I opened the account for him as a new client. He now has no annual fees, other than my management fee, and his 180 day holding period for mutual funds is reduced to 90 days, minimizing, if not eliminating, the likelihood of an early redemption fee.

The net result was that he would receive the benefit of my experience-which he already trusted based on my track record of pulling clients out of the market in October 2000-and it would cost him no more, and likely less, than his discount brokerage account.

Needless to say, John was very relieved. In essence, he traded broker garbage fees for professional management at no additional cost to him.

And, since he itemizes his deductions on his tax return, all fees paid are tax deductible, which is just an added bonus to factor into the equation.

It turned out to be an all around win-win situation for John. I encourage you to review your situation and see if what looks like a discount in fees is actually costing you a premium.

© Ulli G. Niemann

Ulli Niemann is an investment advisor and has been writing about objective, methodical approaches to investing for over 10 years. He eluded the bear market of 2000 and has helped countless people make better investment decisions. To find out more about his approach and his FREE Newsletter, please visit:

Central Bank of Kenya Hikes rate 550bps to 16.50%

The Central Bank of Kenya upped its benchmark lending rate by 550 basis points to 16.50% from 11.00% previously, and raised the Cash Reserve Ratio 50 basis points to 5.25%.  The central bank Governor, Njuguna Ndung’u, said: “Inflation continued to rise while exchange rate volatility persisted in October 2011. Consistent with the monetary policy stance taken by the last MPC meeting, there is therefore a need for further tightening of monetary policy to tame these inflationary pressures and stabilize the exchange rate.”

At its previous meeting the CBK increased the interest rate by 400bps to 11.00%, after raising 75bps in September, and previously increased, and subsequently decreased the discount window rate by 75 basis points to 6.25%.  The Kenyan central bank last increased the benchmark lending rate by 25 basis points in May this year.  

Kenya experienced annual headline inflation of 18.91% in October, up from 17.3% in September, 16.7% in August, up from 15.5% in July, and up sharply from 9.19% in March this year, according to inflation data from the Kenya National Bureau of Statistics.  The Central Bank of Kenya has an inflation target of 5 percent.  

Kenya reported seasonally adjusted GDP growth of -4.6% in Q2, compared to +2% in Q1.  
A Kenyan Ministry of Finance official noted that Kenya is expected to record economic growth around 5-5.5% this year, and 6% next year.  

The Kenyan Shilling (KES) has weakened about 23% against the US dollar so far this year; the USDKES exchange rate last traded around 98.4.

Gaia’s Sullenger Says Buy Gold Shares, Soft Commodities

Nov. 1 (Bloomberg) — Coast Sullenger, managing director at Gaia Capital Advisors, discusses commodity prices and his recommendation of gold shares and agricultural commodities. He speaks from Geneva with Linzie Janis on Bloomberg Television’s “Countdown.” (Source: Bloomberg)

Bank of Uganda Lifts Rate 300bps to 23.00%

The Bank of Uganda raised its new monetary policy interest rate (the central bank rate [CBR]) by 300 basis points to 23.00% from 20.00% previously.  The Bank also raised the rediscount rate to 28.00% and the Bank Rate to 29.00%, by the same margin.  Bank of Uganda Governor, Emmanuel Tumusiime-Mutebile, said: “The Bank of Uganda expects that inflation will peak in the coming months and will then decline during 2012, with core inflation reaching single digit levels at about the end of that year. Core inflation is projected to fall further to the Bank of Uganda’s policy target of 5 percent in the medium term. However, should upside risks to inflation increase, monetary policy will need to be tightened further.”

Previously the Ugandan central bank increased its interest rate by 400bps to 20% in October, after hiking 200bps in September, and 100bps at its August meeting, and previously setting the new central bank rate at 13.00% at its June meeting.  The Bank only recently began using the 7-day interbank rate to influence inflation, also commencing official targeting inflation; the Bank previously announced an inflation target of 7%, and noted it has a 5% core inflation target in its September press release.  

Uganda reported annual headline inflation of 30.5% in October, up from 28.3% in September, 21.4% in August, 18.8% in July, 18.7% in June this year, 16% in May, and 14.1% in April, while core inflation was 30.8% in October.  
Uganda reported annual GDP growth of 6.3% in the fiscal year to June, compared to 5.5% in the same period last year.  

The Ugandan shilling (UGX) has depreciated by about 14% against the US dollar so far this year; the USDUGX exchange rate last traded around 2,635, off from the highest (2,885) on record (against a low of 1570 in 2008).

Papandreou’s Dangerous Game

At first glance it is difficult to understand what could possibly have motivated Greek Prime Minister George Papandreou to announce a public referendum on the Greek debt deal. Any sense of stability that had been achieved by last week’s summit meeting of Eurozone leaders, and the news of a deal to prevent the region’s debt crisis from spreading, has been irretrievably lost.

In order to qualify for emergency funding, Greece was tasked with getting its financial house in order. The so-called “austerity” measures to accomplish this goal have centered on the imposition of new taxes together with deep spending cuts. Public opposition remains vehemently opposed to these actions and it is far from a certainty that a referendum would support further efforts to contain the deficit.

If Greek citizens were to refuse to support the referendum thereby failing to meet the country’s obligations, would the European Union turn its back on Greece and cast it adrift?

This is difficult to say with certainty, but there is a growing sense that Greece’s continued membership within the Eurozone is growing more tenuous. A public vote rejecting efforts to impose a greater degree of fiscal responsibility would surely be seen as poke in the eye to those countries fronting most of the money that has enabled Greece to pay its bills for the past year.

Stronger Mandate or Economic Blackmail?

So, what exactly does Papandreou hope to accomplish with this unnecessary action? Is Papandreou truly concerned with giving the public an opportunity to participate in deciding the country’s future or is this simply an attempt to avoid meeting the terms and obligations of the Eurozone’s debt plan?

If it is the latter, then Papandreou is counting heavily on the Eurozone’s fears that allowing Greece to default would result in unacceptable damage for both the region and the euro. On this, Papandreou may be skating on thin ice.

Having already provided much of a 130 billion euro bailout, Eurozone officials may opt to simply cut their losses. It would be a straightforward matter to redirect money ear-marked for Greece to the banking system to help cover the large Greek exposure many banks have on their books. By insulating the financial system from further losses in this manner, the need to respond to Greece’s pleas for more cash is significantly diminished.

Such a forceful action may also send a message to other countries like Portugal and even Italy who may harbor similar thoughts that the EU will never allow them to default.

The likely date for a referendum is early next year but there is another event this week that could change the Greek landscape before then. A confidence vote is scheduled for this Friday and Papandreou’s precarious hold on power is fading quickly. Two member’s of Papandreou’s government have vowed to sit as independents while a collection of government members have called on Papandreou to resign in a letter sent earlier today to the media.

No matter the outcome of Friday’s vote, one thing is certain – the possibility of the rally following last week’s Eurozone summit extending into the new year has been dashed.


Forrester Says Japan Yen Intervention Impact Won’t Last

Nov. 1 (Bloomberg) — David Forrester, a Singapore-based currency strategist at Macquarie Group Ltd., talks about the prospects for Japan government intervention in the yen and the outlook for the currency. Forrester also discusses the Australian dollar and Reserve Bank of Australia monetary policy. He speaks with Susan Li on Bloomberg Television’s “First Up.” (Source: Bloomberg)