Archive - Oct 26, 2011 - Story

Europe is playing havoc with this old trading strategy. By only having rumors and never having news they keep the markets in permanent buy the rumor mode. The china story is at best old news. Italy's austerity credibility is sorely lacking, but the best news is the Merkozy wants to meet the bankers.  It feels like aliens landing on a planet and saying take me to your leaders. Seems like we are long past short covering and this is people getting long on rumors and plans.  Everything I read tells me they are trying but that there are no solutions that are sure to work and some will ruin the entire system if they are tried and fail.

Fresh from the European Council presses comes the complete 3 whopping page statement to bailout the Eurozone (not to be confused with Hank Paulson's 3 page TARP termsheet). There is nothing at all here, but for those who need a paperweight, feel free to print 200 copies and staple them together or something.

Don't anyone say Italy is not willing to tackle austerity with the determination of a rabid dog: retirement age to be raised by 2 years in 15 years, and an epic €5 billion to be raised from privatizations.

As expected, nothing has been resolved. Everything to be pushed back to some other indefinite time. The only actual agreement, ironically deals, with a date so far in the future, the EUR will likely no longer even exist: 'Agreement has been reached that banks should be required, by 30 June 2012, to have 9 % of the highest quality capital. This figure should take into account a marking down for sovereign bond holdings against current market prices (as of 30 September 2011)."

The horror, the horror:

• EU-27 RELEASES STATEMENT AFTER BRUSSELS SUMMIT
  
• EU-27 SAYS COMMISSION MUST URGENTLY EXPLORE BANK GUARANTEES
  
• EU SAYS BANKS SHOULD FIRST FIND PRIVATE SOURCES TO RAISE FUNDS
• EU SAYS STATE AID RULES ON BANKS SHOULD BE PROPORTIONAL
• EU SAYS MID-TERM BANK FUNDING MUST HEAD OFF CREDIT CRUNCH RISK

To anyone who still has the energy to be lied to over and over by a bunch of corrupt, broke, pathologically lying bureucrats, feel free to tune in.

It begins:

• EURO ZONE PLANS TO LEVERAGE EFSF BAILOUT FUND "SEVERAL FOLD", FINANCE MINISTERS TO DECIDE DETAILS IN NOVEMBER -- DRAFT EURO ZONE SUMMIT STATEMENT
• DRAFT EURO ZONE STATEMENT MAKES NO MENTION AT THIS STAGE OF ITALY'S REQUIRED BUDGET STEPS
• NO AMOUNTS SET FOR BANK RECAPITALIZATIONS

In other news, there will be absolutely nothing actionable following today's "ground-breaking" summit. There will also be nothing at all after the Cannes statement. Or any time after. Why? Simple - there is nothing that Europe can propose in a universe in which 2+2=4 that resolves its problems.

Sigh...

There is little if anything one can say about today's 5 Year auction. It priced at 1.055%, just above the record low 1.015% in September, and well inside the WI 5 Year trading at 1.08%, at a solid 2.90 Bid To Cover, compared to the 2.82 six auction average. The internals were boring, with Indirects taking down 49.3% of the auction, compared to the 40.5% LTM average, Directs declined modestly to 10.4% (in line with the 11.2% average), and Dealer take down unchanged from September at 40.3%. However, one massively notable thing about this auction is that it is the last one, probably ever, in which the US debt/GDP ratio is still under 100% following the auction. Adding today's $35 billion to yesterday's $35 billion in Two year bonds, brings total US debt to $15.010 trillion, with GDP still at $15.013 trillion (granted this number may be revised tomorrow), resulting in a debt to GDP ratio of 99.99%. Tomorrow's historical $29 billion in 7 Year bonds will take America into that uncharted territory of triple digit debt to GDP. But yes, the formal settlement of all bonds will not occur until Halloween, so we can celebrate on several days America's historic transition one step closer to insolvency.

Pardon our ignorance, but shouldn't a value-focused hedge fund that has been in operation for 7 years, and has nearly daily TV and media exposure, outperform the S&P net of fees? Actually, scratch that, shouldn't any hedge fund still in existence after 7 years, outperform the S&P?

One of the premier Euroskeptic think tanks chimes in with, as expected, a rather bleak outlook on what to expect from today's Summit which is just now starting: "The hope for a “comprehensive plan” to save the eurozone, as originally touted by the eurozone leaders, looks to be a lost cause. The best outcome we can hope for today looks to be a broad political agreement, with technical details left to be sorted at a later date. Given previous experiences with technical changes (notably the second Greek bailout package and the Finnish collateral deal) it is definitely possible that the deal could be watered down, for example with investors being offered greater guarantees over their involvement in the second Greek bailout or with the bank recapitalisation actually turning out to be less stringent than expected....No matter what the details look like, the insurance plan is fundamentally flawed, given that guarantees may not be viable when they are most needed and 20% wouldn’t be enough to calm markets any way... there’s massive irony here, as Europe is now falling back on massively complex ‘Anglo-Saxon’ financial instruments to help save the eurozone. Putting these at the heart of an already complex, diverse and flawed monetary union is far from desirable.

And now the "letter" we have all been waiting for...

That the IMF believed banks would ever take a proper write down - reduce what they expect to be paid - is comical because the IIF proposal from the start was made to sound like a write-down even though it never was one. So now, as a massive bailout is about to be announced and the fear of a Credit Event at the EU and IMF is at epic proportions, the banks expect they will get taken care of. Sadly it is probably good for bank share prices short term if they win but the regulatory animosity may grow and the occupy movement will get a more recent and specific event to focus on. Since by now the EU should know where every single sovereign CDS trade is (because they must have asked the banks for that level of disclosure by now) they can go ahead and allow a good old fashioned default and kill some weak institutions and rebuild the system with healthier banks.

President Obama is taking credit for a new government plan to "save homeowners." That is of course pure propaganda to mask the plan's true goal: the perfection of debt-serfdom. The basic thrust of the plan is straightforward: encourage "underwater" homeowners whose mortgages exceed the value of their homes to re-finance at lower rates. The stated incentive (i.e. the PR pitch) is to lower homeowners' monthly payments via lower interest rates. This is the Federal Reserve's entire game plan in a nutshell: don't write off any debt, as that would reveal the banking sector's insolvency, but play extend-and-pretend with crushing debtloads by lowering the cost of servicing the debt. The key purpose of this "plan" is to leave the principle owed to banks on their books at full value while ensnaring the hapless debt-serf (the "homeowner") into permanent servitude to the banks. If the net worth of your home is a negative number, then what exactly do you own? You have the right to occupy the shelter, and you own the debt. So how is this any different from a lease? There is no equity, and no equity being built: there is a monthly payment in return for the right to occupy the dwelling.