Archive - Aug 18, 2011

I prefer to quote Shakespeare rather than Monty Python, but the Black Knight scene just keeps popping into my head lately.  We have been in a period of intense volatility, have hit levels on the SPX (1100) that very few people thought we could.  Yet, the perma bulls have been back in force over the past few days. Armed with 5 days of decent performance and year-end forecasts of 1,400 or more, those perma-bulls were out in full force with their usual arguments. "Transitory", "temporary", "just a soft patch", "decoupling" (I have lost track of who is decoupling from whom, and when that decoupling is good), "contained", and "oversold".  For the past few months, if not longer, the perma bulls cling to every EU plan as an excuse to rally.  Virtually no attention is paid to whether the plan is feasible or if it would even work, it is just assumed to be good and that Europe will finally be fixed.  Any scrap of positive economic data is instantly glommed on to and is repeated ad nauseum.  Bad data is pushed aside or blamed on something - weather being a favourite scapegoat.  Anyways, as I see and read this daily denial of the real problems that still exist, I just keep thinking about that knight insistings "It's only a flesh wound".   

Not even the core is safe anymore, with Germany and the UK both joining the periphery in today's CDS rout:

• PORT +5
• ITALY  +10
• IRELAND   +8
• GREECE    +2
• SPAIN +10
• BELG  +3
• FRANCE +1

And so the last true blue, and much ridiculed economics team, that of Morgan Stanley's David Greenlaw's and his merry Buryini-ruler clad automatons, has waved the white flag. Specifically, in an email sent out yestrday by the firms' overabundant and soon redundant salespeople, both institutional and retail, we read: "WE HAVE BEEN ARGUING FOR A STRONGER 2H US ECONOMY..AND WE ARE CAPITULATING..." The all caps comes from them lest someone accuses us of being overly dramatic.

Update: it begins - Fiat (FI.IM) and Exor (EXO.IM) are halted. Look for Intesa and Unicredit to follow any second.

It was fun while it lasted, or all about 6 days. Following the imposition of the continental short selling ban, Europe managed to prevent the now daily occurrence of halting trading in key financials... for almost a week. But not quite. We fully expect that UniCredit (down 5.3%), Intesa (down 4%) or Fiat (down 8%) wlil be halted any second, despite the fact that nobody is shorting them. All that was necessary for a return to the status quo, or for Europe to be open. Following news from the WSJ overnight that the Fed is "concerned" about European bank funding (a story which is such a glaring plant: why on earth would the Fed of all entities invite contagion by indicating that the funding pyramid, at whose base it itself is located courtesy of the unlimited FX swap lines), which in turn used data first broken by Zero Hedge yesterday namely that "In one sign of how European banks may be having trouble getting dollar funding, an unidentified European bank on Wednesday borrowed $500 million in one-week debt from the European Central Bank, according to ECB data. The bank paid a higher cost than what other banks would pay to borrow dollars from fellow lenders. It was the first time for that type of borrowing since Feb 23", has led to every index in Europe is plunging, and at last check US futures were down over 20 points. Why would use its traditional mouthpiece the WSJ to spread fear? Why QE3 of course. As we will never tire of repeating, the market has to fall another 20% for another easing episode to be feasible. And what better way for this to happen if you are Ben Bernanke? Why hit them where it really hurts - European bank stability of course. Oh yes, all of this has sent gold to just under all time record highs at $1810, pretty much as also expected.

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