Europe has officially entered the Tropic Thunder zone, where one, forget one thousand , monkeys armed with one simple solar-powered calculator, can come up with a better plan than (JP Morgan-advised) Europe. Because as we pointed out on Thursday, "nothing changes the fact that with €100 billion set aside for bank recaps, a woefully low number and one which will do nothing to assure investors that banks have sufficient capital, there is still not enough cash to "guarantee" all future issuance" - well it appears that Europe finally did the math which led us to conclude that the EFSF is DOA. So what is Europe's solution? Why double counting aid already pledged of course: "EU bank plan may include aid already pledged to bailout states-sources." Uh, what? "A drive to lift bank capital across Europe by up to 110 billion euros ($153 billion) is expected to include the roughly 46 billion euros already pledged to Ireland, Greece and Portugal to help their lenders, EU sources told Reuters....Another official confirmed the intention to count money already earmarked for banks in Ireland, Greece and Portugal in any recapitalisation plan. "The problem with shock and awe numbers is that it implies that the money is there," said one official, reflecting on ministers' reluctance to set public goals for recapitalisation. "But governments don't have the money."... Just as was repeated here over and over and over and over... And yes, that red stuff shooting out of the place where your head was a few second ago, is blood. It is now Europe's official "plan" (for at least the next 2-3 hours) to use mystical, magical money, which is somehow double-counted to bail out both a bank and a country at the same time...
In typical European leadership fashion, the need to speak useless words to an audience waiting for some sense of real actionable solution outweighs any actual ability to add value or say something new. What is even more incredible is that we expect the 17 (or 27) nations to agree on anything when they can't even communicate effectively internally as we see the Sarkozy/Merkel press conference perfectly overlap with the Barroso/Van-Rompuy conference. Bloomberg is reporting the headlines - which are the same old same old - and awe-inspiring in their lack of specificity and potential for total opposition in view. Grant Williams (of Things That Make You Go Hhmm fame) perhaps sums it up best: "Europe is broken and the people charged with trying to fix it are clearly not up to the job."
This, in the parlance of our times, is called massively mismanaging expectations.
And end the Fed ...
Gold prices are mixed today as markets remain on edge due to increasing divisions amongst European leaders on how to solve the intractable Eurozone debt crisis. There continues to be very strong demand for physical bullion globally and support is strong at the $1,600 level due to this demand. The sharp fall of copper yesterday, by 6%, is an indication that the US, Chinese and indeed global economy is very fragile and may soon begin to contract. Physical demand in Asia, mainly India and China, has entered the traditional peak season with Indian festivals and the increasingly important Chinese New Year. This is reflected in premiums in Asia which remain good. There are reports of massive physical buying out of China on gold’s fall close to $1,600 yesterday. The most active Shanghai gold futures traded at a premium of more than $10 over spot prices earlier today. The contract stood at 335.22 yuan a gram, or $1,634 an ounce, at a premium of $3.
- France Likely to Lose Top Rating: S&P (Bloomberg)
- BNP urges EFSF to issue credit default swaps (FT)
- China municipalities to issue bonds (FT)
- Europe forced into second summit (FT)
- EU Said to Consider Wielding $1.3 Trillion to Break Impasse (Bloomberg)
- Hilsenrath: Fed Is Poised for More Easing (Hilsenrath)
- Fed debate about more easing heats up (Reuters)
- Obama Nominates Former Fed President Hoenig for FDIC Vice Chair (Bloomberg)
- ECB Said to Weigh Bigger Loans for More Collateral Disclosure (Bloomberg)
- Banks face penalties in return for bail-outs (FT)
While once upon a time, retail equity capital flows would be a perfect coincident indicator to the overall market, with any notable spike in the S&P promptly matched by inflows into domestic equity mutual funds, this is no longer the case. As ICI reports, in the week ended July 12, equity mutual funds saw their 8th consecutive outflow, amounting to $5.9 billion, the largest outflow since the debt ceiling and US downgrade fiasco in August, and a number which brings the total year to date outflow to ($99) billion. True to form, the capital rotated once again out of stock and into bonds with $4 billion in inflows for the week. More than anything this confirms that retail no longer chases day to day market performance out of a profound skepticism for market structure, and the record volatility and well-documented near 100% correlation across all asset classes has driven out all but the bravest. Unfortunately, news like this just released report by Reuters that the Nasdaq hackers from February, also "installed malicious software on the exchange's computers that allowed them to spy on scores of directors of publicly held companies, according to two people familiar with an investigation into the matter." Hardly the stuff that build up confidence in fair and efficient markets.
And the latest:
- GERMAN GOVERNMENT DOESN'T EXCLUDE POSTPONING SUMMIT, WELT SAYS
- WELT CITES PEOPLE CLOSE TO THE GERMAN COALITION, GOVERNMENT
If true, epic collapse coming as it means market shock and awe will be required to get everyone on the same page. On the other hand, when the news is reversed at 3:00 pm by the FT, expect the futures to soar by about 100 points.
Finally some details of the mythical revised and most certainly Dead on Arrival EFSF program, to be fully announced on Friday, emerge with Retuers bringing the scoop. Here are the preliminary bullets:
- EFSF to be able to grant two types of precautionary credit lines, normal and enhanced, based on IMF instruments.
- Typical size of both types of EFSF precautionary credit lines for Euro-zone sovereigns could be between 2 and 10 % of GDP according to a document
- To be eligible for EFSF precautionary credit lines Euro-zone sovereign must respect EU budget rules, have sustainable debt, external position, no bank solvency problem and seek to reduce macroeconomic imbalances according to a document
- Both types of EFSF precautionary credit lines would be for 1 year, renewable for 6 months twice
- IMF involvement in design and implementation of EFSF precautionary credit lines will be sought in all cases according to guidelines
Of course, if bullet point 3 is actually enforced, nobody would be eligible. Which means the whole framework is a joke. Yet nothing here changes the fact that with €100 billion set aside for bank recaps, a woefully low number and one which will do nothing to assure investors that banks have sufficient capital, there is still not enough cash to "guarantee" all future issuance, as was described in great detail previously. Lastly, it is too late to do much if anything except spike the EURUSD by a few hundreds pips for a day or two.
Just out from Reuters:
LIBYA'S GADDAFI DIES OF WOUNDS SUFFERED IN CAPTURE NEAR SIRTE -- SENIOR NTC MILITARY OFFICIAL
All we can say is be careful who you shake hands with. Next up: burial at sea.
COT data in the US shows that speculative sentiment has fallen dramatically which is bullish from a contrarian perspective. The Got Gold Report reports that silver futures market data is the most bullish it has been since 2003 - eight years ago. Silver was priced at about $4.40 per ounce then. Large commercial shorts have dramatically reduced their positions after the selloff in recent weeks suggesting that we are likely at or very close to silver bottoming. While the figures for gold are not as dramatic they too show that speculative positions and sentiment has been reduced significantly. Venezuela will repatriate some gold reserves held abroad before December 24th, Central Bank President Nelson Merentes told reporters today in Caracas according to Bloomberg. “I can’t give you an exact date for security reasons,” Merentes said. Venezuela will keep an unspecified portion of its gold reserves in foreign institutions, he said. In August, President Hugo Chavez ordered the central bank to repatriate $11 billion of gold reserves as a safeguard against volatility in financial markets. Venezuela held 211 tons of its 365 tons of gold reserves in US, European, Canadian and Swiss banks as of August.
- France, Germany Split on Crisis Solution (Bloomberg)
- Franco-German deadlock over ECB’s role in rescue fund (Telegraph)
- Merkel Risks Own Downfall to Save Greece (Bloomberg)
- Sustainable debt needed to qualify for EFSF support (Reuters)
- Bill Would Give Residence Visas To Foreigners Who Spend At Least $500,000 To Buy Houses In The U.S. (NYT)
- Couldn't happen to a nicer person: SAC Capital Faces Second Deal Probe (WSJ)
- Bullard Says Fed Policy ‘Appropriately Easy’, Relapse Unlikely (Bloomberg)
- Eurozone leaders meet in Frankfurt (FT)
- Geithner: TARP Refinancing Under Lending Program ‘No Mystery’ (WSJ)
We may have posted this already minutes ago, but at this point it is all one big blur, so we will go ahead and regurgitate. The latest counter-disinformation from Europe comes from Reuters: "Plans to tackle the euro zone debt crisis have stalled with Paris and Berlin at odds over how to increase the firepower of the region's bailout fund, French President Nicolas Sarkozy said on Wednesday. Sarkozy told French parliamentarians the dispute was holding up negotiations. He then flew to Frankfurt to talk with German Chancellor Angela Merkel in an attempt to break the deadlock ahead of a make-or-break European leaders' summit on Sunday. A French presidency source said the French and German leaders were meeting other euro zone policy chiefs and International Monetary Fund head Christine Lagarde on the sidelines of an event mark the end of Jean-Claude Trichet's presidency of the European Central Bank. France has argued the most effective way of leveraging the European Financial Stability Facility is to turn it into a bank which could then access funding from the ECB, but both the central bank and the German government have opposed this. "In Germany, the coalition is divided on this issue. It is not just Angela Merkel who we need to convince," Sarkozy told the parliamentarians at a lunch meeting, according to Charles de Courson, one of the legislators present. His comments fuelled doubts about whether euro zone leaders will be able to agree a clear and convincing plan when they meet on Sunday. " Judging by the reaction of the EURUSD, this IS news because it only made Bloomberg minute ago, even though it hit Reuters about 45 minutes earlier.