Premature Speculation

Via Peter Tchir of TF Market Advisors

Monday afternoon the markets shot straight up after taking a dose of CNBCialis. CNBC was the first to break the story about letting EFSF use leverage or turning the EIB into a vehicle to increase the potency of the EFSF funds.  That was followed up by more leaks to other news sources.

Stocks went higher quite happily but failed to drag the credit markets with it to a large degree.  Any analysis of the various plans all lead to the same conclusion - no matter how complex or convoluted the plan, the only way it works is for Germany and France to risk their credit ratings to support everyone else, or to print money.  No miracle solution was at work.  Plans may yet be put in place, but it is clear all they do if shuffle the deck chairs and obfuscate who is picking up the tab, but solve nothing.  It is clear that if it gets implemented, any further problems would become far worse as there would be no Eurozone country strong enough to support the rest.  What wasn't clear, is whether the downgrades would occur even before the plans were launched.

Germany has been staunchly opposed to the plan since it was first announced.  During the entire 18 months that this slow death of Greece has been playing out, no plan that had any chance of becoming reality was ever launched without Germany's involvement.  I wonder if the plans had been proposed and shot down, and some excitable ministry of finance official tried to get it approved via the back-door by leaking it to the media and hoping it got so much positive momentum that the people who had rejected it out of hand would have to reconsider?

I read a great piece yesterday titled "Take The Loss".  I continue to believe that the best solution for Europe is to allow Greece to default and then protect all the banks and institutions that can be protected.  Provide liquidity and capital at a fair price and finally move on.  All the banks trade well below "book value" because everyone knows "book value" is just a garbage number.  Let book value decrease by taking the appropriate write-offs.  The market may have priced in a lot of what is out there already.  HSBC has shed over $20 billion in market cap over the past 12 months.  SocGen and BBVA both over $15 billion, DB close to $10 billion.  A big part of these losses in share price is attributable to their PIIGS exposure.  Let Greece default, let the banks take the hit, let's see what other dominos drop, address those with either more defaults, write-downs, or capital, and repeat the process and very quickly we will have a much stronger residual Eurozone.  I doubt that more than 3 countries take debt haircuts and probably 20 to 30 weak/mid-size banks need to be shut.  Painful, YES!  But this is do-able.  The market caps of these banks has been hit hard already, the politicians are likely too afraid of the consequences of default.  Much is already priced in.  What isn't priced in, is a system not spending each and every day worrying about Greece, and a world where politicians can govern, rather than attempting to manipulate markets they don't understand.  Removing those uncertainties may help more than we realize - possible unintended consequences that are positive.

Government support shouldn't be forced on anyone, and it should be priced fairly.  BofA and Buffett showed everyone the fair price of raising capital.  Governments should charge no less, and if a bank can't handle that cost and can't live without an injection, and can't get a better deal from the private sector, well that's just too bad.

As I wrote earlier, I will change my view of the market when something real comes out to make me change it.  I also really believe that in the near term, after a Greek default, SPX is likely to move in a range of 1000-1150, and the next big move will be if the global economies can resurrect growth.


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