Ramblings of a Portfolio Manager

Fat Fingers, Thinner Wallets.

It would have been comical had not the financial anguish been so great or the memories it evoked so painful. There, last Thursday, on the right side of the screen were hundreds of government employees expressing their anger and frustration in a childish temper tantrum at the dilemma that they themselves had caused. On the left side was the Dow, tick by tick, dropping with every Molotov, er Metaxa cocktail let fly. We’re talking, of course, about the Greek Government Union employees rioting at the austerity cuts mandated by the EU bailout package. The would-be comical part was the goat, seen in all the videos, running helter skelter amid the chaos. The not-so-comical part was the close analogy it drew to another scary media spectacle just 19 months earlier. There too, hundreds of childish government employees vented their feigned and hypocritical wrath at a situation that they also caused while the world watched the capital markets fall, tick by tick. That, of course, was the vote on the TARP bailout bill in Congress. Unfortunately, in that scenario the only goat (the “scape” kind) was Hank Paulson, who had to take the blame from grandstanding hypocritical Senators (e.g. Barney Frank) for a situation he certainly didn’t cause but was clearly using all his powers to avert. The Greek goat probably ended up as Souvlaki, roasted over the trash fires by hungry cops (we noted that all the donut shops had already been looted by the other Unions). The American goat, thanks to our more “mature” society, was labeled “damaged goods” and got to write a book that helped augment his stack of T-Bills. It’s a great country.

Amid the televised media spectacle investor panic sent the Dow down almost 1000 points intraday before recovering almost 700 of those points. We’re not qualified to even speculate upon the reasons for the resultant gut-wrenching move, which occurred in just 15 minutes, so we’re not going there…although there is a “grassy knoll” theorist around here who is convinced it was all the work of cyber-terrorists. We’re going to give him some time off to spend with a certain Police Chief we recently had to let go in part due to his conviction that the local nut case who was blowing up porta-potties was in truth an Al Quaeda cell practicing for an attack on the Empire State Building. On second thought, that nut case was released just last week from the hoosegow…hmmmm.

Instead of opining on last week events, we thought we’d give a little test to see who was paying attention. Ready? Here are some headlines from last week. Music please! One of these things is not like the other. One of these things just doesn’t belong. Can you tell which thing is not like the others by the time I sell all my longs?

a. EU Raises 2010 GDP Forecast
b. China’s October Manufacturing Grows at Faster Pace
c. Oct. ISM Factory Index Surges to 55.7%
d. World Equity Markets Lose More Value Than the Combined GDP of the PIGS
e. U.K. October House Prices Gain for Third Month
f. UK Manufacturing PMI at Two-Year High
g. US Employers add 290,000 jobs, Twice the Consensus
h. Australia Increases Benchmark Interest Rate to 3.5%
i. Barrons says “here's a chance to shop for stocks.”

Time’s up! The astute among you noticed immediately that this was a trick question as we all know that Barron’s wound NEVER publish a bullish article on stocks. Right? Wong! Actually, they did. May 8th: “Try not to get rattled by the market rout. Instead, here's a chance to shop for stocks.” Go figure. So the correct answer is “d.” Yes, world equity markets did indeed erase more in value than the entire combined GDP of the PIGS (approximately $4Trillion) in just 4 days last week, which flies in the face of all the positive (in some cases too strong) economic data from around the world. Keeping it all in a Fred Rogers framework: “Over reaction. Can you say that?”

OK, for those of you who missed it, here’s another, easier little test:

Question: Which country is the largest exporter to the EU?

a. United States
b. China
c. Japan
d. Australia
e. Germany
f. The EU

Also a trick question. Yes, the EU is the largest exporter of goods to itself. However, within the EU, Germany is the largest sovereign country to export to the EU and the second largest exporter in the world, after China. The US comes in third in world rankings. Why does this matter? Well, with all the handwringing over the world impact of a European slowdown, one should consider who will be affected first. China, as we all know, is in the midst of a tightening phase due to excessive economic strength. Germany was about to go there before the Greek mess hit and the US is still contemplating tightening after already beginning the liquidity withdrawal. These countries, if beset by export declines due to EU weakness can turn their monetary policies on a dime, as they did in 2008. That, in our opinion, would start the liquidity cycle all over again, driving up stock prices, among other effects. So, while we realize that the story isn’t just Greece but the so-called domino effect across Europe and that all the positive data coming out of countries right now is “rear view mirror” information, we also understand that there is a fair amount of firepower left in the largest economic powers to prevent another financial crisis, which is what the markets fear is happening now.

Oh Oh! As Rosanne Rosanadanna would say, “never mind!”

Timing is everything and as we write this we see that the EU Ministers have approved a $962 billion fund to bolster the Euro and to stave off further debt-crises in member countries. In one fell swoop, this move takes the PIGS off the table. Along with the loan package the European Central Bank will initiate their version of “quantitative easing,” something that last week its president, Jean-Claude Trichet, said the central bank didn't even contemplate. The ECB will go into the secondary market to buy euro-zone national bonds and the Federal Reserve has re-activated swap lines so foreign institutions can get access to loans. It’s an unprecedented move from what here-to-now has been an agonizingly slow, almost constipated, European bureaucratic system. It’s also surprising show of cooperation among central banks. The markets seem to like it and as of this writing Dow futures are up over 400 points.

So as the CNBC junkies cover their shorts in the Euro, let us praise the EU Ministers, mourn the goat and remember that you heard of this first on Ramblings: Special Edition, last Thursday.