Friday, March 22, 2013

How Much Does the Cyprus Bail-Out Really Matter?

By Dr. Van Tharp Trading Education Programs and Workshops

The financial industry is abuzz over the news coming out about Cyprus. The story begins with Cyprus finding itself as the latest country in need of a bailout. European regulators decided that it would be a good idea to have Cypriot bank depositors help pay for that bailout. The subsequent plan to levy all bank deposits raised a furor among not only the Cyprus natives, but also Cypriot leaders, German legislators — and even the Kremlin (because of the large amounts of Russian deposits in Cyprus). So much of a furor in fact, that the all-powerful regulators have been scrambling to revise the bailout plan even before it started.

So for traders and investors, the questions come fast and furiously: What does this mean in the short and intermediate term for the grinding bull market? Will we finally get a pullback? And in a broader view – how much does this news of the Cyprus bailout matter overall?

The last question is probably the best place to start — how much does the Cyprus bailout matter? From there we’ll look at some support and resistance levels to keep our eyes on if a pullback does materialize so that we can measure its severity. Let’s dig in…

How Much Does the Cyprus News Really Matter to Traders and Investors?

Let me start by telling you what I concluded and then we’ll look at some supporting data. On Monday, the markets gave us our first response that the news out of Cyprus didn’t matter that much. The markets dropped a bit in the morning, but, as many observers pointed out, in a way that did not indicate any panic. Then in the U.S. markets, prices spent the rest of the day recovering to close with a very unassuming, modestly down day.

Here’s why: financially, Cyprus is tiny, financially. In fact, Cyprus is so small that it makes Greece look like a giant. To give some perspective, if you look at the Gross Domestic Product (GDP) of the 50 states in the U.S., the most recent data shows that Vermont is ranked number 50 (lowest) with a GDP of $26.4 Billion. The GDP of Cyprus is only $25 Billion! That’s more than 11 times smaller than Greece. So in one sense, the markets are telling us that this action is like taking a bucket of water out of the Pacific — while there may be some yelling about how the bucket was used to remove the water, in the final financial analysis, no one notices that anything has changed.

But before we dismiss the incident completely, I believe that there are bigger ramifications to the European regulator’s actions — ramifications that far outweigh any immediate financial math. By confiscating bank deposits, major notions have been violated — the concept of private property rights, the notion of insured deposits not losing principal, and the broader notion that banks in general are a safe place to store your savings. Everyone chuckles at the fictional uncle Ernie who buries his savings in a coffee can in the back yard or stuffs them under the mattress. Now, no one is laughing at the people who used “non-traditional” savings methods in Cyprus and may therefore get to keep all of their money.

Next, let’s turn our attention to what happens if the EU’s attempted methods to solve the most recent bailout in Cyprus outweigh the amounts involved. How do we know that this is more than a minor blip? What if this is just the first domino that starts toppling other dominoes? The chart below of the S&P 500 ETF (symbol: SPY) is self-explanatory as we look for sign posts that could point to deeper retracements:

It’s important to note that, so far, (as of the close on Monday) the markets have once again absorbed bad news (this time about the EU and Cyprus) and held their ground. The next couple of days will tell if there are runs on banks outside of Cyprus and if this is more than a minor blip on the proverbial financial radar screen.

Click Here to Review Dr. Van Tharp's Home Study Programs