Grand Plan 2 Or Grasping At Straws?

Tyler Durden's picture

Via Peter Tchir of TF Market Advisors,


On October 27th we rallied 40 points in SPX and hit 1285.  So far today we are up 32 points and are at 1185.  About the only positive thing I have to say is that 1185 is cheaper than 1285.


The reasons for the rally are largely based on headlines and rumors out of Europe and being too pessimistic about what happens if there is no “solution”.


IMF bailout money:


A story in an Italian newspaper stated that the IMF might be preparing a 600 billion Euro loan for Italy.  Not only has it been denied by the IMF, it makes no sense based on data the IMF itself provides.  IMF financial resources included only $385 billion of forward commitment capacity – less than half of what is allegedly being prepared for Italy. If the IMF is talking about such a massive program, a program far beyond the scope or scale of anything else they have ever done, where are they going to get the money?

Assuming the IMF has more than the $385 billion seems like a big leap of faith.  Will any existing quota members meaningfully step up their commitments?  I don’t believe that will happen, particularly not in the US.  Will they borrow money from the ECB?  It is unclear whether they are legally allowed to do that, and even if they are legally allowed, how happy will some major members be about seeing their money leveraged?


The IMF is real, and is out there trying to help, but their resources are limited, and they are just as likely to be preparing financings for countries impacted by continued problems in the weakest European nations.  The IMF typically insists on defaults and restructurings before providing significant money, and that is probably why they have experienced success in the past.  They broke those rules in Greece and it is quite obviously a mess.  The IMF will play a key role in any solution to the crisis, but that money may well be held in reserve to provide funding post some defaults, rather than another feeble attempt to kick the can down the road.


EFSF – not even what was promised


The EFSF guidelines came out on Sunday.  They were  more confusing and more complicated than I expected.  Most of the programs proposed fail to use any leverage.  The “leveraged” part which seems to be leaning towards the “insurance” format, provides relatively few new details.  There is still NO explanation of how the EFSF will get leveraged money!   Believing that these confusing and relatively weak documents ensure that the EFSF will get leveraged up is folly.  In fact, it is becoming less clear by the day that the EFSF can even raise 440 billion Euro of unleveraged money.  This is the most bizarre part of the rally.


Eurobonds, Fast Track Treaties, Integration


Yes, Germany and France are pushing for some fast track approaches to integration.  Has anyone bothered to figure out why?  Clearly it is because it is good for Germany and France.  They will get control over other countries and may even get some collateral provisions in case of default.  I can see why this is great for Germany and France.  It should also become clear to many of the other Member States, that it is a bad deal for them.  Default or leaving the Euro is NOT the end of the world.  In spite of the hype about the cataclysm that would ensue if any country defaulted, there is scant evidence of that.  In fact in the rest of the world, default and restructuring has been the first step on the road to success for over indebted countries.


The fast track path is a ploy that is an attempt by Germany and France to gain control over a situation where right now, the weak countries have more power because of the weak protection bondholders have.  The fast track may get some traction, especially with puppets in charge of Italy and Greece, but I suspect reaction amongst the masses and the other countries will be far from docile.

Eurobonds have no chance of working.   Worst idea out there, still.  There is no way to implement them in a size that is meaningful, without buying back existing debt of the weak countries.  Doing that will make it clear that Germany and France are over the edge, and the Eurobonds will trade incredibly poorly.  They will actually cost the Eurozone countries more as a whole than if each country continues to issue their own debt.  Eurobonds realistically would require several years to implement, and would only gain traction if the countries were more equal and the economic situation was stable.  None of those conditions currently exist.


Greece and No Default?


Somehow there is a theory that the IIF negotiations failing are good because it is a realization that private sector shouldn’t be forced to lose money.  Similar comments came out regarding the ESM (the permanent replacement for EFSF).  Without haircuts, Greece will never be sustainable, and the backlash against banks will continue to grow.  If the banks continue to be the prime beneficiaries of all the government bailout money and are not penalized there will be growing demands for some form of government punishment.  This comes on the back of a Bloomberg story about much profit banks made on the back of government support.


In the end, I think a likely solution is more likely to cause further pain for bank shareholders, not less.  At some point, the governments will look at bank shareholders to foot the bill.  They benefited from the good times, get the main benefit of bailout money, and made most of the dumb decisions that have caused this mess.  The banks continue to say that if you wipe out the banks, there will be no lending or recovery.  There is a growing view that you can wipe out shareholders, but so long as creditors and depositors are protected, the banks can continue to lend, and will finally bear their fair share of the costs.


Is break-up and default the equivalent of Armageddon?


A big reason the market wants to rally on any positive noise is the firm conviction that default or break-up is the equivalent of Armageddon.  The belief is that without a bazooka or magic bullet, the markets and economies will basically cease to exist, so the only logical conclusion is that the bazooka or magic bullet will be given.  That is incredibly extremely, and for banks, incredibly self-serving.  The issue is not so black and white.  Default and break-up does not have to be a disaster.  That is especially true if much of the money that was going to be part of the magic bazooka is provided after the the defaults and break-ups have occurred.  In fact, all that money could be targeted much better and the system would be simpler and the worst of the zombie banks would be gone.


If default or break-up leads to Armageddon, then investors are right to place more hope on some moves that attempt to keep the status quo alive a bit longer.  If default and break-up just causes some problems, different ones than exist now, but ones that can be addressed and fought, then it is far less smart to assume that this isn’t the endgame that Europe is heading for.  Banks in particular would bear the brunt of that pain.


Thanksgiving Sales


They seem good.  They were up.  Though I’m not sure if shopping hours were also up by more than 7%?  We also need to see what happens for the rest of the season – we had amazing weather this weekend which may have encouraged people to get out of the house.  This data definitely seemed good, but the jury is still out on how good and how sustainable it is.  A 3% move in the S&P can’t be justified by this alone.

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AngryGerman's picture

Was there a grand plan 1?

Golden Boy's picture

Wow, the anti-eur rhetoric is nuts here today.

Lord Welligton's picture

But where is the solution.

It's not Anti Euro as such.

It's anti madness.

If "they" come up with something that is reasonable and can be seen to have a chance of working then fine.

Otherwise the Euro is toast.

fonzanoon's picture

Wake up and smell the QE3

Ivanovich's picture

Exactly.  This is what is driving the madness.

bernorange's picture

Doom is a bullish sign for currency debasement.

I am more equal than others's picture

Like Forrest said 'stupid is as stupid does' and 'that's all I got to say about that.'

IrritableBowels's picture

Really?  In what form? And why today?

SheepDog-One's picture

Well...the RUMOR of QE3 anyway, which is certainly nothing new its a year old.

So lets price in QE3 just for fun, it would have to be massive, $4 trillion or so, so the result of QE3 would be oil at around $140 and gold at $2,400 or so....good lets seem them do that!

GMadScientist's picture

France and Germany now accepting applications for these positions:

- EuroSerf

- Potato Farmer (Poles preferred)

- Pepper Farmer (Hunkies preferred)

- Bespoke Thong Maker (Bunga preferred)


e2thex's picture

In theory, theory and practice work. In practice they do not.---Yogi Berra


Cdad's picture

It really is too bad that the IMF rumor IS JUST A RUMOR, and a disproved rumor at that .  Personally, I would have loved to discover that even more leverage was being used on top of the leverage that currently exists in the system...all of it chasing debt that is certain to be written off and stocks that are priced for stupid.  Oh well.

GMadScientist's picture

Worry not; just because they failed to tip the can of turpentine into the blaze doesn't mean they aren't
still fanning the flames and just as far from putting out the conflagration.


Snakeeyes's picture


Greece and Portugal didn't get memo. Or are they considered too far gone for the EFSF or any future IMF bailout? Monday’s Euro Update: Slight Improvement in Bond Yields


razorthin's picture

"it seems the main reason for a market rally is the amrageddon-like scenario of the break-up and the typical belief that 'the-worse-it-gets, the-better-it-will-be-in-the-end', so buy.


Pathetically true.  So let's just skip the real pain and move right on to nirvana.  The above will make perfect sense at spx 400.

oogs66's picture

really think it is that bad?  why not spx 900?  and guess what, when they do all the bailouts, the next crisis, probably a few months away, spx 400 would be a dream, either than or $10 a gallon gas?  who knows, but why does s&p have to go down that much if they let countries default and weakest banks get wiped out? 

razorthin's picture

If they step back and let the deflation happen and the credit evaporate as they should for a long term solution, then even spx 400 is quite ambitious.

But, you are probably correct.  They'd sooner see $10 gas before it reverts to $0.25

e2thex's picture

SPX 400, DJIA 4000.....ain't gonna happen.  Today's rise was in Friday's close. Forget the news. That's all noise.  






What happens?

Flounder's picture

CAC40 up 6.5% since Friday afternoon

CAC40 down 25.5% since July

If you experience an erection that lasts more than 4 hours seek medical attention.

i-dog's picture

Oh!? ... I didn't read that bit ... I always look for somewhere to bury it!

spanish inquisition's picture

The hopium is strong today, I wonder if they injected something into the turkeys? Maybe they releasing happy gas in the malls? ("mummy whats to shop!" That is what I heard in the malls spoken like Dennis was weird)

Josephine29's picture

The problem with the IMF providing 600 billion Euros is that it does not have it as explained below.

How much firepower does the IMF have?


This is not as easy a concept as you might think but let me run through some numbers and I will put them in US dollars as so few people have any concept of what an SDR actually is.The numbers are from the IMF website and are from late summer.

Quota Value US $362 billion

Ability to borrow (NABs etc) US $ 600 billion.

Amount Lent US $ 69 billion

Amount Promised but not drawn US $213 billion

Potential Firepower US $680 billion

So if you remember that is for the whole world and not just Italy it is well short...


AngryGerman's picture

and they do not get any backing from

SheepDog-One's picture

$600 billion Euros? Just last week they found a $4 trillion unfixable new debt problem in Europe...they'd need to announce $10 trillion in new Euros now just to get back to dead broke.

lizzy36's picture


The IMF has about $285B to lend, so what moron believe they have EUR600B to lend to Italy alone.

Retail Sales numbers are at best guesses, by the Retail Sales Federation and ShopperTrak. Like an obese person self reporting their diet like caloric intake (really they ate salad as their main course, just for got to mention that their sides were 2 big macs and 3 large fries).

ShopperTrak reports +6.6% gain in retail sales. How did they come to this conclusion: ShopperTrak “uses equipment installed in stores to measure traffic.” Not that is not SALES but TRAFFIC.


AngryGerman's picture

yep, it's like fucking without coming

LawsofPhysics's picture

Expect a lot of this as the propaganda machine goes into overdrive.  Lots of semantics will be used to make the bad new more palatable for the sheeple.  Pretty clear to everyone that the last 40 years has been made possible by an exponential increase in the shadow banking sector, now over 700 trillion in bad paper.  Everyone simply needs to stop paying taxes and focus on their local economies.  We will end up there eventually anyway, so why not get a head start.

SheepDog-One's picture

Only problem is the sheeple are all broke, why go to such extravagant lengths to fool people who cant even buy food and shelter much less shares of worthless stocks?

SheepDog-One's picture

Yea 'traffic' measured as 'retail sales'? All BS, sales may be at all time lows as far as anyone knows. 

Also the 'official numbers' of $30 billion in sales are a fart in the wind....that means EVERY american alive spent $100? Or if 10% went shopping, theyd have to have spent $1,000 to support that claim? No way do I believe it.

bnbdnb's picture

Its so funny watching the obvious manipulation of the EURUSD. Every time its about to breach the PSAR it pops 10 pips.

The Axe's picture

out of my 10000 citibank....thanks for your support.... may the force be with all of ZH....

MFL8240's picture

If the IMF is talking about such a massive program, a program far beyond the scope or scale of anything else they have ever done, where are they going to get the money?


Was this question neccessary?  Where does everyone think this printed money is coming from??

LawsofPhysics's picture

I have an idea, give them the world's reserve currency for a change, stop printing dollars and watch the value of the Euro fucking evaporate as they print it into oblivian.  Most people I know are sitting on cash and physical anyways.  Let the local economies thrive, fuck the central planners.

Many farmers can't find workers.  End the SNAP program and replace it with a one way bus ticket to the nearest farm that needs laborers.  Pay them minimum wage and all the fresh produce they can eat.  You will solve the obesity problem, the health care problem, AND the unemployment problem all at once.

j.darkness's picture

Eloquent, LawsofPhysics, solutions abound and they will be ignored.  I've been lurking and learning here for over a year now and while its always been a bit on edge, now seems particularly fragile.  The accelerating rise in value of otc cds noted here earlier seems like the beginning of the end game.  It reminds me of some kind of slow moving explosion that can only be stopped by a much larger one.  Keep up the good work. 

mayhem_korner's picture

Where does everone think this printed money is coming from??


Why from the printers, of course.  ;)

I think we should refrain from - if not reject outright - the phrase "printed money."  If it's origins is a printer, it may be currency, but it shirley ain't money.  That equities of any flavor rise on the hopes that someone will agree to inject more unbacked currency into the FUBAR system is evidence of a flatline condition.  :D

adr's picture

-etail sales are way down from last year. They may do some neilsen box type shit with the number by counting NYC and \ sales and apply it across the country. Outside of government welfare sponsored consumerism the picture was horrible. My wife works retail and they didn't come close to last year's Black Friday despite being open for 6 hours longer. The crowds were very subdued in my area. By 3AM Best Buy was a ghost town, There were pallets of doorbuster TVs left, the $5 movie bins were still full. 

SheepDog-One's picture

How can they so efficiently tally retail sales the next DAY for 'Black Friday' reporting, but for all other economic data its months old?

jcaz's picture

Blah, just another spike in a bear market-  pretty typical in history.....

Everybodys All American's picture

It must be mentioned if the IMF indeed begins to bail out any country then they are essentially barred from the financial markets from selling their sovereign bonds. It's game over and austerity is forced on the selected country. If that's bullish then I contend you're trading in a broken market. Thanks again to a guy with an ugly beard in DC.

arkady's picture

What about this story from Bloomberg that strongly suggests as if some banks are awaiting QE3.


I can't tell if this is just a rumor or confirmed news though, it is written in an awkward manner.

SheepDog-One's picture

The worse things are, the better! Hell I always said when Russian nukes impact Manhattan island, the DOW will spike up +300 at least.

RobotTrader's picture

Why aren't the gold-clutching gloomers here cheering?

A huge rally in stocks is the only way gold will ever see $1,850 again.

SheepDog-One's picture

Rally in stawks makes gold go up? I thought you said gold clutching gloomers better cheer more money printing as the only way gold goes up. 

You still mad you sold all your gold at $900? Dont let it get to you so much, it will eat you up, just forget your terrible calls and move on.

CPL's picture

It's okay Greg, gold isnt the only ship rising.  Oil.  WTI.  Texas Tea.


BTW rally just broke.  Isn't Oil a bitch. 

CPL's picture

I thought it was going to take until 10:30 for the HFT's to go on the sell side.


WTI just broke $100 a barrel and broke their ridiculious plan.  Gold and silver are going apeshit as well.


RSI shit the bed.  EMA...nothing moving but bots.  There is going to be a Bull raping today.  Numbers are all backwards and screaming massive fall.

SheepDog-One's picture

Oil at $100 really screws their stock pumping fantasies.

CPL's picture

It's the best example of a ratchetted trade countering the inflation these yahoos are playing with if I've ever seen one.  I now want tptb to inject another trillion into the system. 


WTI hits $100, market shits the bed.  S&P, DJIA can be any number we would like it to be but the physical nature of oil and the fact nobody goes anywhere without it, it's the reflection of the amount of money being pumped into the system.


Notice how Goldman, JPM, etc all note Gold will be 2k by the end of the year?  They mention absolutely nothing in terms of market performance.  My favorite thing though is their complete avoidance of the issue of oil pricing.  Scares the shit out of them.  It should.

Tsar Pointless's picture

Retail sales up 7% Y/O/Y, with real inflation running @ 12% or more.

Did you try to buy a fake Christmas tree this weekend? They're only up about 300% or so in price from last year.

Yep, one hell of an economy we have here, bitchez!