This week started relatively calmly. I knew the sovereign debt mess in Europe was nothing short of an Icelandic volcano just itching to erupt, but I still hoped the nearly $1.0 trillion in bailout money would have provided some cooling effect. Well, it did, but that is not from where the trouble came. Souring the already sour mood was Germany’s decision to ban, albeit temporarily, naked short selling of major financial institutions and certain credit default swaps, which first had the market wonder “Why now, when help is coming?” And then realize that Europe’s debt crisis has only just begun. As a result, the euro, Canadian dollar and most equity markets simply spiraled down the toilet.
The message behind Germany’s naked short selling ban was clear — speculative assault on the euro-zone, its currency and certain debt default financial instruments is not acceptable. The thing about naked short selling is that it is highly speculative and very aggressive because it means the short seller is rushing the transaction before even checking if the securities could be borrowed first.
It seemed that Germany acted out of desperation, which is probably true, too. But whether that was the case or not mattered little; the market quickly switched into familiar panic mode, its confidence seriously undermined. Adding to Germany’s desperation, there were other undertones, such as the realization that European governments actually do not know what to do to solve the sovereign debt problems in the region. For the time, Germany is acting alone. However, that just proves the euro-zone’s indecisiveness as a whole, which is an entirely different kind of danger in and of itself.
If anyone thinks that Germany is the only one overly bearish on Greece, they could not be more wrong. For example, Nouriel Roubini, Professor at the New York University, also known for being in the small, yet celebrated minority that predicted the financial and credit crisis of 2008, said in an interview with the BBC, “The troubles in Greece are simply the tip of the iceberg and that the troubles in the [entire] euro zone represent the second stage of a typical financial crisis.”
Then the Securities and Exchange Commission (SEC) threw into the melee its new proposed trading rules, which would halt trading in stocks experiencing large price swings to avoid market plunges, the likes we saw nearly every day after the market imploded in the fall of 2008 and more recently on May 6, 2010. Under the proposed rules, trading in any S&P 500 stock that either goes up or down by 10% or more would be halted for five minutes. These so called “circuit breaker” rules are nothing new; it is just that the SEC is extending their application to almost an entire trading day, from 9:45 a.m. to 3:35 p.m.
So, is the recovery actually happening or not? It depends on the viewpoint. Case in point; two retailers that could not be further apart on the U.S. consumer spectrum, Wal-Mart and Saks Fifth Avenue, both posting robust earnings while so many others struggle just to keep their head above water. At face value, this is great news for both companies. However, there is another side to these results. For Saks, stores open at least a year posted their fourth consecutive quarterly decline in revenues. And, as for Wal-Mart, its core customers have not returned yet, not in droves or otherwise. Obviously, dire personal finances and high unemployment are still wreaking havoc in the retail sector.
What about the U.S. home construction sector? As everywhere else, the market is showing signs of life, but the pulse is barely distinguishable. The U.S. home construction jumped 5.8% in April, which is its best showing since October 2008. However, requests for new building permits are slowing down, which means that construction is cooling. Basically, all that April figures are showing is that homebuyers are rushing to get in on the tax credit of $8,000 before April 30th deadline.
Really, when it rains, it pours…