Frontrunning: February 18

• Greece bail out cost: $441 billion (Bloomberg)
• Dollar rally drives euro near nine month lows as metals retreat (Bloomberg)
• Greece or California: who would you rather be? (LA Times)
• Germany's Merkel she's got the whole euro in her hands (BusinessWeek)
• States must fill $1 trillion pension gap (NPR)
• Bernanke chooses to exit through the eye of a needle (Green Faucet)
• Weil: BofA's new settlement with SEC smells even worse (Bloomberg)

RANsquawk 18th February Morning Briefing - Stocks, Bonds, FX etc.

RANsquawk 18th February Morning Briefing - Stocks, Bonds, FX etc.

Deleveraging Through... Deflation? Has Ending QE Been The Ulterior Motive All Along? Andrew Smithers Thinks So

Confused by recent proclamations by Hoenig, Plosser, and other unnamed Fed members, who want an end to QE? Even more confused that this could actually happen? Andrew Smithers, former head of SG Warburg asset management before starting Smithers & Co., may have some iconoclastic insight into this development, which at its core is fundamentally deflationary, and a stark refutation to everything the Fed (presumably) stands for. A paradox? Smithers breaks the "Econ 101" mold in this fascinating interview with Kate Welling. The most provocative perspective: Smithers goes against the grain of every economic textbook which says the only way to inflate debt away (deleverage) is by, well, inflation. Instead, what Smithers suggests is a slow, gradual process of deflation, in which incremental cash flow is converted into equity, and pushes debt out. Indeed, this is precisely what we have been seeing especially in the REIT sector where numerous names, courtesy of BofA, have raised equity on the basis of imaginary valuations, which may just become a self-fulfilling prophecy if enough people buy into them, and by throwing cash at these companies, allow them to lower their debt-to-capitalization ratios. Then again, with another half a trillion in equity needed for the REIT sector to fund itself out of a mid-term funding crisis, that's purely a pipe dream. However the bigger picture of the Smithers perspective is that this deflationary approach is exactly what the Fed may be engaged in. By distracting the increasingly more vocal inflation hawks, who anticipate that inflation is and always will be the driving motive of the Chairman, Bernanke could very well be pursuing just the opposite: a slow-bleeding deflationary trend.

Pivot Galore

After pretty much two weeks waiting since what we thought was the last meaningful turn in risk appetite (towards risk appetite), I think the markets have reached a possibly key pivot area. I will start with commodities where the pivot is the clearest on the day. Copper has retraced 61.8% of the recent sell off, and posted a quite nasty indecision candle on the day. If we gap lower tomorrow and close below 319 this would be a major evening star. Also note that today's pivot also corresponds to the level at which copper broke through the support of the bullish channel in place since March 2009. Gold similarly has hit an intermediate resistance at 1,120/1,125. As long as we do not post a daily close above that level there is risk to retest at least 1,074 before having a shot at further upside, and if we venture below 1,060 then we are headed for 980/1,008 which is the massive support zone (if broken this invalidates further upside for the medium term). - Nic Lenoir

Same...Volume... Different Day

No need to even comment any more.

FOMC Highlights, Hoenig Dissention And Full Minutes

Several thought it important to begin a program of asset sales in the near future to ensure that the Federal Reserve’s balance sheet shrinks more quickly and in a more predictable manner than could be achieved solely by redeeming maturing securities and not reinvesting prepayments; they judged that a program of asset sales spread over a number of years would underscore the Committee’s determination to exit from the period of exceptionally accommodative monetary policy in a manner and at a pace that would keep inflation contained without having large effects on asset prices or market interest rates. A few suggested that the pace of asset sales, and potentially of purchases, could be adjusted over time in response to developments in the economy and the evolution of the economic outlook. The Committee made no decisions about asset sales at this meeting. - FOMC Minutes

Moody's Downgrades Greek Hybrid Securities As It Kills Its Assumptions About Government Bail Outs Of Subordinated Holders

The barrage on Greek financial institutions continues, with Moody's downgrading Greek bank hybrid securities. Those impacted include National Bank of Greece, EFG Eurobank Ergasias, Piraeus Bank and Alpha Bank. The rating agency mainains a negative outlook on the bank's Baseline Credit Assessment, whatever the hell that is. The basis for the rating action is presented as follows: "Prior to the global financial crisis, Moody's incorporated an assumption into its ratings that support provided by
national governments and central banks to shore up a troubled bank would, to some extent, benefit the subordinated debt holders as well as the senior creditors. The systemic support for these instruments has not been forthcoming in many cases. The revised methodology largely removes previous assumptions of systemic support, resulting in today's downgrades. In addition, the revised methodology generally widens the notching on a hybrid's rating, based on the instrument's features." Is this a preamble to yet another general downgrade by Moody's on the country? Should the Greek Moody's rating drop to A1 or below, the Titlos SPV downgrade cascade consequences, as discussed previously, could come to the fore very promptly.