Guest Post: Whilst We All Await The Outcome Of The EU Summit I Want To Draw Your Attention ElsewhereSubmitted by Tyler Durden on 10/26/2011 - 07:03
Whilst the US equity markets closed down 2% last night, it is clear that there is little appetite to put on new trades in front of this summit meeting as evidenced by the lack of interest in Asia. Equities and FX markets were extremely quiet except for when the Aussie CPI came in weaker than expected sparking a fall in the AUD and a complete 25bp cut being priced in for next week’s meeting. To me the AUD looks very exposed to a steep fall as global growth is in trouble. The fall on Wall St was, in my opinion, more on the back of further weak data from the housing market in the US and consumer confidence which is collapsing fast, as the Case Schiller disappointed yet again. Is operation twist going to help? If the answer is no then Bernanke will have to try something else and this view is building as the fall in equities was accompanied by a fall in the Dollar and a steep rise in precious metals, all signs that fears of further QE are building.
As Merkel ends her speech to the Bundestag on her way out to the Euro Summit, here are the main rhetorical conclusions:
- MERKEL SAYS JUSTIFIABLE TO MAXIMISE EFSF FIREPOWER
- MERKEL SAYS GERMANY `IS NOT THE NAVEL OF THE WORLD'
- MERKEL SAYS EURO CAN'T BE ALLOWED TO FAIL
- MERKEL CITES 'HISTORIC DUTY' TO PRESERVE EUROPE, EURO
But none of that compares to what just was the use of the nuclear mutual assured destruction option, to wit
- Merkel: No one should take another 50 years of peace in Europe for Granted
And scene: Hank Paulson would be so proud
With European coverage today about to confirm with absolutely certainty that the only option for Europe is to baffle everyone with intolerable and ridiculous amounts of bullshit, and failing that, to delay, delay, delay (we are already hearing of another summit in 4 days), probably what is most indicative of what to expect out of Europe is what incoming ECB president Mario Draghi said is the situation in Italy which he called is "confused and dramatic." That pretty much sums it up. Anyone expecting any actionable result out of the drama queen country or continent, will be disappointed. In the meantime here are sporadic news which attempt to paint a picture of the total confusion in Europe...
About a year ago, we speculated that as part of the ongoing currency warfare between Brazil and the "developed" world, its finance minister Guido Mantega would keep his trade surplus trump card until the moment of biggest impact. That moment has come, after the financial head (with the Playboy-posing daughter) just told Europe to take a hike. "I believe that European countries do not need funds from Brazil to buy bonds. Brazil is not considering it," Mantega told reporters in Brasilia. "They have to find solutions to the European problems within Europe." And with Brazil out, it is certain that China will not step up over fears of appearing weak and needing to provide vendor financing to its biggest export partner. Unfortunately for Europe this means that at least one component of the revised SPIV: that which foresees public investment from third parties into the EFSF (a new twist proposed only last week), can now be safely forgotten, bringing us back to page one and the entire 5x levered CDO structure which as has been explained numerous times, is Dead on Arrival. There is, however, one loophole. "Mantega said Brazil would be willing to provide financial help via the International Monetary Fund." Which is rather laughable considering that by IMF, one typically refers to, at least in polite society, Uncle Sam. Then again, with a French woman (and one who until recently was solely reponsible for the grave French financial condition) in charge, it is easy to lose sight and to be, there is that phrase again, baffled by irrelevant bullshit even as following the bailout money always lead to the same old source.
Is it safe to say that the Goldman love affair with the government is officially over? From Reuters: "Former Goldman Sachs director Rajat Gupta will surrender to the FBI on Wednesday to face criminal charges, a person familiar with the investigation said. Gupta was named as an unindicted co-conspirator in hedge fund founder Raj Rajaratnam's trial earlier this year. He has denied wrongdoing. Rajaratnam was sentenced to 11-years in prison this month. Gupta's attorney, Gary Naftalis, did not immediately respond to a call seeking comment." Perhaps it is also safe to say that the war between Obama and Wall Street is now official. Of course, we give Obama about 24 hours before the economy tanks, the stock market implodes, the great unwashed see their meager 201k's converted into 100.5k's, and decide to #OccupyTheWhiteHouse. In other words, our money is not on the administration on this one. In fact, when the smoke settles, we expect a few extra tentacles from 200 West to penetrate even deeper into the three farcical branches of government of this once non-banana republic.
On Friday the "haircuts" on Greece get serious. No more bogus high coupon principal protected notes - but real notional reductions of 50 per cent or more. I believe the ECB has a portfolio of 55 billion of Greek debt. If average price was 80 then that is a 16.5 billion actual loss. ECB, unlike our beloved FED, doesn't want to just print money so they make a capital call on their members. Yes, the same members that back the EFSF. How many of those members even remembered the ECB can call for additional capital (it's why they are so happy to employ the double down don't frown trading strategy). The terms of ECB capital calls are worse than EFSF because they are joint and several. If countries don't meet their obligations they don't go away, they get passed to another country. So as ECB loads up on PIIGS debt and losses or haircuts would be paid for by the non problem countries - in addition to their EFSF obligations. Germany maybe has learned not to overextend and is scared to pile this (previously ignored) liability on top of it's EFSF guarantees. At least EFSF is something they have control over. France I think was planning on loading up the ECB with so much debt they would just capitulate and print money.
In this video excerpt from the Casey Summit When Money Dies, Rich Dad advisor Mike Maloney explains how currency is created, "fractional reserve banking," and why our banking system is a pyramid scam of epic proportions.
It was bound to happen: after hitting a two year high recently at (adjusted) 15.3 billion shares, total NYSE short interest, which failed to be satisfied with a violent market plunge and instead got caught in a vicious short squeeze, has dropped to the lowest level since mid-August, or 14.7 billion shares. Naturally, this, coupled with the massive bearish bias in the euro, discussed previously, where covering merely added to reinforce the squeeze dynamics, are sufficient to explain the weak hands covering following the unprecedented near 1000 point jump in the DJIA. The good news for bears: it appears the weak hands have been shaken off now. At this point, even if no incremental shorts are layered on, then certainly the autopilot melt up in equities will be next to impossible to be sustained, and some real, not rhetorical, pick up in the global economy will be needed. Alas, one is not coming.
The latest Momo implosion as predicted:
- AMAZON.COM 3Q EPS 14C, EST. 24C
- AMAZON.COM 3Q REVENUE $10.88 BILLION VS EST. $10.95
- AMAZON.COM SEES 4Q SALES $16.45B-$18.65B, EST. $18.16B
- AMAZON.COM 3Q OPERATING MARGIN 0.7%
- AMAZON.COM sees 4Q operating income (loss) between $(200) million and $250 million, or between 142% decline and 47% decline compared with fourth quarter 2010
No, Paulson & Co. is not long.
Very simply, the facts of the current environment in Europe don’t equal the conclusion that a coordinated effort will restore confidence. The fact of the matter is that European Sovereigns are massively indebted and European banks are massively under-capitalized. The proposed solution of raising capital and issuing fresh debt to solve this issue is a joke. If I walk away from a home I owe $200k on and its fair market value is $100k (a 50% haircut), does a loan to my bank for $100K from the institution overseeing it change the impairment? No. You’re shuffling the cards. Instead of taking a $100k loss, they now have an asset worth $100k and a new liability of $100k. The asset is still worth $100k. Even though their little maneuver technically gives them an asset of $100k and cash of $100k, my bank now has $100K less to lend against. Thus, their leverage increases. This analogy applies to European banks holding sovereign paper... and for that matter the countries themselves (ie Italy voting on whether Italy's debt should be purchased by the ECB/IMF/EFSF, etc). At this point, any 'plans' are only slightly more creative than card shuffling tricks from a clown at an 8 year old's birthday party.
If you are long, or want to get long here your stop losses will be wide and volatility based. Here are some tips on managing the positions:
- Silver Stop Loss should be $32.45. You can pick a tighter stop if you like, but this is the proscribed level for pullbacks to go to and the bull move to remain intact. Losses can be managed by adjusting volumes rather than tightening stops.
- Gold Stop Loss Should be $1680.00. This may seem less risky than silver, but that often means worse reward potential.
- Tomorrow morning trail stops higher as profits occur, use previous lows, highs on the hourly level or the top Bollinger Band line on the Daily chart previous session.
- Get ready to take profits aggressively: when these hit, 80% of the projected volatility based move is in the first 72 hours
- Get out if you are not in the money in 48 hours, even if your stop isn’t triggered. Momentum fades fast if you don’t get follow through from the immediate push.