A turbulent session in Europe ended on an ugly note as broad equity markets closed near their lows, credit spreads near their wides, and financials gave up all their rumor-driven gains. EURUSD, however, managed a spikey end to the day, popping its head back above 1.37 after trending generally weaker all day.
When all else fails, scapegoat, which in corporate America means fire your CEO. According to a headline from Bloomberg right now, HPQ (and soon many other companies) will follow Yahoo in dumping its CEO, Leo Apotheker. The result: a surge in the stock. Our question: will Leo draft his "WTF" letter from an iPad as well? Expect the Netflix board to "spin off" its CEO next.
I remain confused why the Private Sector Initiative isn't finished yet? Are [banks] worried their accountants or the markets would see through the ploy of a "par" bond exchange and not give them any benefit from that trick? Are the governments finally getting concerned that the EFSF should not pay banks par for 40% of their Greek holdings? The IIF proposal must have been structured by Robin Hood's evil twin - the one that steals from the poor and gives to the rich. The swap, that switches Greek exposure from banks to the EFSF ensures the banks lose less, but the people of Europe lose more directly. Nothing has been solved in Greece. Until Greece is fixed or defaults, the markets will remain manic/depressive. This proposal would shift some risk out of the banking system, which is good. But it puts it directly on the EFSF guarantors.
GATA's Chris Powell speaks: "The speaker following me, George Clooney, will be able to tell you what it's like to be handsome, talented, rich, and famous. I could tell you what it's like not to be. But instead the conference has asked me to talk about gold, which at least might make you rich, or help you preserve some of whatever you've got. This opportunity is full of risk, because the gold market long has been manipulated by Western central banks to restrain the gold price. The Western central banks are slowly losing control of the market but they are not giving up easily. Why do Western central banks manipulate the gold market? The gold market is manipulated because, despite Federal Reserve Chairman Ben Bernanke's insistence to Congress a few weeks ago that gold is not money, just "tradition," gold is indeed a currency that competes brutally with government-issued currencies and helps determine not only the value of those currencies but also interest rates and the value of government bonds...."
90 minutes after rumors of forced mergers and recaps and an easing of collateral requirements by the ECB, SocGen (among other French banks) has retraced more than 75% of the gains and senior financial credit spreads have weakened to their widest levels intraday. It certainly feels like any strength is being used to reduce exposure further - even as we wait for Bernanke's Bonanza this afternoon...
UPDATE: SocGen now trades lower than pre-rumor levels!!
Confirming that when it comes to providing credible, timely information, the NAR is second to none with its release that while the market was tumbling, the economy was collapsing (recall that abysmal August Philly Fed number), the US was on the verge of bankruptcy, and Europe was getting deliquified... existing home sales soared by 7.7% from 4.57 million to 5.03 million, on expectations of a modest rise to 4.75 million. No typhoons, rogue trades, abnormal heat or cold, earthquakes, High Frequency Trading or any other "transitory" events were 'blamed' for this stunning beat. Well actually Irene was blamed for the number not being even bigger. All is well: supposedly we can now take Operation Twist off the table.
I direct your attention to the pace and direction of stimulus additions at the time to look at the “macro” forest from the “extrapolated trees” to see the outcome of a policy departure was more beneficial to bond market valuations as The Chairman was illustrating sound monetary prescriptions, ones that preserve streams of cash flows instead of diluting them, perceived exitings of easings. So, with a morning rant in a pre-Fed proclamation (which wasn’t planned), I can’t help to think that if the telegraphed notion of a twist or a reduction of interest on reserves were to occur today that this could be viewed as a mere TECHNICAL operation but possibly the order of the day is that, this policy is aligned in the wrong column to protect the integrity of purchasing power of bond investors. A mis-alignment. World off opposites. Easings are bad, retrenchments are good. Twisted.
As we reported, last night a quartet of GOPers (re)sent a letter to Bernanke demanding no more QE. To be sure this was not the first such letter, and followed a nearly identical missive sent back in November of 2010. And while the ultimate purpose of this letter is unclear, and is unlikely to prevent the Fed from doing the only thing it believes it should do: i.e., spark the economy by reflating asset values, aka printing or duration extending - or the only things it knows how to do, did the republicans just shoot themelves in the foot and allign the dissenters against growing opposition to a full blown LSAP episode? Here is JP Morgan's Michael Feroli explaining why this may be the case.
In an effort to enable every insolvent, illiquid, and in-default institution in Europe to gain access to the seemingly bottomless pit of Trichet's despair, the ECB just dropped a series of eligibility requirements on collateral needs. Somewhat interestingly they dropped the requirement that the collateral be 'traded on a regulated market' - does that mean they will accept defaulted GGBs?
The chairman of the "Friends of the Fermentation" committee dives into the two topics preoccupying the world: Bernanke and Greece, and as usual, deconstructs both with his laser-focused pragmatic perspective. That both of these are closed loops that only get worse as they "get better" is becoming increasingly clear to everyone even remotely interested in events away from the top 20 items in Google Trends.
A day after the IMF warned that the world is facing a dramatic economic slowdown cliff, it follows up by pulling off the scab on a festering European wound, with Reuters reporting that according to the IMF, "Europe's debt crisis has increased the risk exposure of banks in the region by 300 billion euros and they need to recapitalize to ensure they can weather potential losses. In its Global Financial Stability Report, the IMF said it sought to "approximate the increase in sovereign credit risk experienced by banks over the past two years." Earlier this month, IMF Managing Director Christine Lagarde drew fire from European officials when she called for a mandatory recapitalization of Europe's banks. News reports last month said the IMF had identified a 200 billion euro shortfall in European bank capital, but officials in Europe insisted the figure was off the mark and the capital position of most banks in the region was solid." So what does the IMF do to address protests by the IMF that it was overestimating undercapitalization? It hikes them by 50%! Yet even so it is still €700 billion short of Goldman's estimate for a €1 trillion hole in Europe. Also, assuming European banks had three peaceful years in which to recapitalize at much higher valuations, it is safe to say they will absolutely not do it now, when the market has basically locked them out. And needless to say, when Greece defaults all these shortfall numbers will have to be revised.... by a factor of 10x... higher.
"Because it is not a liquidity crisis, it is a solvency crisis." The chart shows nothing new but present the evolution of the European solvency crisis crisply and succinctly for anyone who may be lost in the day to day headline shuffle and confuse the forest for the trees.
Europe’s fiscal and debt crises have dominated the financial news for months, and with good reason: the fate of the European Union and its common currency, the euro, hang in the balance. As the world’s largest trading bloc, Europe holds sway over the global economy: if it sinks into recession or devolves, it will drag the rest of the world with it. As investors, we are not just observers, we are participants in the global economy, and what transpires in Europe will present risks and opportunities for investors around the world. The issue boils down to this: is the European Union and the euro salvageable, or is it doomed for structural reasons? The flaws are now painfully apparent, but not necessarily well-understood. The fear gripping Status Quo analysts and leaders is so strong that even discussing the euro’s demise is taboo, as if even acknowledging the possibility might spark a global loss of faith. As a result, few analysts are willing to acknowledge the fatal weaknesses built into the European Union and its single currency, the euro. In the first part of this series, we’ll examine the structural flaws built into the euro, and in the second part, we’ll consider the investment consequences of its demise.