TGIF

It's rock-and-roll in the market - intraday moves of 4-5% being the norm, yesterday was the biggest party for risk-on for a long time, but end of the day we remain inside the weekly range, but lots of people including yours sincerely has gotten burned from trying to fade both up-and downside.

A quick look at our benchmark models inidicates that the main theme remains Doon-and-Gloom with a performance of +609 bps post yesterday, while our risk on model called benchmark for same period is down 234 bps.

Meanwhile despite last nights massive upmove the Beta-model remains solidly net short (1x capital) - performance so far -318 bps.

Note: The beta-model is a slow moving model used to capture the main trends - not specific recommendations.

Oterwise I spend most of yesterday discussing with several people the 'timing' of the real crisis. The main arguments among the smart people is that it's too early to call for the crisis yet, there could be anything from six month to two years before it materialise for real...

I'm more sceptic, as you surely know, my main issue and positioning right now remains anti-EU for the following reasons:

Globalisation has two major bottlenecks which stops the natural proces

Germany going it alone on capital restrictions upsets a system where the whole premise if free floating capital.

Now German investors needs to go abroad to manage risk - and everything being equal the investment flow into Germany should be less, as this type of socialistic remedies decreases the transperency of investing and increases both the legal- and transaction price.

The globalisation now have two main bottlenecks:

A. China - who by fixing their exchange rate(from strengthning) maintains current account surplus despite the normal process being the opposite for young growing nation and..

B. Germany, the biggest GDP factor in Europe by far(and the riches) - but partly closing the freemarkets the current account surplus of Germany will become less exportable, plus there could be political ramification towards Germany(I note several MSM is taking "the piss" on the Germans) and I see this as a sign of anti-German sentiment(which I certainly do not share) - this is from FT Alphaville this morning: Full FT Alphaville link (click for version)

'We expect one of Deutschland’s debt defence brigade to start issuing a statement any second now . . .

DO NOT DIZPUTE ZE ZAFETY OF ZE BOBL SHOULD YOU CHOOSE TO ZELL ZE BOBL BAD ZINGS WILL HAPPEN TO YOU SCHWEINHUND'

Europe game-theory:

De-facto we have seen a gigantic step towards EU becoming true economic zone with coordinated fiscal policies - this is good for the long-term viability of the EU, but it ignores the inevitable political aspect which is several nations will not move and ratify this (Denmark, Ireland, Holland for sure)... so we have wedge where on one side the policy makers are taking steps way beyond the spirit and legal text of Masstrict (which is good economically) - and a political process which stipulates that giving up any sovereign power is matter for the domestic electorates - in other words: For now the politicians can excuse themselves as "saving the EU", but long-term they need to go to their electorates and get the approval to move Europe closer to true Union.

There is NO WAY this will happen! The distrust in Europe is bigger than ever before, but it's long tidious process and we need to see who wins out.

The odds clearly is for this to take longer, for this to become yet another bubble, before we will have to the adjustment we should have faced in 2008/2009 - transfer of debt to one balance sheet to another still does not help anyone, but the perception remains that the world is saved.
 
STRATEGY

Remain extremely defensive. The "models" still confidently short the markets, and end of month manipulation should be used to sell the remaining balance of stocks on your books.

Nice week-end 

High intraday volatility indicates? Humble pie being served?

Wow - went to bed with S&P safely below 1060-00 thinking - this is going to be an ugly night - and it became an ugly night...... but for us 'bears' - Low to High range 40 big figures! (1055-00 / 1095)

I fail to see how the US market can be plus/minus 4% outside normal trading hours, but it does show we are at a cross road. I could also very well be that I and my fellow bears need to eat some "humble pie".....

The long and short it remains:

Against my "model environment" I still need to be short, but if this close is up +25/35 points  @ 22.15 European time the model may turn neutral again. (follow up 2nite or tomorrow)

but.... more importantly:

We all agree on the crisis is incoming - the difference is one of timing - and yes in trading timing is everything, but stay with me:

The believe in the political system + central bank is old, well-tested and should have highest probability - and a view we shared until very recently.

We are however concerned about Germany going it alone - in a synchronized world this does not fit ........

Also China is totally ignoring the calls for revaluation of their currency, which means the negative impact of globalisation continues, i.e: China is net saving, the G-20 net spending - and it should be the other way around due to average age of population.

Leave that aside. The two question, you and I need to ask ourselves are:

• Do you believe they(politicians+ bureacrats) got more ammunition to use to stablise these markets (or do you believe this is start of sovereign debt crisis) - I do.....but what and when?
• Will you stay with your model or not. Our model is very simplistic and has been on this blog several times, our 'Beta-model' remains short, for now, and yes (for now)

You know my answer to the above questions for now, but I have to admit a 40 points rally got me very nervous and as it is... into to the month-end rebalancing it has not been a good ride for me, so to some extent... I am already halfway-through the humble pie..........

Winston

David Harvey- The Crises of Capitalism - May 6 speech . Must see for economic students....

Very interesting talk on Capitalism by David Harvey.

David Harvey takes a different angle to analysing the capitalistic system. His take: I want to do something different from everybody else so he looks at the market from Marxist point of view..... 50% of the conclusion are wrong but the whole argument and process he uses is v.v.v.v.v.v.v telling and something anybody with interest in todays world should spend 15 min on.......

Teasers: Not possible in todays system to create 3% compounded growth; The only new market are ficticious (like carbon); You need banks to create credit otherwise the expansion stops..... et......

Wiki David Harvey

http://www.youtube.com/watch?v=26o22Y33h9s

 (Hat tip to FT's Long-room)

Also the British Academy letter to the Queen and why they did not see the crisis coming:  British Academy Letter to the Queen

Winston

Too bearish?

In order to put some balance into my negative sentiment find the link to Mark Hulbert, who thinks it's gone too far too fast. As for me I need to stay with the program although it has been an expensive last 24 hrs for me - (adding to downside on the low yesterday)....but even my Beta-model is now short indicating I am NOT in position to buy market as of yet:  Beta-model link

But here is the well argumented too many bear story from Hulbert:  Mark Hulbert: Rush is on to jump on bearish bandwagon

Winston

Weekly Investment meeting (May 25th 2010)

This mornings meeting had several key themes but probably the best way to show how the world is split down the middle with one side continously qoutting "excellent fundamentals" as main reason for coming bull-market, while the price-action and the logic dictates we are at the end of the road. My partner Jesper came up with this chart:

The good fundamentals, the accomodative policy et al constitutes the tip of the iceberg, the sovereign debt, balance sheet destruction (of banks & nations) the part below the water.

I do not think I need to put further words to this.

On the S&P and equities overall we had close look at support levels and potential support level. Clearly the market is oversold now, but at the same time the SOVEREIGN SPREADS and CREDIT SPREADS continues to expand!

Above is the spread between Italian bond futures(BTP & the "insolvent") vs the Germant bond future (Bunds & the "solvent") - the spread exceed 13.00 again this morning - closing gap from the Monday past the 1 trillion EUR bail-out plan. It seems for now, that the ECB is losing this fight quickly. A slippery road.... is .......slippery Mr. Trichet!

but.. on levels.. we think the high in June of last year(2009) is important. 

The initial top moving of the low in March could constitute some support for the S&P - this level is: 930/940 in the S&P (Yes, it is a further 10% to the downside), but the interesting thing being that STOXX50 the broadbased European Index touched its - June high this morning (2445-ish) - showing the massive under-performance of European stocks to the US.

No wonder people are confused and wanting to believe in the mighty rebound; I think of one particular travel-writer, sorry economist, who wrote this week-end: "I learned as a young man not to fade the charts" - and then he goes on to why 200 dma this time will not work as indication of further loss' - He may end up being right, but for the wrong reasons, but I guess in "economist-land" it does not matter why you are right (or wrong) as long as you crack a good joke.

Our bottomline:

We are respecting and looking for some action from ECB, EZ or the US over this coming week - the Dirigism' is not dead, but even with our livid imagination we have a hard time coming up with a "encore" for saving the world as:

• Intervention - tried did not work
• 20 years of easy monetary policy - tried did not work
• Lax regulation - tried did not work
• Biggest one-off stimulus in economic history - tried did not work
• Biggest co-ordination on goals (with no operative measures) since Marshall-help  - tried did not work
• Transfering massive help to banks in order to keep the system going - tried did not work
• Tax cuts, house benefit, tax benefit - tried did not work

Well, we got feeling the 'fiscal austerity' will soon only be dreams of such measures, and we will see another major stimulus plan being implemented - probably in Seoul at the G-20 in November?

However friends,

We may be wrong - let's hope so, but for now please promise to keep your risk low, liquid - rather lose the first 10% of a rebound than risking 50-70% of your capital.

Winston

ALERT ALERT - Italy vs. Germany blows out to post 1 trln. package high!

Watch this spread - been excellent early indicator of RISK OFF...

ECB now caught out..

Bear vs. Bull

(The cartoon is from 1939)

I find it extremely interesting that the few people, and yes it is v.v.v.v few people I acutally read-and-follow, are EXTREMELY NERVOUS right now.

 I am talking about people who has been in the market 40-50 years, like Richard Russels http://ww2.dowtheoryletters.com/  - pretty much the only paid subscription I have (except for the Financial Times). His daily newsletter is pure gold for anyone and dirt cheap to (which always appeals to cheap guy like me).... but also the true old-style macro managers of the world are all issuing WARNING ALERTS similar to the ones I have been trying to send to my friends.Click for last weeks warning note

On the other hand - post Fridays RIDICOLOUS manipulation up day! (Which could not even get close to the 200 dma) - the pundits of the ever so happy, happy crowd was out in force over the week-end and in notes this morning telling me how this could work, the market is floated with liquidity et al...but friends....... when in doubt visit your premises:

1. There are still no end insight for dealing with the SOLVENCY CRISIS
2. The Beta-models are all in BEAR mode
3. Sentiment - remains optismistic with MSM(which should all be closed down pretty much for incompetence!!!!) leading the way. A 2% up is celebrated like the 4th of July while a 5% down-day is merely a correction inside a bull market. I do not watch CNBC too much these days(particularly in the US it stinks) as the ratio of morons to common sense is almost 20 to 1. The point? The market is still far, far from realising the true scope of this crisis - when the truth hits home with the Sunshine crowd we will be way into the worst crisis since 1920s.....

Read excellent piece by RBS' Bob Januaha called:  Bob's World | Maybe Not Such an Idiot...( Every Bear has his day!) . 

Bob is calling on major shift to DEFLATION seeing 2 yr US below 2% - but his point being the private sector has never been able to make a self-sustained recovery (it has been based on massive fiscal- and monetary help) and now this stimulus is running out while most G-20 nations are looking for tightening of policies(UK+ Euro-zone). The horrendous Keynsian/Monetrarist nightmare is upon us - with the sovereign credibility reaching ZERO......

We shall not, ever, believe the politicians and policy makers will give up, we need to prepare ourselves for massive QE in the US, UK and Japan end of the year, and potential for, despite all the tought talk right now, of further MASSIVE STIMULUS. Watch China to lead as they did in 2008 (by implementing) and in 2009 (by stopping)...... Where China goes, goes G-20 - a point not discussed too much these days while China makes new low week-after-week. 

I was always taught as young trader to "watch the flow" - where the flow goes, the power goes - Clearly the globalisation put China in the driving seat, that the market fails to acknowledge this is sad as trading market with China as leading indicator has been an excellent recipe for positive P&L. (Yes, I know China was up big today on talk of no further tighetening..... but wait for Friday to make your judgement)

Trading-wise - we added to risk during last coming from low, but this mainly through options... long Gamma on: DAX, Bunds, EURUSD, STOXX50. Keeping it simple. My target for EURO remains 1.10000 - and after touching 1051-00 in the S&P and closing below 200 dma - I found old low of 1010/20 as first target, but if we are right about incomign focus on DEFLATION, the stock market should easily take out those levels and trade towards 950.00.

However, the "short-term noise" of central bank intervention and manipulation will be in play and increasing into next week-end - I wonder which kind of meeting there will be in G-20 this week-end. 

Finally, I hope I am wrong (I can afford to loose my option positions), but as many others I remains extremely concerned about the state-of-play from here. We failed to use the crisis in 2008 for something good (deleverage, restructure, bettter regulation) instead of our "Masters" decided to buy some time extension and time is one thing we do not have enought of.

Best wishes,

Winston

Quick Friday comment.....

Friday - or 'amateur day' as we have coined it in this office.... The central banks been busy intervening in the markets. Heard this morning that Swiss National Bank has used 50 bln. CHF up-and-to end of April - imagine the number after last 72 hours of trading. It's gigantic - the only analogy being Bank of England supporting GBP/DEM in September 1992! (Yes, it will end the same way...)

I must say I am totally surprised at the intervention in EUR/USD - it makes NO SENSE! The last thing Europe needs is a stronger EURO. Let me give one free of charge advice: BUY 1.2000 EUR put USD call 2 or 3 month expirty - it is only matter of time before the EUR goes 1.20, 1.15, 1.00,.........

This is from Saxo Trader spot reference: 1,2530.


Otherwise I have rolled my spot into options as the intervention makes the market disconnected.

The target zone medium-term has been 1050-00 ish - now today we need to see if it holds or not, but..... all things considered this coming Monday/Tuesday could be: Black Monday II - I hope not, but it's real chance.

Nice week-end

Winston

Market is now in PANIC MODE - EXTREME CAUTION NEEDED

Dear Friends,


The market has during the day moved to what can only be described as on the edge on total melt-down - for now liquidity is ok, but sovereign spreads like Italy vs Germany is blowing out indicating the market not ready to accept the 1 trillion non-plan.


A couple of major points for now:


RESPECT THIS IS FOR REAL. We have tracking model which monitor doom-and-gloom this model is up 9.2% on the day - not on the month but day. 


This is at least a 5 std. dev. move indicating extreme caution needed.

Click for larger version

The key point to look at remains: solvency or lack of it. Today the spread between the Italy (the supposed insolvent) and Germany (the supposed solvent) moved close to pre-package level indicating the market wants more than word - it needs details and action.

Click for larger version

The technical levels to observe:

If market closes below 1100-00 there is fair chance of going to medium-term support @ 1050.00 (another 2.5-3.0%).........

But the main risk remains that we have moved directly from a perceive V-shaped recovery to Crisis 2.0 - a crisis which will lead us much, much lower.

Winston

Self-doubt and markets

I do not know what it is about Thursdays but I always get 'concerned' with my positions on Thursdays take this morning:

From the word go the market is taking RISK ON based on this simple analysis:

1. Swiss National Bank have intervened 'heavily' in EURCHF  (In all honestly I think it was more game of people re-playing the fight w. Bank of England in September 1992, namely: Fighting the SNB @ 1.4200. For now SNB won, but EURCHF will go lower still in the end.
2. S&P 'failied' at least in first attempt to take out the 200 MA - making it a buy-opportunity for the long-always crowd. Macro cycles are good as you will know!
3. Friday vote on Euro-zone package in Germany and the meeting of minds (Financeministers once again in Brussels to detail some of their 1 trillion package)

so......there is all reason for bring cautious but as I wrote last week, when in doubt go to your premises:

1. Macro theme: This is about solvency not liquidity 
2. Leading Indicators: The model we monitor is indicating contraction incoming - not expansion as seen by the Ivory Tower investment banks
3. Beta model: If in doubt stay with its modus.
4. Sentiment: Monitoring the ratio of MFI(Money Flow Index) to move in SPY

Macro Theme:


If this is about solvency I find it odd that BTP vs BUNDS keeps expanding away from insolvent toward solvent. This is key concern - and our main leading markets indicator for now:

Click for larger version

.....and why is LIBOR-OIS spread rising day-by-day?

Click for larger version

LEADING INDICATORS:

We track this model: http://www.consumerindexes.com/   - A high frequency data points analysis and it is indicating slow grind lower and not a V-shaped recovery as most Investment Banks loves to talk about!

Click on chart for larger version

Beta-model

This is the model we fall back on when in doubt as we have tracked it to slightly outperform S&P with much better sharp:

Click for larger version

SENTIMENT

Several measures but I prefer MFI vs price-action as it tells you NET buying and takes algo-trading intraday et al:

Click for larger version.

Conclusion:

When visiting all the premises and NOT listening to the market noise there is still no real sign of:

• Market/Central banks adressing solvency issue
• Leading Indicators: If anything - incoming data will disappoint relative to expected....
• Beta-model is neutral but getting ready to go short.
• Sentiment: Private investors still exiting positions.

Be safe

Winston

What you NEED to know about Trichet!!!!!

If you look up Trichet on Wiki its a smooth and nice CV, but look closer and you see and understand how he believes in Socialism and intervention. This is NOT a market friendly guy - and certainly not one which should rule the henceforth independent ECB:

http://www.ft.com/cms/s/0/8bbaa714-5f8b-11df-a670-00144feab49a.html   (full FT story):

Mr Trichet was born in 1942 in Lyons, the son of a professor of Greek and Latin. He trained initially as a mining engineer before switching to the French finance ministry via the Ecole Nationale d'Administration.

In his early years Mr Trichet dallied with leftwing politics, joining the militant PSU party and earning the nickname Justix (after Asterix, the cartoon character) for his defence of workers' rights. But by the late 1980s, he was director of the French Treasury and chairman of the Paris Club of international creditors, involved in a wave of emerging market debt crises.

The French tradition as Mr Trichet rose through the ranks saw a clear role for state intervention, says Gilles Moec, European economist at Deutsche Bank. "If there is a need for deep and decisive public action at a time of crisis, he will not hesitate – because that is the way these guys are built." The ECB president also "belongs to a generation of civil servants which really put a lot of energy and passion into Europe's monetary union ... it is almost spiritual".

http://en.wikipedia.org/wiki/Politics_of_France

I rest my case - yet another Socialistic experiment is about to implode!

Pure panic in Germany & the US is not far behind....

There is too much to report on this evening -Germany moved in total panic move to ban short-selling...

This has been my greatest fear: A STUPID DESPERATE move from the idiotic policy makers..... this DOES NOTHING to mitigate downside.... they are removing considerable liquidity from the market, the move will be seen as penalty to holding German assets, German moves early and leaves trail for others to follow - can u say REGULATORY ARBITRAGE?

This is classic panic in crisis - if looked upon in history the politicians and central banks has learned nothing but to repeat the mistake of 1920s.... gr8 work - I was worried before tonigt - now I can hardly sleep.

Below most of the research I got tonight on the issues (thank to Ed, Jesper, Eric, GS, Nomura et al)

====================

Goldman:

Germany imposes temporary ban on shorts

	Germany's Bafin has just put out a press release banning short selling of sovereign CDS starting tonight and lasting through March 31, 2011, possibly inspired by the UK and US banning of shorts at the height of the financial crisis (Reuters' English translation of headlines below) In our view, its likely that this drastic move has been triggered by the planned passing by parliament of the German share of the EUR 440bn package on Friday.   Dirk Schumacher, who also just landed has heard that there seems to be more resistance to the help package than previously thought. So far, we have not heard of similar moves in other Euro-zone countries, but it seems likely that several of them might follow suit later this week.  As I discussed in my note on Sunday, policymakers are determined to protect the Euro-zone, and they have identified the financial markets as the key obstacle for stability, which implies risks of further regulation.  Stay tuned as we learn more Dirk & Erik 19:28 18May10 RTRS-GERMANY'S BAFIN ANNOUNCES BANK ON NAKED SHORTSELLING OF CDS ON EUROZONE GOVERNMENT BONDS 19:31 18May10 RTRS-GERMANY'S BAFIN SAYS BAN TAKES EFFECT FROM MAY 19 TO MARCH 31, 2011 AND 'WILL BE CLOSELY MONITORED' 19:32 18May10 RTRS-GERMANY'S BAFIN SAYS BAN ON SHORT-SELLING ALSO APPLIES TO SHARES OF 10 LEADING FINANCIAL INSTITUTIONS 19:33 18May10 RTRS-GERMANY'S BAFIN SAYS STEP 'DUE TO EXTRAORDINARY VOLATILITY WITH GOVERNMENT BONDS IN EURO ZONE' 19:35 18May10 RTRS-GERMANY'S BAFIN SAYS MASSIVE SHORT SELLING COULD HAVE LED TO EXCESSIVE PRICE MOVEMENTS 19:36 18May10 RTRS-GERMANY'S BAFIN SAYS MASSIVE SHORT SELLING COULD HAVE ENDANGERED FINANCIAL SYSTEM STABILITY 19:40 18May10 RTRS-GERMANY'S BAFIN SAYS SHORT SELLING OF SHARES BANNED AT AAREAL BANK AG, ALLIANZ SE, COMMERZBANK AG 19:40 18May10 RTRS-GERMANY'S BAFIN SAYS SHORT SELLING OF SHARES BANNED AT DEUTSCHE BANK AG, DEUTSCHE BOERSE AG, DEUTSCHE POSTBANK AG 19:41 18May10 RTRS-BAFIN SAYS SHORT SELLING OF SHARES ALSO BANNED AT GENERALI DEUTSCHLAND HOLDING AG, HANNOVER RUECKVERSICHERUNG AG 19:42 18May10 RTRS-BAFIN SAYS SHORT SELLING OF SHARES ALSO BANNED AT MLP AG AND MUENCHENER RUECKVERSICHERUNGS-GESELLSCHAFT AG

===============

FT: Spanish debt auction comes close to failure

By David Oakley

Published: May 18 2010 18:09

Spain came close to its first debt auction failure on Tuesday,
highlighting the funding problems for weaker eurozone economies.

The government's difficulties in selling €6.44bn ($7.96bn) in one-year
and 18-month bills sparked worries over its 10-year debt auction on
Thursday.

Madrid had planned to issue €8bn, but only just attracted that amount
of bids, with yields at record highs. This prompted debt managers to
reduce the size of the sale by €1.56bn. Normally a government bill
auction would be covered at least 1.5 times.

=================

Reid Says He Has Votes to Limit Debate on Financial Regulation
2010-05-18 19:32:56.875 GMT


By James Rowley
   May 18 (Bloomberg) -- Senate Democratic Leader Harry Reid
said he will have the 60 votes needed to limit debate on
legislation to overhaul financial regulation and move toward
final passage later this week.

   "A number of Republican senators have told me they will
vote" to limit debate on the measure, Reid told reporters
today. "It's time for us to vote" after almost a month of
debate on a new regulatory structure designed to prevent risky
investments that helped cause the 2008 financial crisis, he
said.

   The Senate has scheduled a vote tomorrow on Reid's push for
limiting the debate. Under Senate rules, it takes 60 votes to
approve such a motion. With a 59-41 majority, Democrats need at
least one Republican for the motion to pass.

   If Reid prevails tomorrow, a second procedural vote to
curtail deliberations would be needed before the Senate could
proceed to final passage unless Democrats strike a deal with
Republican leaders that would allow for a certain number of
amendments to be considered.

   Maine Republican Susan Collins said she would decide
tomorrow whether to support limiting debate. "We are making
progress in working through the amendments, that's very
encouraging to me," Collins told reporters. "The process thus
far has been open and fair," she said.

==============

Bafin Confirms German Ban on Naked Short-Selling at Midnight
2010-05-18 18:24:04.236 GMT


By Alan Crawford
   May 18 (Bloomberg) -- Germany's BaFin financial-services
regulator said that it will introduce a temporary ban on naked
short-selling and naked credit-default swaps of euro-area
government bonds starting at midnight.

   The ban will also apply to naked short-selling in shares of
10 banks and insurers including Allianz SE and Deutsche Bank AG,
BaFin said today in an e-mailed statement.

=====================

Nomura comment:

Couple thoughts coming out of cont'd discussion on the announcements which i think make sense are that these new bans are largely political.   In advance of the 21 May vote on Germany's loan guarantees, it would be understandable that they could try to get ahead of a US-like political and legal scuffle down the road about banks making money by being short the market and through CDS while Germany was bailing out Greece...
.. and if Germany is doing this, then the others could easily be close on their heels.
  While the market impact (given that since the package was announced CDS longs and cash bond shorts should have already gotten out) should be localized or is at least questionable, we are worried by the fact that policymakers feel the need to do this and continue staying involved and vocal..   (rather than allowing mkts to stabilize after the aid was offered)
  Policymakers' reaction function is becoming more and more erratic...  biggest pain trade would be risk off and EUR higher --- i'm not quite there yet though.

=========================

Congress blocks indiscriminate IMF aid for Europe


By Ambrose Evans-Pritchard Economics
Last updated: May 18th, 2010



Europe may have to clean up its own mess after all. The US Senate has
voted 94:0 to block use of taxpayers' money for IMF rescues that make
no economic sense or bail-outs for countries like Greece that far are
beyond the point of no return.

"This amendment will help prevent American taxpayer dollars from
underwriting dysfunctional governments abroad," said Texas Senator
John Cornyn, the chief sponsor. "American taxpayers have seen more
bailouts than they can stomach, and the last thing they should have to
worry about are their hard-earned tax dollars being used to rescue a
foreign government. Greece is not by any stretch of the imagination
too big to fail."

Co-sponsor David Vitter from Louisiana said America had run out of
money. "Our country already owes trillions of dollars in debt. We
simply can't afford to take on other countries' debt in addition to
our own."

It is unclear where this leaves the EU's $1 trillion "shock and uh"
package. Urlich Leuchtmann from Commerzbank said the IMF share of
$320bn was the only genuine money on the table, the rest being largely
euro smoke and mirrors, or plain bluff.

The measure is an amendment to the US financial overhaul law. Backed
by both parties, it can hardly be ignored by the Obama administration
whatever Tim Geithner may or may not want to do. The bill has to go to
Conference for reconciliation with the House, but the point is made.

It instructs the US representative at the IMF to determine whether a
country with a public debt above 100 per cent of GDP can be expected
to repay IMF loans. If this cannot be certified, the US must oppose
the rescue package.

This is obviously aimed at Greece, which will have a debt of 130 per
cent by the end of this year. The debt will rise to 150 per cent by
the end of its the rescue/death package, leaving Greece in a worse
position than before.

The IMF share of the Greek bail-out is 30 times quota, more than
double any other rescue in the history of the Fund. There is a very
strong suspicion in Washington that the IMF is being misused by French
chief Dominique Strauss-Kahn – French presidential candidate in
waiting – to support ideological purposes regardless of economic logic
or sanity. This can (and in my view most likely will) destroy the
credibility of the Fund itself unless the US and Asians can wrench the
institution back from the Europeans.

The US is the IMF's biggest shareholder and can veto aid packages,
though it has never done so because the Fund has never been so stupid
as to defy the world's dominant financial and strategic power.

In this case it fair to assume that China shares many of the Senate's
concerns. The latest US Treasury Tics data shows that China is
rotating is vast reserves back into dollars, and presumably away from
euro bonds. If we treat this as Chimerica – the US/Chinese single
currency or condominium – we have a force in the world that cannot be
pushed around.

Personally, I have changed my mind on Greece. My initial reaction
earlier this year was that it had to be saved to avoid a sovereign
Lehman. Many posters on this blog cried "shame", saying it was just
another moral hazard rescue for bankers. They were right. I flagellate
myself and wear a dunce's hat.

The correct policy would have been – and still is – to help Greece out
of its debt-deflation death spiral through an orderly "pre-emptive
debt restructuring" along the lines of the IMF package for Uruguay. In
Greece's case it would require a haircut of 50 per cent or so for
foolhardy creditors, ie your bank and mine, your pension fund and
mine. This would not do much good unless Greece also devalued by 30
per cent to 40 per cent to retrieve competitiveness and put the whole
fixed-exchange nightmare behind it.

This would be the normal IMF policy in these circumstances as
countless ex-IMF officials have stated. I suspect that many in the
Bundesbank and the Bundestag finance committee would have liked this
policy too – making an example of a country that was so far gone, and
had so flagrantly broken the rules.

The IMF-EU should instead have drawn up its defences in Iberia, along
the Lines of Torres Vedras – to borrow from Wellington. Portugal and
Spain are at least defensible – arguably – and more deserving.

The solution is being blocked because Brussels views any step back in
the EMU Project as intolerable. So the IMF is squandering its scarce
resources on an unworkable plan in Greece.

As we can now see, by misusing the IMF so cavalierly the euro-elites
have provoked a reaction from Washington that will vastly complicate
any future rescue for any eurozone state.

In fact, we are already living in a post-IMF world. There is no
bailer-of-last-resort. Sobering, isn't it?

===============================

BANK OF ITALY ALLOWS NEW REGULATORY CAPITAL RULES FOR EU BONDS
2010-05-18 17:42:11.416 GMT

 STORY TO FOLLOW.

--MARCO BERTACCHE

================================

The waiting game is back on....

Time for reflection and premise checks I guess.... the market been in supportive mood again..... at the open on Monday ECB and its allies put in bid across all sectors and floated the market (read banks) with free liquidity - the tide went out again and things normalised.

The investment banks is back at their game of praising the central banks and politicians - makes sense to 'brown nose' your paymaster ... nothing new there.

The support this week looks strong and firm, but it raises the the queston of which type of intervention is this?

The FX type - putting in bids, not telling when, testing markets, and then backing down, or the 1992 Bank of England version: Sitting on the bid in secondary P.I.G.S debt and toxicating the already poor ECB balancesheet?

Both approaches have negative impacts, the most important one being: It crowds out the private demand for fixed income in P.I.G.S as no one in their right mind will buy 2-year Greece at 95 cents in the dollar, which will enforce quicker resolution on austerity and structural reforms.

It is very tempting to join the biggest investment club in the world: 'Everything is good and getting better' when looking at macro data, as my friends in Goldman put it yesterday: 'It's the positive macro cycle vs the funding crisis'  - the piece goes on to describe how 'fundamentally' the data is good and improving while uncertainty of path re. Euro-zone creates misalignments in capital.

Well, the misalignment is in the fact that government/central bank is moving toxid waste from one box to another without ever thinking it needs to pay for it!

ECB has de-facto started QE - as their deposits seems to be colleteral! Joke- utter joke, the ECB ...

We have had a few bad days as we unlike the week-end before did not back down on risk, and how its time to revisit the Oracle of Delphi and find some anwers to these questions:

Will we have to see new highs before this collapses?
IS ECB on a QE or not?
Will new UK government use GBP as lever to increase competitiveness?
How long will ECB intervene in secondary market?

In other words, it's tough to be bearish right now, as the "logic" indicates its time to cover and rest.......(I note MS ex-post has found the market is now in bull-trend ...... See ZH yday)

For now I have increased the gamma-downside in equitites as I can't be member of the "fair weather club"

Safe winds,

Winston

Tempatations....Temptations.....the beauty of FIAT money (Macro May 13th 2010)

It's very tempting to join the fans of FIAT-money creation and go long the stock markets, but fortunately I have a few rules which keeps me from doing it:

• The extremely simple moving average model (as shown yesterday) called our Beta-model, as it is designed to tell us when to be long (or short) on strong trends.
• Analysis of money-flow into big assets classes: Gold, Bonds and Stocks. Todays three charts looks at this and find that somewhat surprising big inflow into bonds- and gold, while the move higher in stocks since April has been without "real money" buying.
• The risk indicators: USDJPY & EURCHF (as shown in Tweets yesterday EURCHF chart
• General news picture and macro assesment as per our Weekly Investment Outlook.

This week has been interesting in the sense that despite everyone 'intellectually' agreeing this plan failed to do anything about structure- and competitiveness in Southern Europe, they love the fact they now got free state guaranteed money for longer - Yesterday was a turning point in the research I receive from major banks of the G-20 - EVERYONE and I mean everyone embracing the FIAT money creation and to no big surprise either. Their livelihood is now 100% dictated by the whimps of central bankers and politicians. Long live the easy money, long live the FIAT regimes - their only issue being:

• EURCHF at all-time low - even lower than in 2009 on the low point in S&P
• GOLD at all-time high.... and it is very important to remember Gold is the only currency you can't manipulate and hence the real money of the world is flowing that way. Gold,EURCHF (plus USDPY) are the true STATE-OF-THE-WORLD indicators - as shown in the chart attached S&P goes up without ANY real buying- it is back to the algo-trading manipulation of the FIAT-banks buying programs.

Botttom line:

This could go on for another 24 hours or 24 days, but the gravity of the above observations is not to be neglected at least in my experience.

After having been short up to Friday- square over week-end I am now more or less back to same Gamma-short position in Equity and Gold, the only thing missing is a true conviction FX deal, but JPY strength is tempting for old macro guy like me.

Winston

Chart & Model updates.... Doom-and-gloom tracker beats risk-on....

The level of the EURUSD tells you where the world is......the things to watch over the next few days are:

• Gold - new high yday - can it continue and is this the final test FIAT money?
• USDJPY - to have serious RISK OFF - we need USDJPY to break below 92.10/92.00
• S&P reverted perfectly last night on 1168+-1 the level my favorite chartist Andrew Baptiste of Morgan Stanley called for as line in the sand, but today is another day - the politicians already congratulating themselves for their success while EURO goes from low to low and the press in Germany is up in arms. We are once again the schmuck of Europe - German press (click for story)
• Finally, I enclosed the "principles" of Ray Dalio - one of the power houses of global macro. This is the 2010 version (and 80ish pages): Ray Dalio principles @ Bridgewaters (click for link and download pdf in the page)

Be safe,

Winston :-)

Trying something new: Facts. Macro

Fact: The Euro-zone and the EURO is dying a painful dead. The political establishment will do anything to safe something which never should have started....

Fact: If the proposed stricter criteria proposed was implemented ex-ante (Trichet favourite sentence!.....)in 1999 Greece, Portugal, Italy and all the small EEC countries would never had been allowed in. They did get in because despite what politicians tells us: Euro-zone is a political project not an economics one.

Fact: The are several countries which would be better of outside Euro-zone than inside presently: Greece, Ireland, Spain, Portugal, and Italy to mention a few. Why? Lack of competitiveness - they need to devalue their currency by 30% and make investors take 50% hair-cut.

Fact: All European banks are now de-facto quasi-public owned. The deal this week-end was ONLY about safe-guarding the banks capital. The banks are now extended government agencies - think KfW in Germany and the like. Purpose? To have positive-feed-loop where government issue debt, guarantee low financing costs and the let the quasi-public banks buy it. Price: Higher taxes on income and growth. This fact is the most important one and it will not last - it last sales date may be extended but ultimately it will get "killed".

Fact: Regulation is phase two in this "grand plan" of the lost politicians. Lower leverage also (which is good actually), but having a bunch of bureaucrats decide the future of Europe is a joke. EUR/USD is now below the close Friday- did anyone say: 1 Trillion EUR wasted?

Fact: Asia needs to control inflation. Meaning tighter monetary policy ==> lower growth ==> higher unemployment ==> lower valuations

Fact: US and Europe needs inflation. This week-end plan was phase one of monetizing debt - (hence the need to help the banks again)

Fact: ECB lost ALL of the credibility left after the disaster of a press conference Thursday with Trichet. (Please, please can someone give that guy an English course - he pigeon English is a joke -like mine))  Gros/Mayer on ECB lost credibility

Fact: Geithner/Obama willingly export their so called Harvard model to Europe, the Harvard model is one that makes us all bankrupt. (Do Google search on Harvard Alumni and their track records!)

Fact: This is the final phase of easy money - in the next phase will allocate capital to highest marginal utility - meaning we got window of 3-6 month before the world takes a permanent change.

Fact: By Q4 this year we will have started a descend into new low in equities, new highs in trade protectionism

Fact: Mean stream media is a the lowest point in terms of reporting - they are effectively running the equivalent of QTV when reporting on the market. Never asking the right questions, never making the politicians accountable.

Fact: If this "globalisation game" continues all the worlds savings will be in Asia, Europe will be a Disneyland (it already is intellectually!), and the US will be one big farm.

Fact: Time is running out - restructure Greek + friends debt - Break the EURO into pre-1999 segments. Make permanent stop to printing money, deleverage banks to 4-5x, accept we will go through 3-5 years of hardship and start investing in people, and productivity. The world is full of smart people, it is just a pity none of them are in governments, central banks or even banks (sorry friends - but having job taking money from the state day-in-day out is nothing less than poor judgement of your part.....if I was rich enough I would only trade with banks which have NOT taken subsidies - it is time to vote with our feet)

Fact: The world will survive, the jobs will come back, but now is the time to face reality: we need 5-7 years of sub-par growth, stock markets returns.

Be safe

Winston

What has not changed will lead us to the global lost decades

My friend Yoshi in Singapore is just back some travels in Asia and is here reflecting on the markets and it is not for faintheartet...... enjoy -steen-

Tuesday, 11 May, 2010
 
Dear friends,
 
I've just come back from Indonesia and I would like to share my latest macro thought with you.
 
Indonesia is a natural-resource rich but politically poor country, but things look very buoyant with many more hotels and restaurants. The tangible assets/natural resources are attracting money like the pre-Asian crisis time.
 
I found it interesting to hear  from  the majority of the less fortunate in Indonesia that the Suharto time was better (they say "Life was simpler and the prices were cheaper"), which echoes a recent survey showing the majority of the Russians considers the collapse  of the Soviet Union as an unfortunate event.
 
Sounds paradoxical for some including me who were brought up and educated in the western world: the democracy and capitalism are the only way for all. Or is it? The Romans and the ancient Greek claimed to have had democracy for their citizens at the cost of others. The cultural differences and political system alone cannot explain the difference in the living standard and per capita income in 2010, but it's to do with how the global resources have been allocated. So the reallocation of global resources from the resource concentration continues to be my long-term macro theme and the underlying cause of the increasingly unstable developed economies.
 
Our world has not evolved enough to say we have democracy and capitalism. We are still in the final phase of the mercantilism: I don't believe for a second that the new $1 trillion EU/IMF plan is about people, it's all about the banks like that of the US and Japan. The two reasons we don't see colorizations any more is because it costs more than the benefits (Afghanistan & Iraq being the case) and the fiat reserve currency system has enabled the US to monetize the global resources to finance itself.
 
The EU/IMF plan means the existing financial system has grown too big for the US and the EU alone to handle. We can easily presume there will be no money/willingness left to bail out the rest of the world when China, the last hope of the global bubble, bursts.  I've said before "Don't let the nominal GDP statistics underestimate the impact. The PPI China is already 75% of the US economy."  
 
I cannot be optimistic about the next two decades when I repeatedly see the corrupt leadership in the G20 continue to allocate the precious resources to the unproductive part of our society. First, they transferred (and continue to) the tax money to the financial system and, now, they are trying to transfer the global resources from the productive part of the world via IMF.
 
So the mkt is waiting for the four beasts to finish off the existing financial system.
1.      Deleveraging of the banking system & reintroduction of the Glass-Seagull
2.      Spread of the sovereign insolvency
3.      Burst of the Chinese bubble
4.      Mass class actions against the main stream media
 
I still think the summer or the final quarter of 2010 will be the beginning of a long decline in the overly priced intangible assets including the major currencies. I look for the following as the initial signals for the next G20 lost decades:
1.      USD/JPY 85
2.      10y UST 5.0%
3.      Resignations of PIIGS from the EMU
 
And the end result after the G7 lost decade will be:
1.      S&P 350
2.      JPY 65
3.      10y UST 15-20%
4.   Gold 3000
5.      Demise of the EMU and the EU
6.      North American Monetary Union
7.      Asian Monetary Fund, independent of the US and Europe
8.      Major geopolitical events
 
So until then, the mkt will still respond to the liquidity injections until it collapses of overdose towards the end of this summer or in the final quarter. My best guess right now is S&P 1270-1320 if the banks will not pre-empt the mkt by a series of more stock issuances.  
 
Yoshi

...so what changed this week-end?

The risk here is to jump to too big conclusions on a Monday where repositioning is the name of the game - but as can be seen by the Bloomberg overview taken this morning - the market is on the roll - having 5-15% gains across the board led by french banks - which also underlines that this deal was primarily a deal to safe the European bank system.

The 2008 crisis saw the bank being bailed-out by the local governments, now the all of the G-30 / IMF is securing what remains of the european major banks - the reason being the national governments needs someone to facilitate their huge deficits. Expect the same banks to see massive increase in regulations as they are OWNED by the governments. Ironic that the EU sees this as fight vs. the banking system - as the banking system is built on the types of deals done this week-end:

Creating more debt to pay for old debt....
Floating the market with liquidity to keep rates artificially low
Backing away from the spirit of EU and certainly that of the Bundesbank

The key take-away from 10.000 feet this morning:

1. ECB has lost all credibility as independent authority - this has been a gradual process which has been cemented by Mr. Trichet, the ultimate bureaucrat. Greenspan II as he is called in this office.
2. Bundesbank founding fathers must be turning in their graves observing how the founding principle of clear line between monetary- and fiscal policies came down today.
3. ECB can not buy directly in the government market, but feel validated in buying in the secondary?   So buying a used car, instead of a new car, is not buying a car ? Or? Please explain to me.
4. The lack of ANY STRUCTURAL REFORM or RESTRUCTURING OF DEBT - scares me 3-6 month down the line.......

This morning is not the true picture of the reaction - as the market was life-time short the EUR and probably heavily short all risk sectors - clearly this buys the market some time, but it does not improve EU's competitiveness, it does not address the unemployment, the north-south dividide in Europe, it actually reminds me of relieve AID for Africa - the more money we send down there, the poorer they get!

We had the luck of being perfect square on the closing Friday night,  and we are trying not to be too negative on this rally, it will last 3-4 hours, days, weeks or months, but it is not a lasting solution - for now liquidity is flowing into banks, which again turns around and buys more EU debt, US debt and the circle starts again.

I have bought small down-side in stoxx50 this a.m and will buy some more every day this week .... the reversal of the peak of todat could be fast and furious or not........for now everyone got what they wanted...........but my final question remains:

Who is paying for this party?

You tell me?

The more we change the more we stay the same....Macro

Well, well it took them a long, long time to produce this mockery of a solutions. There seems to be only 40 bln. of real money from government - the remaining 680 ish... is coming from where?

Let me see - you got someone who is deep in the red, who is servicing huge debt, and your solution is for you, the big brother, to start issuing more debt? How is that going to shelter investors from the end game of ......... bankruptcy. Amazingly this game has become one of creating bigger and bigger nominal numbers of support, with less and less substance to how it works.

ECB turnaround in buying Government bonds just cements the utter joke Mr. Trichet is - "We have not even discussed buying bonds he said no later than Thursday" - Well Mr. Trichet, we knew all along you lied, and now we got the proof - AND in the process you show cased that the ECB is NOT INDEPENDENT at all - on contraire........

The LRTO funding and swap lines was predictable - Mr. Geithner/Pres Obama always game for floating markets with liquidity....the Harvard way of of helping markets....go bankrupt..

Long live the FIAT regimes / This line of defence continues 30 years of easy monetary policy as the only solution to any problem.. God forbid any structural changes...... after the first 24/48 hrs of happiness in Brussels, they will be back by Wednesday or next week-end trying to come up with the first 1 trln. EUR plan with no merits to it......

This plan did not adress the real issue: DEBT RESTRUCTURING -  the solution to the crisis was to float markets - this will be good for stocks...untill next crisis - the bubble is getting bigger, and bigger...and the politicians are like parents shouting louder and louder to their kids with less and less reaction .......

Remain sure the world analyst' will be out saying this is a good plan, something which should work, just as they did for every week-end meeting in the last two month..

Oh-by-the-way:...... Merkel lost her poltical power yesterday to SPD - the party which did not support help for Greece - clearly that is good news...

Oh-oh-by-the way.... UK still without government... that also must be good... for EUR critical incoming government....

Yes, the EUR hit a new high in political will survive this morning, I still have a hard time to see what really changed - except we got more debt - the last place I will as an investor the next few years will be in Government debt and never ever will I buy Europe FI - be safe

BELOW is from JP Morgan on this night deal to give you some - "objective observations".....

==========================

------
Europe Debt Crisis – Substantial Action Unveiled Sun Night

·         There were a series of announcements out of Europe and the US Fed Sunday night that will most likely exceed the expectations of investors heading into the weekend on Friday.  There are three pieces of the plan – a EU720B plan from European governments, substantial promises from the ECB, and the re-opening of FX swap lines.  The ECB made a dramatic u-turn and said it would participate in euro area public and private debt markets (recall that Trichet said last Thurs that the ECB hadn't even considered this option at its last meeting).  The EU720B promise from the various European governments will probably take some time to flesh out and there are still some details to be answered, but the ECB debt purchases could commence at any time and is probably the most unexpected component of the Sun  night announcement.

·         Trading update (as of 10pmET Sun night): SP futures up ~29 points; the Euro is up 1.2%.

**********************

1 – EU720B Stabilization Fund:

·         The EU720B plan consists of government-backed loan guarantees and bilateral loans worth up to €440bn provided by eurozone members; a further €60bn supported by all EU members through expansion of an existing balance of payments facility; and up to €220bn provided by the IMF (per the FT).

·         Elena Salgado, Spain's finance minister, said that the €440 billion would be available over three years, and would need approval from contributing governments. She said a new "special purpose vehicle" would be created to make these loans (WSJ)

**********************

2 - ECB takes several actions:

·         To conduct interventions in the euro area public and private debt securities markets (Securities Markets Program) to ensure depth and liquidity in those market segments which are dysfunctional.  The scope of the interventions will be determined by the Governing Council.  In order to sterilize the impact of the above interventions, specific operations will be conducted to re-absorb the liquidity injected through the Securities Markets Program. This will ensure that the monetary policy stance will not be affected.

·         In order to sterilize the impact of the above interventions, specific operations will be conducted to re-absorb the liquidity injected through the Securities Markets Program. This will ensure that the monetary policy stance will not be affected.

·         To conduct a 6-month LTRO with full allotment on 12 May 2010, at a rate which will be fixed at the average minimum bid rate of the main refinancing operations (MROs) over the life of this operation.

**********************

3 - Swap lines re-established:

·         FX swap lines re-established between the Fed and other central banks, inc. the ECB – "In response to the re-emergence of strains in U.S. dollar short-term funding markets in Europe, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing the re-establishment of temporary U.S. dollar liquidity swap facilities"; the BOJ will consider similar actions soon.  http://www.federalreserve.gov/newsevents/press/monetary/20100509a.htm