Cyprus

Cyprus (a tiny EU country with a GDP 7% of Greece or a country that has a GDP smaller than Shreveport, LA} applied for a bailout over the weekend from the EU.  The terms they received are starkly different than places like Ireland, Greece and Italy.   In addition to the customary bank bailout by the EU, depositors of Cypriot banks are going to be taxed.  The taxes on savings accounts as originally proposed were a tax of 9.9% on amounts over 100,000 Euros and 6.5% on amounts under that amount.  As of this writing, the tax number for amounts under 100,000 euros is under negotiation and could be lowered.  

Lot's of chatter over the weekend and today on whether this is a tax or confiscation of assets, on whether this will lead to a run on banks in other countries on the European periphery or even if this means that Germany calls all the shots.  You can go to any financial website and rapidly get an idea of what's going on.  Cyprus has long had a history of being a haven for money launderers so this is undoubtedly one of the reason the EU is going after the depositors.  World stock markets have not taken this well, being down about 1% for the day.  That's also about what the US is set to open down.

Only time will tell if this is a one off event or the beginning of something bigger.  It's hard to know at this stage where this goes.  What I do know is that this is happening at three critical junctures for stocks.  The first is that the Dow has just hit new all time market highs and the S&P 500 is bumping up against it's old high.  These are both milestones that many thought could lead to some profit taken.  The profit takers now have their excuse.  

We are also near the beginning of the period where seasonal trends begin to work against stocks.  Late spring to early autumn is statistically a harder period to make money than the fall winter time frames.  Finally markets are very over bought in all three time frames that we measure so either a pause or some form of correction could be expected here anyway.  These things usually need a spark.  

It's hard to know if Cyprus is that spark.  Certainly world markets haven't liked what they've seen today.  This was an unexpected and unlooked for event so it's understandable that markets would have reacted in a negative manner.  It will be how markets react in the following days that will be important. That's the weather gage we'll use here.  One thing I'll throw out.  If world markets shake this off and are higher a week from now, there are many out there that may have to reevaluate their overall economic views.  If markets shake this off then it will likely mean that investors see global economic growth as better and that will likely trump these events.

Stay tuned.....

*Long ETFs related to the S&P 500 in client and personal accounts.  Long ETFs related to the Dow Jones Industrial Average in certain client accounts.