Stock World Weekly: Fear and Loathing in the Eurozone

ilene's picture

Stock World Weekly: Fear and Loathing in the Eurozone 
(Excerpt from the Week Ahead section) 

Merkozy Ambulance

Late Thursday afternoon, Jon Hilsenrath of the Wall Street Journal, a well-known sounding board for Bernanke when he wants to give signals to the markets, reported “Federal Reserve officials are starting to build a case for a new program of buying mortgage-backed securities to boost the ailing economy, though they appear unlikely to move swiftly.” (Fed Is Poised for More Easing) 

This report builds on sentiments that Federal Reserve Governor Daniel Tarullo expressed in a speech on Thursday evening. Bloomberg reported “Federal Reserve Governor Daniel Tarullo’s call for resuming large-scale purchases of mortgage bonds may boost chances the central bank will start a third round of asset buying aimed at reviving U.S. growth.

“Policy makers should move the tool ‘back up toward the top of the list’ because it would help the economy through lower mortgage costs that would boost home purchases and spending by people who refinance their home loans, Tarullo said late yesterday in a speech in New York.”

Tarullo’s speech and Hilsenrath’s article both came out on Thursday, suggesting the Fed is making an effort to broadcast its seriousness about using its tools to jump-start the moribund U.S. economy. Any large-scale program of buying bonds will essentially be another round of quantitative easing (QE3), predictably leading to increases in stock and commodity prices.

However, regarding commodity prices, one event last week may put a damper on increases in commodity prices. On Tuesday, the Commodity Futures Trading Commission (CFTC) voted to put position limits on commodity markets, as it attempts to deal with problems created by runaway speculation. Phil has repeatedly reported on the manipulation in the oil markets, with articles such as last June’s “Which Way Wedne$day - Let’s Break the $peculator$.” Tuesday’s action, while welcome, is long overdue. 

Screen shot 2011-10-23 at 2.52.47 PMThe six month chart of the Dollar shows the 73 to 76 range that the Dollar traded in for five months, before it broke out in early September. Now, however, the Dollar’s impressive breakout is failing. It looks like the Dollar may return to its previous trading range. Moreover, with Bernanke and Tarullo banging the drums for more QE, market participants know that QE3 is likely to weaken the Dollar. If the inverse relationship between the Dollar and the stock market persists, the depressed Dollar is bullish for equities. This is no secret and is why hints of QE3 drive the Dollar down and prop equities up.

Europe will be the focus of the financial news again next week. German Chancellor Merkel and French President Sarkozy will try to work out a deal to give additional funding and more discretionary power to the EFSF, while simultaneously strengthening “economic integration” and capitalization of European banks, all under the auspices of implementing “economic governance of the euro area.” Achieving their goals would be historic by any measure.

A primary issue at the heart of the struggle is whether the theoretically unlimited funding of the European Central Bank (ECB) can be used to ‘backstop’ the EFSF, thereby guaranteeing sufficient capital to recapitalize banks and buy distressed bonds. While Sarkozy is a strong proponent of backstopping the EFSF with ECB funding, going so far as to abandon his wife during childbirth to travel to Frankfurt to make his case to Chancellor Merkel, his efforts were in vain. Merkel, backed by ECB President Jean-Claude Trichet, adamantly refused to consider Sarkozy’s proposal. 

As the UK Telegraph noted “Europe's central bank could not be used to boost the EFSF because of a 20-year EU treaty clause forbidding the union from using its cash to save European governments. Unlike the EFSF, an ad hoc inter-governmental ‘special purpose vehicle’ based in Luxembourg, the ECB is governed by the detailed chapter and verse of European law.” According to a senior EU diplomat, “If the ECB could act like a national central bank that would make life a hell of lot easier, problem solved, but that runs up against the treaties and Germany's cult of the Bundesbank. Sarkozy was told 'game over’” (France and Germany: an unstoppable force meets an immovable object)

Indeed, the mood at this weekend’s summit in Brussels was somber. The impasse over the EFSF was overshadowed by a surprise announcement from Christine Lagarde, former French finance minister who is now chief of the International Monetary Fund (IMF). Lagarde warned that, without a default, the Greek debt crisis by itself could deplete the entire €440Bn EFSF fund. Her announcement further stated that the IMF was no longer willing to pick up a third of the total bill for rescuing Greece, estimated at €73Bn, unless European banks were prepared to write off at least 50% of Greek debt. One eurozone finance minister was quoted on Saturday as saying that the situation in Brussels was “Grim, the worst mood I have ever seen, a complete mess.” (Eurozone summit - despair and backbiting in the corridors of power)

Stock World Weekly writing and editing team, Elliott and Ilene, recently interviewed Russ Winter of Winter Watch at Wall Street Examiner. In part 1, Chaos in the Land of Oz, we established that the Fed is the Wizard, and we are living in an economic Land of Oz. This week, in part 2, we discussed the debt crisis in Europe, the too-big-to-fail (TBTF) banks, and whether there is a pathway back to Kansas. On Russ's position(s) in the stock market, Ilene asked: Are you long or short any particular stocks? 

Russ: Right now, I’m shorting the "Palace of Versailles" stocks, stocks like Tiffany’s, Ambercrombie-Fitch, Coach, Starbucks, that sell at rich multiples, because supposedly wealthy people are doing well. Well, rich people were losing their asses in the market in the last couple of months. If you look at the polls, rich people are just as negative as poor people now. The Palace of Versailles trade makes little sense when protesters are in front of your houses, and the stores you shop at. I try to run counter to the conventional wisdom. (Click on this link to read the full interview, Chaos in the Land of Oz, part 2)

Late Friday afternoon Phil took a “cashy and cautious” stance. He wrote, “Well that was a totally fun week. Congrats to all the bullish faithful and, of course, the $25KP players – CASH IS GOOD – enjoy the weekend!”

In contrast to Russ and Phil's more cautious positioning, Lee Adler of the Wall Street Examiner is on the cusp of potentially turning more bullish, BUT he wants to see some proof first. He wrote to subscribers of the WSE’s Professional Edition"The market has broken a key resistance level. Unless this move whipsaws, the market could reach projections of 1280-1300 quickly. Such a breakout would in turn suggest that the 18 month 2 year cycle had entered an up phase. Unless bears mount a ferocious countermove on Monday, the likelihood is that they could be in hibernation at least through the winter months."

We have a trade idea this week from Pharmboy, who writes, “Bristol Myers Squibb (BMY, $32.56) is losing its patent protection on Plavix next year, but has a blockbuster replacement in Xarelto. The company has other interesting pipeline candidates, and a hefty 4.1% dividend yield. 

I like starting a position by selling the January 2012 $31 puts for $1.10 or better.”


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maddogs's picture

I'd like to see and read that regulation,"On Tuesday, the Commodity Futures Trading Commission (CFTC) voted to put position limits on commodity markets," so far, most everyone has been granted an exception.

Does anyone have a link and does anyone a have a "status" as far as whom will or won't have position limits imposed?

maddogs's picture

Never mind, I see it's more of the "Same".

"The path to finalization was fraught with partisanship, squeaking by at 3 votes to 2. But Reuters Legal anticipates that position limits will not come into effect without a fight. Their market analyst predicts that industry groups may bring legal action in the conservative D.C. Circuit Court. The technical legal issue will center around the CFTC’s authority to impose position limits preemptively: “Does the commission need to show excessive speculation has caused sudden or unreasonable fluctuations or unwarranted changes in commodity prices and position limits are the only means of ‘diminishing, eliminating or preventing’ the burden on interstate commerce? Or has Congress given the commission an explicit instruction to impose them preemptively?” Alternately, position limits opponents may use another strategy that has worked against Dodd-Frank. The Chamber of Commerce was able to strike down one Dodd-Frank rule written by the SEC by arguing that the agency inadequately assessed the rule’s cost-benefit ratio."

ilene's picture

Thank you for that information. It sounds like there's at least going to be legal delays on the way to implementing the rules, and then exemptions...

PulauHantu29's picture

More MBS will be bought and the dollar will fall again imo. The Fed is owned by bankers and will do their bidding which is to do what the Fed has been doing...monetizing the debt in an orderly way to save banks.

Add this coming monetization + the massive trade deficits + falling tax revenues + slower aggragate demand and I see much more pritning to stave off deflation.....a weaker dollar and higher commodity prices.


tictawk's picture

The REAL purpose of QE is to help banks unload foreclosed property and property in default.  The Fed is hoping to spur real estate buying by the public even while home prices have not cleared at market prices.  There is still lots of downside in home prices but artificial support by Fed and govt programs is keeping a bid under prices.  Some banks cannot afford property to be marked to market because it would crimp their capital structure. The Fed is now trying to help.

Zero Govt's picture

"The Fed is now trying to help"

Haha you're a funny bloke yeah?

The Fed has already tried helping (the Gangster Bwankers) with QE1, Lite and 2... the 'bid' under toxic mortgages didn't help any, in fact the NY Feds offerings back to the market of their stinky WS shit went bidless. The Feds primary role to 'backstop' US Banks, well the big bankrupt most criminally ingratiated ones at least, is going really well. Being Govt mandated to be the most retarded suicidal investor on the planet and last bag carrier dumb enough to 'buy and hold' the most toxic crap from the arseholes of Dimon and Blankfein fits peanut-brained Benny down to the ground

How well has Benny done with the empty shopping malls and fried chicken joints the Fed now owns? Er, not well at all. He hasn't managed to pump up or even hold the value of any of the shit he now has on his gooey hands. It's looking so crap he's now had to start cooking his books (making up his own Fairy Land valuations) even more-so than his corrupt usual criminal self

So if Benny cannot rig the prices of the toxic garbage in his own hands with counterfeit wealth printing how'd the pea-brained little toe-rag ever imagine a second round of twat-investing swallowing yet more shit from WS's rectum is going to work out?'ll be different this time guys just crack me up, just too funny

Ned Zeppelin's picture

This is simply not true: ". . .because it would help the economy through lower mortgage costs that would boost home purchases and spending by people who refinance their home loans." 

Lies.  So what are the real reasons to buy up these RMBSs?

maddogs's picture

To get them off the Fed balance sheet, the Fed is overleveraged after all:)

FunkyMonkeyBoy's picture

Anyone care to tell those bunch of Jewish fellas running the FED that QE1, QE2, QE Lite, QE Twist and shout DID F**K ALL to help the economy...

... and can someone please tell the common man, that the FED has no intention of saving the economy, that is not the agenda they have been given by their masters. Their agenda is to enslave the peoples of the world via their confetti scam. They've bought up the governments, armies, corporations, etc with nothing but fresh air while simultaneously destroying the value of people's store of wealth from their labor and toil.

Some persons need to hang, the sooner the better for all of us. The enemy is domestic and in plain sight.

GOSPLAN HERO's picture

Oath of Enlistment in the U.S. Armed Forces: I, (NAME), do solemnly swear (or affirm) that I will support and defend the Constitution of the United States against all enemies, foreign and domestic; that I will bear true faith and allegiance to the same; and that I will obey the orders of the President of the United States and the orders of the officers appointed over me, according to regulations and the Uniform Code of Military Justice. So help me God.

Fred C Dobbs's picture

The more I listen to Alex Jones the more I agree with you.  Tells us more Mr. FMB.

honestann's picture

The fact is, so many predators have joined the statism/authoritarianism racket in the past few decades, that hanging everyone who deserves to be hung would put a small but visible dent in the global population problem, and a huge dent in the global human predator infestation.

honestann's picture

Damn!  And since so much "money" is green, that has a nice implication to it.  Good one.