Here we go again.
Ok, now let's get this straight. They write a big check to Greece to try to restore confidence in the EU and then Germany decides to shake that confidence a bit by banning “naked short selling” in stocks. Once again just when the market tried to put this EU crisis behind us, here we go again. Producer prices came in at a negative as deflation pressures are mounting and the last shred of confidence the market held on to was dashed by the terrible timing of Germany’s BaFin financial-services regulator saying that it will introduce a temporary ban on naked short-selling and naked credit-default swaps of euro-area government bonds starting at the midnight hour. As in last night! It had appeared that the market was starting to stabilize but now what! Way to go guys. Way to go to not instilling confidence. The BaFin Financial service head Jochen Sanio is the same one that said that speculators were, "waging a war of aggression against the Eurozone." He is now taking steps to make sure speculators stay away and make them less likely to buy Eurozone toxic debt from countries like Greece who fraudulently hid the magnitude of their real debt in the first place. No wonder the euro is in trouble as German President Angela Merkel warned that the single currency was in danger. No kidding.
What we have here is a situation where the government, by their action, is going to make a bad situation worse. Continuing to blame speculators for Greece’s and the euro’s woes is like trying to blame Cubs fans for years of poor team performance. Like we played bad because the fans didn’t back us enough and they booed! (I think maybe at least one former Cub feels that way). Well the truth is that years of fiscal responsibility brought the wrath of the short seller. Short sellers that are reacting to the terribly weak fundamentals have piled on when it became clear that the Greeks covered up the true nature of their mountainous debt. I do not seem to remember speculators writing Greece’s budget! I do not think that it was speculators that cut those deals with the unions. It was not speculators that went on a wild spending spree racking up insurmountable debt. What is clear is by this extending the ban on short selling, the governments of the EU are still refusing to face reality of their own misdeeds. As global governments continue to be addicted to spending, the problem cannot be solved until they admit they have one. Once again governments point the fickle finger of blame while their own policies have brought us to the point where the fundamental structure of the global economy invites and almost demands short selling to show the true value of the risks associated with dealing with a country that misstates its true financial well being. Now I would admit that at times short selling can be comparable to a run on a bank and there are times when such a ban might restore confidence and order to the market place. But what we were witnessing was the market coming back in the euro and commodities markets that were beaten down while spreading deflation fears. Order was coming back until of course this terribly ill timed announcement by Germany’s Financial regulator.
So what did those evil speculators due when they found out they could not sell the market naked? They decided to sell just about everything else. They punished the euro because of the governments’ short sightedness and sold short on many commodities markets. The deflation tromping that was trying to end was put back on the front burner.
Take crude oil for example. The front month crude oil was getting ready to expire and the June contract traded at the lowest level since Sept. 30, 2009. The soon to be front month July contract is not faring much better and also hit its lowest price since that same date. This massive drop in price and confidence has also brought down the price of the products. We have seen the price of RBOB gasoline fall from a high of approximately $2.4411 per gallon on May 3, 2010 to a low of approximately $2.016 overnight. Heating Oil fell from an approximate high of $2.3574 per gallon on May 3, 2010 to a low of approximately $1.9401 overnight. These drops are substantial and are something to worry about as they have many similarities to the drop we saw in oil and products from record highs in July 2008 as the global economy crumbled down all around us. What that drop in price reflected was one of the biggest drops in demand in history. It unmasked the real reasons why the price rose in the first place and that was as global market participants went to seek safe harbor from the greatest financial crisis in history.
We should learn and maybe listen to what this recent plunge in price may be telling us. Bulls should now admit to themselves that the late April, early May spike in crude was another financial hedge phenomena mixed in with some seasonal optimism and the overly optimistic interpretation of economic data. The market has to temper the good news that the strength in those numbers is being inspired with the type of economic stimulus that is unsustainable in the long run.
The market may have to face the reality that China has not decoupled with the rest of the globe and that the problems in Europe could impact their demand for oil and other commodities. If Europe stops buying China’s goods, that has to hurt. And as confidence falls along with commodity prices we could see markets start to freeze up as the specter of falling prices creates even more uncertainty. You may be able to ban short selling in certain parts of the world but the fundamentals that make people want to short the market in the first place will find another perhaps even more dangerous outlet.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at firstname.lastname@example.org