Thursday, May 24, 2012

Thursday, May 24, 2012 – Banks Issue Instructions for the Euro-Crisis – by Sinclair Noe

DOW + 33 = 12,529
SPX + 1 = 1320
NAS – 10 = 2839
10 YR YLD +.04 = 1.76%
OIL +.95 = 90.85
GOLD – 4.50 = 1558.80
SILV +.48 = 28.42
PLAT – 7.00 = 1424.00

The Dow Industrials moved lower this morning, then recovered, then dropped, then rallied into the close. Stocks moved down, up, down, up. If you can figure out what it means, send me a note. I'm not sure it means much.

Treasury prices declined a little and yields inched up. The Treasury Department sold 7-year notes at auction. One economic report today showed 370,000 people filed for first-time jobless claims last week. Another report showed durable good orders rose 0.2% in April. Nobody was surprised by the reports.

The euro jumped up against the Swiss Franc on rumors the Swiss government might implement a tax on Swiss franc-denominated deposits. In the past the biggest argument against a tax was that it would drive Swiss banking activity off shore. So, how does a rumor like that get rolling? Well, there are wheelbarrows full of euros being deposited into Swiss banks right now.

Meanwhile, JPMorgan issued a report on the European Central Bank, or maybe they issued instructions; I'm not sure which. The economic downturn will lead the ECB to ease monetary policy even further with a combination of interest rate cuts and another round of the LTRO, Long -Term Refinance Operation, also known as Free Money. Of course, if the ECB lowers rates and injects more liquidity into the banking system, it might be seen as an admission that the Euro-zone is in worse condition than they've led us to believe; it might be seen as a sign of weakness. So, it would be prudent to expect the ECB to change the name of their accommodative monetary policy.

The Murdoch Street Journal has compiled a rundown of various guesstimations of what might happen if Greece exits the Euro-union, or, what Citigroup has coined a “Grexit”. Seriously, I don't make this stuff up.

Capital Economics: Leaving the euro zone could indeed be the only way for these countries to avoid a sustained and damaging period of deflation [and] The repercussions if Italy and Spain left would be immense, causing another deep recession. But for Greece, and possibly for the rest of the currency bloc, the advantage of regaining full control of monetary and fiscal policy is likely to outweigh the costs.

JPMorgan: There’s now a 50% chance of Greece leaving, up from 20% before the country’s politicians failed to produce a coalition government. Regional unemployment could be higher than “anything seen in the past half-century.” A Greek departure is likely to be disruptive and disorderly, pushing the euro to around $1.15-1.10 against the dollar and causing a 2% drop in euro-zone gross domestic product.

Danske Bank: We are in for a long period of uncertainty but we believe that ultimately a deal will be struck between the EU/IMF and Greece that keeps Greece in the euro and austerity will continue. The alternative is too severe for both the EU and Greece.

Deutsche Bank: Leaving the euro altogether would cause economic, political and social chaos, the bank says, whereas a parallel currency would give the authorities the power to stabilize the exchange rate…so as to keep the door open to a future return. They would call the parallel currency the “Geuro”. Other possible parallel names include Eur-rock or possibly Eur-reek.

RBS: There is already likely to be some form of Plan-B… [but] if contagion really kicks off then a thinly veiled form of monetary financing of debts may be on the table. Probably in the neighborhood of $400 billion in bank bailouts.

HSBC: Broadly speaking, it reckons that the “best” outcome for the euro would involve the experience for Greece being as tough as possible. If it’s too easy, the temptation for others to leave would be greater, and the currency would be seen to be easily divisible. Of course HSBC complaining about moral hazard is a bit like Satan complaining about the heat.

Italian Prime Minister Mario Monti said Greece is likely to stay in the euro and a majority of the region's leaders support issuing a joint bond. Monti said: "Europe can have euro bonds soon." Italy can help push Germany to support the idea of collective debt and to embrace the "common good" of Europe.

Of course, euro-bonds are not a done deal, this is just part of the deliberations at yet another Euro-union summit. The idea of euro-bonds is that the countries of the euro-zone would collectively assume some or all of the debts of individual governments. Even if Germany, Finland and Austria dropped their objections, constitutional changes and other interim steps would mean the first euro bond couldn't be issued for years. One council-member of the ECB warned that a Greek exit “would create large, massive shocks, and no-one knows the consequences”; the truth is that the next ECB economic summit is scheduled for late June; the trouble is that Europe doesn't have a month to wait for another summit. I am not confident they even have a week. The Greeks would like to stay in the Euro-union, 85%, but they are sick and tired of the German boot on their throats. Look for some kind of significant movement before the Greeks hold their next election. That whole democracy thing worries the technocrats in the ECB.

Yesterday we told you about hearings on why financial regulators only seem to dole out playful little slaps on the wrists for banksters. Today, the Securities and Exchange Commission announced it has decided to end its investigation of potential fraud at bankrupt Lehman Brothers Holdings without any enforcement actions against the firm or its former executives. The SEC had been examining whether Lehman misrepresented its financial health in the period before filing for bankruptcy in September 2008. A spokesperson for the SEC said investigators had questioned former Lehman executives who proclaimed they did nothing wrong, so that means everything must be copacetic.

Zillow is the online real estate pricing website. They issued a report today that nearly one third of mortgage holders nationwide, or 15.7 million, were underwater; owing more on their mortgages than the property is worth. That brings the nation’s total negative equity to about $1.2 trillion in the first quarter. Las Vegas was the worst, with about 71% of all homes underwater; Phoenix was second worst; southern California accounted for about
$139 billion in negative equity.

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