Between Hilsenrath's humoring, Draghi's 'ready-to-act', and Merkel's 'fold', it appears all-is-well once again in the world. European banks are soaring - especially the most recently devastated as the broad European bank index jumps its most in 5 months. Italian and Spanish sovereign bond spreads compress notably, perhaps on hope of a renewed SMP - even as LTRO3 seems to have lost favor with the ECB (effectiveness?). Basis-swaps popped higher (better), Bund yields rose, Swiss 2Y was flat (but low) and Crossover spreads (high-beta credit) are outperforming. It seems that markets are pricing in a best-case scenario. EURUSD is oscillating higher but stocks remain notable underperformers over the last few weeks and frankly this feels more like a short-squeeze bounce than a renewed rally as we know all too well that nothing has been solved (even if Germany is caving on Spanish banks). With the long-weekend and lack of liquidity, it seems markets have simply round-tripped to pre-NFP levels and now it gets interesting - context, as always, is critical.
With all proposed Spanish bank bailout plans so far either shot down, or found to be inadequate, the question always has boiled down to whether Germany, which as we have noted in the past is the true lender of last resort in Europe, not the ECB, will agree to the trade off of preserving the Eurozone, i.e. temporarily ending the latest Spanish risk flare out, in exchange for the risk of political disgrace domestically, where more and more people are against sweeping European bail outs, due to soaring "contingent liabilities" which increasingly more people on the street are realizing are all too real (see: TARGET2). On the other hand, a direct bank bailout request for Spain using traditional European channels, which would fund the government, would result in a deterioration in the Spanish sovereign leverage, and make the country even riskier, thereby putting more pressure on the banks, and so in a toxic loop. It now seems that this dilemma may have been resolved, at least on paper. As Reuters reports, "A deal is in the works that would allow Spain to recapitalize its stricken banks with aid from its European partners but avoid the embarrassment of having to adopt new economic reforms imposed from the outside, German officials say. While Berlin remains firm in its rejection of Spain's calls for Europe's rescue funds to lend directly to its banks, the officials said that if Madrid put in a formal aid request, funds could flow without it submitting to the kind of strict reform program agreed for Greece, Portugal and Ireland."
On our current course, there is no other choice for the average American but to say no, regardless of the law, or the threat of its violent enforcement. Rebellion, in all its forms, is as natural as the cycles of the Earth. It reoccurs time and again, sometimes suppressed, but not for long. The horrors of governments gone rogue are no secret. We have so many examples in history to draw from it is hard to imagine any crime despots have NOT visited upon innocents. Frankly, if control thirsty elites can refine tyranny down to a science by examining the mistakes of the past, there is nothing stopping us from refining defiance down to an art form as well. Again, what other choice do we have, but to take heart in the knowledge that though there is no assurance of victory, there is also no assurance of defeat.
'The unbearable harshness of being' a European in the midst of crushing austerity has forced everyone from France to Greece to pick up their pitchforks against those stability-minded and conscientious Germans. As Diapason's Sean Corrigan shows in this clarifying chart, the 0.18% drop in Eurozone Real Government GDP must have been truly devastating; or perhaps, just as we have said again and again, it's all about the flow not the stock and any lack of growth is the death-knell for what is called capitalism.
Sadly the man who thought (with good reason) he was more important than the Chairsatan (until the whole CIO fiasco blew up in his face of course), Jamie Dimon, will not be there (and will thus not be available to provide an update on the CIO's losses to date, which are likely orders of magnitude greater than the $2 billion benchmark previously disclosed, but that does not mean today's Senate hearing on lack of regulatory oversight and massive bank prop losses will be any less interesting. From C-Span: The Senate Banking Committee will hold an oversight hearing on efforts to overhaul the regulation of derivatives. Lawmakers will focus on the steps the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) are taking to implement provisions of the Dodd-Frank Wall Street Reform Act, and their efforts to reduce systemic risk and improve market oversight. The session also will spotlight J.P. Morgan Chase's $2 billion trading loss, which is under investigated by the FBI and the SEC." We, for one, can't wait to find out what the FBI's trained CDS forensic experts discover on this one...
Reflecting on yesterday's monetary-policy-hope-driven rally, UBS' Art Cashin prefers to focus on Richard Fisher's very frank (and succinct) speech on the limits of monetary policy and the importance of fiscal policy. Urging everyone to read it, and send it to your Congressman and Senators, he reminds us that Fisher is the only Fed policymaker to have been a banker and a money manager, and in the words of Richard Fisher, he worries that: "there is a growing sense that we are unwittingly, or worse, deliberately, monetizing the wayward ways of Congress."
From Whitney Tilson's just released letter: "It was an ugly month – our second-worst ever – but for perspective, our fund gave back slightly more than the 12.3% gain of the previous two months. We’re still having a decent year, with a healthy, market-beating gain. In fact, this is the fourth-best start to a year in our fund’s 14-year history." Is that so? May one inquire, in the aftermath of the JPM CIO scandal, does T2 mark the bulk of their positions, which as Zero Hedge disclosed recently are call options, based on market, or based on magical bid/asks, to be made up on the go (as in JPM'scase)? That's right - a hedge fund which "invests" in theta. Is there any wonder why the "hedge fund" with about $200 million in actual stock-based AUM (the balance being calls and warrants), may be the first one with a negative Sharpe ratio? For a visual summary of why LPs (aside from friends and family of course) in T2 are singlehandedly propping up the bottom line of Dramamine, see the chart below.
The headlines are rolling in. From Bloomberg:
- ECB SEES 2012 INFLATION AT 2.3% TO 2.5% VS PREV 2.1% TO 2.7%. - so... counterdisinflation
That's the kicker: ECB sees inflation. Deus Ex Off - forget more easing at this point. Everything else is just filler.
Minutes ago, the ECB already delivered a major disappointment to those most desperate for a Deus Ex intervention: those praying for an ECB rate cut were EastLB (0.5%), and BNP, Credit Agricole, Margin Stanley and Nordbank, all of whom were hoping for a 25 bp cut. Incidentally, all banks that are, shall we say it, liquidity challenged. They did not get their prayers answered. Now, the prayer goes that Draghi will magically hint at the NEW LTRO (not LTRO 3, thank you Apple). In reality he will most likely continue dragging the old party line - economy is weak, we hope governments fix it, but ECB stands ready, etc, hardly the stuff of "Bath Salt your Face Off" rally legends. Watch the whole thing live at the link below.
Imagine if you will a very large and diverse restaurant. It is not the Restaurant at the End of the Universe of Douglas Adam’s fame but the biggest one on this world and it is known as “Investeros.” Here there is a group of people that have been dining together for the past thirteen years. For most of the time the food was good, the service polite and paying the bill was never an issue. Then Don Grekko got into trouble and then Don Paddy and also Don Portugesse. They still went to lunch, of course, everyone being good friends but the other diners had to pick up their bill and this was getting tiresome. There was huffing and puffing and each of them said, in turn, that it was not their fault. There was the usual polite finger pointing and these three gentleman ate, but what they could order was severely curtailed because of the prices. This caused some issues but everyone still dined and the world went on albeit not quite as pleasantly as before.... In a final act, of what they thought was brilliance, the dining group turned to the owners of the restaurant and asked for credit. They got this for a time but the bill for present and past meals kept increasing as well as the interest on what was owed. “You know us, we have always paid, we will always pay” is what was told to the owners of “Investeros” but the bill was becoming so large that many of the restaurant’s owners said that the days of the “free lunch” was over. Now the group is once again at the table ordering lunch and desert has come and gone and everyone is sitting there looking at everyone else. No one is volunteering to pay the bill; no one knows who will pay the bill. The restaurant is about to close for the siesta and the waiters are getting impatient along with the management.
As largely expected, except for some die hard contrarians, and as we predicted, the ECB keeps rates unchanged, and checks to the Fed. Now everyone turns attention to 8:30 am press conference where those who provide investment advice based on coin flips what central bankers do, will pray to their assorted gods that Draghi will fix everything. Or at least something.
10 Minutes to go until the ECB.... very likely disappoints again. As it usually does. There is simply too much pent up hope in what Mario Draghi will say or do, as always happens at critical junctions for the insolvent continent. Recall the same happened in November, only for the world to have to bail out Europe following a non-announcement by the ECB as Europe was imploding. Finally, why should the ECB do anything, when the public debate has already started about the US bailing out Europe: why should Draghi further infurtiate Germany's taxpayers when it has a free put option on Bernanke doing what he does best in two weeks. But for now: RISK ON. For at least a few more minutes.
- Wisconsin's Walker makes history surviving recall election (Reuters)
- China Labor Shortages in Guangdong Show Stimulus Limits (Bloomberg)
- Oil rises toward $100 ahead of ECB (Reuters)
- China's Property Controls to Stay (China Daily)
- Spain Makes Explicit Plea for Bank Aid (FT)
- Fed Considers More Action Amid New Recovery Doubts (WSJ)
- Noda Sales-Tax Push Confronts Rising Japan Majority Opposition (Bloomberg)
- National Interests Threaten EU Bank Reforms (FT)