In today’s edition of Blast from the Past, I draw your attention to Professor Robert Mundell’s comments on the euro nearly one year ago.

Meanwhile, back at the factory, the accounts are repositioned and the only stocks we own are gold and silver names. We also own various calls on gold and silver and a fair amount of puts on the euro.

I previously wrote of the S&P 500 holding to it’s pattern of higher lows. Stocks have recovered off their lows, but have come upon resistance, which at one time was support. Given this picture, I am looking to short the S&P rather than be long it.

Trader Art - Support Becomes Resistance Oil on Canvas

Greece

Remember this about Greece: they cannot be bailed out by borrowing more. You cannot borrow your way out of too much borrowing. It does not work. Once debt levels reach a tipping point, there is no way out except default. Which is what Greece will be forced to do through a forced restructuring.

Big Trade

Given the crosscurrents, we are looking at a trade that could be bigger than the crash of 2008.

Hold on. The big trades are always full of twists and turns.

The Euro made a nice bottoming pattern last week. Note the most recent low is higher than the prior low. With this in mind, I can zoom into a lower timeframe to find an entry.

EURUSD Bottom Oil on Canvas

This week we will start to hear first quarter earnings results. Before the New York market open Wednesday we’ll hear from Monsanto (MON). After the bell Wednesday Recycling behemoth and steel manufacturer Schnitzer Steel (SCHN) and retail giant Bed Bath & Beyond will report. I haven’t looked at analyst estimates for any of these names. Market volatility is generally cheap here, as is volatility in many individual names. My bias is to own calls and puts into some earnings announcements this month. A quick view of the charts has me reaching to own calls in BBBY and puts in MON. Generally speaking, you can see how the street will react to earnings by looking at the supply and demand patterns before the announcement. As you can see from the charts below, Monsanto (red) is in a downtrend and looks distributive. Therefore, it will likely trade lower after results. On the flip side, BBBY (blue) is in an uptrend and is being accumulated. It will, therefore, likely trade higher.

Trader Art - MON/BBBY Oil on canvas

There are also four US Treasury auctions this week. Keep these times in mind for volatility in currency markets.

Monday: 13:00 EST US Treasury to auction $8 Billion in 10 year TIPS
Tuesday: 13:00 EST US Treasury to auction $40 Billion in 3 year notes
Wednesday: 13:00 EST US Treasury to auction $21 Billion in 10 year notes
Thursday: 13:00 EST US Treasury to auction $13 Billion in 30 year bonds

I wanted to be a part of it so I became it. And the beat goes on.

As the previously documented sovereign event approaches, the uncertainty that remains draws me closer to the prosperity that will effect the collective consciousness of my readership connection. To further dissect the economic scenario that is playing out, I will offer some thoughts on where things are, what could cause things to reverse, as well as how to best prosper from the sovereign contagion that is spreading like wildfire.

Greece

In my prior post, I outlined the sovereign default risk that we face—somewhere, sometime soon. Several geographies are flashing extremely risky scenarios. Greece is in need of a bailout and they lay on the precipice of disaster if some aid is not found. Any proposal of aid I have seen will not be a solution, rather a band-aid on a broken bone. However, a band-aid could buy Greece some time–which they are in dire need of.

Ireland

Economic woes in Ireland are severe, and they are not being given the focus they require. Further trouble in the place where I kissed the Blarney Stone could be the impetus for the contagion to spread further, causing the market dislocation that I anticipate.

Dubai

Risk in Dubai is priced where it was at the height of 2009. Further trouble and inability to restructure will cause fallout in Dubai—which will affect Europe, which will effect Greece, and the dominoes will continue to tip. Last week in Dubai, I found money dealers paying extremely large mark-ups for physical gold. Indeed, rumors of gold being used as legal tender in Dubai are true. Again we see my thesis substantiated: the risk aversion trade here is not the US Dollar, rather the precious metals–gold and silver.

Spain: The Wild Card

All of the above geographies could stabilize, or with further troubles, could act as catalysts for the contagion to spread quicker than it already is.

I’d note that Spain was a large driver of contagion over the past two years. The housing bubble in Spain was by far the largest real estate bubble compared to anywhere else. They also face a severely high unemployment rate. However, even with all this trouble, spreads on banks in Spain are not showing the stress they should. When the stress of the housing bubble and unemployment rate percolates into Spanish banks, it will be easy for Spain to pick up where it left off. More in need of a bailout this time, Spain will contribute to the strain in Europe, affecting Greece, affecting Ireland…tip, tip, tip.

All That Glitters

Though the catalyst remains uncertain, the looming event is undeniable. Remember, when the entire universe lunges to take risk off the table in a reaction to what I anticipate, gold will stand, glittering amidst the debris. I’ve said it once and I’ll say it again: if you don’t own gold, you should.

And the beat goes on.