Bill Cara's Blog for Dec 19, 2011

http://www.ecb.int/press/key/date/2011/html/sp1112...

nothing notable. Draghi is hopeful that unlimited lending with a 3 year pay back time frame for European banks should get lending happening again - Japan shows that this won't happen in a meaningful way.

Apart from that, Draghi comments that the ECB should have the EU's EFSF structure in place by January for use shortly afterwards.

Euro banks appear largely positive. London miners are slightly under. Let's see what the US session does for this market.

You mentioned the miners, so here's another piece on French banks curbing lending to commodities traders. As the UBS guy points out, it wasn't just Europe they were lending to. That being said, I do currently hold a small position in VALE which I will add to if we see lower prices.

http://on.ft.com/rwjIbO

reposting from yest:

Les,

C&H - yes, although not ideal -oOverhead resistance is too close, handle a little too deep. I'd be careful about applying any technicals to a genuine news-driven market though

Hard to tell what to make of it. The data is not easy to come by or to check.

http://www.bloomberg.com/news/2011-12-18/china-deb...

"Repo lenders and parties to derivative contracts are exempted from the “automatic stay” rule in bankruptcy."

Excerpt from an analysis by David Malone of how counterparty banks were able to ”legally” swindle folks who had their money in accounts at MFGlobal...

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) the order was changed. And that change is the crucial event.

What was this ammendment? The ammendment exempted repos (and hypothecated and re-hypothecated assets) and a whole range of derivatives from the automatic stay. It also allowed lower quality assets to qualify for the exemptions.

Which means,

The special bankruptcy treatment given repos and derivatives means that repo lenders and parties to derivative contracts can keep the collateral if their trading partner becomes insolvent. This exempts them from the “automatic stay” rule in bankruptcy, which prohibits most creditors from trying to collect ahead of others.

Or as the official report from the US Financial Crisis Inquirey Commission said,

under a 2005 amendment to the bankruptcy laws, derivatives counterparties were given the advantage over other creditors of being able to immediately terminate their contracts and seize collateral at the time of bankruptcy. (p. 48)

So when a bank goes bankrupt, BEFORE even the most senior bond holders, the repo lenders and derivatives traders can remove, or keep all the assets pledged to them.

This amendment which was touted as necessary to reduce systemic risk in financial bankruptcies also allowed a whole range of far riskier assets to be used, making them too immune from the automatic stay in the event of bankruptcy. Which meant traders flocked to a market where risky assets would be traded and used as collateral without apparent risk to the lender. The size of the repo market hugely increased and riskier assets were gladly accepted as collateral because traders saw that if the person they had lent to went down they could get your money back before anyone else and no one could stop them.

It also did one other thing. Because the repo and derivatives traders ran no risk – they could get their money out of a failing bank before anyone else, it meant they had no reason at all to try to stop a bank from going under. Quite the opposite.

All other creditors – bond holders – risk losing some of their money in a bankruptcy. So they have a reason to want to avoid bankruptcy of a trading partner. Not so the repo and derivatives partners. They would now be best served by looting the company – perfectly legally – as soon as trouble seemed likely. In fact the repo and derivatives traders could push a bank that owed them money over into bankruptcy when it most suited them as creditors. When, for example, they might be in need of a bit of cash themselves to meet a few pressing creditors of their own.

The collapse of both Bear Stearns, Lehman Brothers and AIG were all directly because repo and derivatives partners of those instituions suddenly stoppped trading and ‘looted’ them instead.

According to Enrico Perotti, professor of international finance at Amsterdam Business School speaking at the London Conference on The Future of Bank Funding, held in June of this year, 2011,

The financial crisis happened when repo lenders and derivative parties lost confidence in the mortgage-backed securities they’d accepted as collateral for repo loans and credit default swaps. They demanded to be paid, forcing their troubled trading partners into fire sales of their holdings to raise cash. They were unconcerned that they might drive their trading partners into bankruptcy, because they were exempt from the automatic stay.

Professor Perotti went on to say,

As often in financial regulation, this leads to unintended consequences. As a default leads to repossession of collateral for all safe harbor claims, repossession accelerates fire sales, resulting in a disorderly resolution, with a rush to sell collateral ahead of others, creating a downward spiral in valuations. The timing of the jumps in risk spreads on Lehman, two days after the default, demonstrates this effect, as does AIG.

Should the bankers and their political fluffers like Mr Leach have known? Well they were warned at the time. In 2005 a paper entitled “Derivatives and the Bankruptcy Code: Why the Special Treatment?” by Franklin R. Edwards and Edward R. Morrison, in the Yale Journal of Regulation
http://www1.gsb.columbia.edu/mygsb/faculty/researc...

VI. Conclusion
… the Code’s special treatment of derivatives contracts cannot be justified by a fear of systemic risk…. Indeed, exempting derivatives counterparties from the automatic stay may make matters worse by increasing systemic risk….Our analysis, however, should worry members of Congress and legislators in other countries. They have been lobbied heavily by special interest groups (such as ISDA) to expand the special treatment of derivatives on grounds that such legislation is necessary to prevent a systemic meltdown in OTC derivatives markets should a derivatives counterparty suffer financial distress.

Our analysis casts serious doubt on this proposition. Systemic risk may be a real threat, but bankruptcy law has no role to play in addressing it.”

Here’s a link to the full report: http://tinyurl.com/chujodt

http://www.oftwominds.com/blog.html

by Charles Hugh Smith

The velocity of money rose in the stagflationary 1970s, even as stocks yielded negative returns when adjusted for inflation, i.e. to real returns. Velocity declined in the mid-1980s and then exploded higher in 1990s, topping out several years before the stock market topped in 2000.

From 2000 to 2009, the market staged a sharp rebound even as velocity continued down to a historic low. This suggests stocks have some catching up to do with velocity, that is, the S&P 500 should decline significantly.

Many people have noted the explosive rise in money supply since the 2008 financial crisis; [but currently, MZM (eg, 3 month T bills] shows that this "new money" isn't entering the real economy at all, as money velocity has plummeted to zero.

This [final] chart shows a rough but long-term correlation between T-Bill yields (interest rates) and the supply of financial assets (money stock). The stock of money fell off a cliff in 2000, and that marked the highs in both the S&P 500 and the T-Bill yield.

Maybe near-zero interest rates aren't the panacea the Federal Reserve thinks they are.

If we look at civilian participation in the workforce and other basic measures of employment, we find they topped out in 2000 as well.

ALOHA!!

"However, as I said last week, I think the probability is lower than normal for that scenario to play out because of the extreme levels of negative sentiment in gold/gold miners and the extreme levels of bullish sentiment in the US dollar."

I find it like some unreal Fellini movie that the only way the USD can rally is if all of the European Union implodes! What sort of global currencies do we have here? "Faith and credit" is no basis for anything in the real world, much less a global reserve currency. Who here operates that way? Take that "business plan" to the SBA and try to get a loan!

When will reality ever be official monetary policy at the US Treasury?

Vad-

Who was it that said, "It's like pushing on a wet noodle..." you get some traction, but not much.

'Twere not so, the economy would be in the wildest boom you ever saw- with the $trillions already poured into it!

"Whose money has plummeted to ZERO? I don't know ... over at the US Treasury money is flowing into the economy like there is tomorrow. What is $238BIL in one day?"

All that money helps little (including 'inflation') if it just piles up in the banks and goes to replace money destroyed by mortgage loans, derivatives, etc.

"Twere not so, the economy would be in the wildest boom you ever saw- with the $trillions already poured into it!"

Your headline is talking about MARKET rally. You do realize that the economy and market are not necessary correlated directly and immediately, right?

See, this kind of things is potentially very harmful. Loud headline screams "no hope for rally" and cites all kinds of irrelevant arguments while totally dismissing any possible IFs, as if author knows for sure which steps are going to be taken by all the stakeholders. This kind of arrogance is exactly what led many into the trap set by the rally started in March of 2009. You have been here, on this blog, you could see all those "it's fake, I am shorting this market right here right now" posts, and what enormous damage they suffered and caused. Do we have to repeat that exercise again, or maybe let's learn from the mistakes that cost dearly?

http://www.hussmanfunds.com/wmc/wmc111205.htm

by John P. Hussman, Ph.D

As economist John Williams http://www.shadowstats.com/ observes, "starting in October, a divergence developed: Whereas year-to-year change in BLS estimated payroll earnings continued at a more-or-less constant, positive level, tax receipts fell quite markedly. Where the Treasury numbers reflect full reporting, the BLS data are sampled, heavily modeled and usually heavily revised. The implication is that the BLS has overstated average earnings and payrolls meaningfully in recent months."

The pattern in withholding tax deposits mirrors what we've seen in a whole ensemble of reliable leading economic measures we track - a sharp initial deterioration in early August, followed by a slight bounce into October, followed by resumed weakness that reinforces our concerns about the economy (see Have We Avoided A Recession? http://www.hussmanfunds.com/wmc/wmc111205.htm )

In our view, it is very difficult to obtain useful views about economic direction using the standard "flow of anecdotes" approach that is the bread-and-butter of many analysts. The economic data reported daily are a mix of leading, coincident and lagging indicators, often noisy and subject to revision, and without any overall economic structure. Adjusting one's entire economic views following each report, as if each somehow adds significant information, is a recipe for confusion. Treating economic data as a flow of anecdotes, without putting any structure around them, is why the economic consensus has failed to ever anticipate an oncoming recession.

normxyz,

the real economy for most is not in a boom. the stock market relatively speaking is in a boom. we are higher than 2008. we really shouldn't be, but we are thanks to funny money.

just my opinion.

Vaclav Havel, the Czech Republic's first president and Kim Jong Il, North Korea's Leader passed away this weekend.

Two very polarized and revered figures that led 2 very different nations that were forced to split from their other half.

Kim Jong Il was famous for his quasi-religious status as the worshiped leader of what many call the largest national cult in the world that is North Korea. With millions starving, and many billions in foreign aid keeping their population afloat, North Korea stood in stark contrast to its ethnically identical but economically progressive South Korean counter-part.

What drove one man to exalt himself so high that he could allow his own people to starve while insisting they worship him is beyond me. A quote from Kim Jong Ii is telling:

"I am the object of criticism around the world. But I think that since I am being discussed, then I am on the right track."

In stark contrast to such shallow and megalomaniacal thought was Havel.

Havel was an artist and dissident before entering politics. He was famous for his essays, most prominent of them was "Post-Totalitarianism" (Power of the Powerless), a term that describes the social and political order that enabled people to "live within a lie" of regimes such as Nazi and Communist dictatorships.

My favorite Havel quote is equally telling:

"Hope is a state of mind, not of the world. Hope, in this deep and powerful sense, is not the same as joy that things are going well, or willingness to invest in enterprises that are obviously heading for success, but rather an ability to work for something because it is good."

Both men leave behind stunning legacies, one of hope and leadership in the face of adversary, the other a long and slow road to restore basic human needs to some 25 million people.

It never ceases to amaze me what kind of life the world will allow us to lead.

I would suggest using any of the big 5 Canadian banks.

Regards

Work to do for sure in NK. Can you see re-unification as the result of the loss of iron grip by young millenial successor who may not be anything like his father? Educated in the west for starters.

Picture's worth a thou words. Click thru to the video. Does not look good. http://www.bloomberg.com/video/82991554/

Re: of mice and men new
Submitted by westcoaster (696 comments) on Mon, 12/19/2011 - 13:03 #102364 (in reply to #102360)

Can you see re-unification as the result of the loss of iron grip by young millenial successor who may not be anything like his father? Educated in the west for starters.
____________________

This is the million dollar question.

My answer: Warmer relations eventually, economic ties and some growth in real wages/living standards but people fail to realize the massive state bureaucracy that underpin's North Korea's regime.

Even with a very-liberal minded leader, it would be a slow thaw to unlock the existing system because so many people are complicit in perpetrating totalitarian rule.

This is happening in Cuba, but it is smaller and less dictatorial than North Korea. In addition, China has a very strong say in NK's policies, including the purse strings to most of their foreign aid allotment.

Western Educations might actually provoke a stronger anti-western (but not anti-capitalist) stance. Think of the multitude of western educated liberal arts majors who take very strong stances against western imperialism, expansionism and capitalism. That kind of array of opinion is a positive and healthy thing, perhaps the new NK leader will posses a rare trait in NK right now: critical and objective thinking.

No one knows how it will turn out, but the next 60 days or so will no doubt give us some key signals.

(Reuters) - Royal Bank of Scotland (RBS.L) is to further shrink its investment bank arm and cut more jobs after the euro zone debt crisis sliced into third quarter profit, hampering its turnaround.

RBS, 83 percent-owned by the UK government after it was bailed out during the 2008 financial crisis, said on Friday it expects a tough fourth quarter after it took a further hit on its Greek government bonds and sold most of its Italian bonds.

http://www.reuters.com/article/2011/11/04/us-rbs-i...

This British bank stinks as the Treasurer has moved forward plans to split vanilla banking from their investment arm in the UK. That a British bank is taking a hit on Greek bonds that they shouldn't be holding is perhaps indicative of the market - or lack of - in select sovereign bonds at the moment.

In which other banks are the rest of these stinking corpses buried? Still seems to be a deflationary leg as write downs happen. No bonuses set aside for the investment banking arm - that is a dangerous precedent :) Where's the sugar?

The drop to 19 support looks ominous here. See the attached chart. A deflationary pulse to take this bank to new lows or are the wise guys about to get together to help out their banking pals here? Something to watch.

Almost 2m shares changed hands today so far. There's a firm bid for everything offered at $0.90. See if it holds.

wow. what a fun movie. saw it over the weekend.

the special treat was the 6 minute prologue to the next 2012 Batman, which is only being shown if you watch MI4 on an IMAX screen.

the dubai towers in imax was stunning.

From CIBC: 2012 Gold Averages: Goldman $1,810/oz, Barclays $2,000/oz and UBS $2,050/oz

I sold them a bit early. Lots of fear I guess. At least GLD/GDXJ are respecting the 12/14-15 low. I wish I could say the same about GDX and HL. Interestingly, HL is rebounding some after hours.

I added to my PNPFF position that I started on 12/14 and this trade is working at least.

Check out this chart. http://bit.ly/vpFOQy

you would think it was some tech stock. nope. just TLT.

if it can go north of 125, it's going to keep going.

FD No position

jragusa , for reasons of the safety found in diversity , it makes sense . Does anyone know of countries that allow a person to open an account with out a residence . Yes there are many reasons for concern .

nyugrad-

Sounds like you are ripe to look into "behavioral finance," especially the work of David Kahneman (his latest book is "Thinking, Fast and Slow").

While the weak version of EMT (Fama and French's Efficient Market Theory) works most of the time- technically- for a deeper appreciation of what is happening in the market (including how it is likely to affect you/the trader) see the behavioral finance literature including also the work of Robert Shiller and Nobel laureates Vernon L. Smith and Amos Tversky. Tversky and I were in the same graduate mathematical psychology program at the U. of M.

Best of fortune go with you.

Hi All - Caught this clip in the WSJ: Statistics on Chinese wine production are as famously murky as the origin of the liquid that goes into the bottles. But it's widely agreed that, although hardly a drop of Chinese wine gets exported beyond Hong Kong and Macau, China is about to become one of the world's top 10 wine producers. The London-based International Wine & Spirit Research, which does world-wide market studies on the consumption of alcohol, says China is now the fastest-growing wine market in the world, with consumption of more than one billion bottles forecast for next year. The country already boasts more than 400 wineries, although the Big Three of Dynasty, Great Wall and Changyu account for the vast bulk of the production. Is there an investment here? Happy Trading

I have not been following the threads today, but saw this earler, and it looks like no one has given you a good answer. The apparent reason for difficulty of US citizens getting bank accounts in Europe seems to be a new regulation imposed by US tax people who want records of US citizens accounts, and they have apparently set up a large bureaucracy that banks have to follow. The expense of doing this is apparently not worth the value in dealing with the US accounts.

http://www.spiegel.de/international/business/0,151...

As I said when finished the 111 Trades course, "Hello photography!" Let's hope this magical spectacle lightens the mood.

http://photography.realitytrader.com/2011/12/butch...

The scary point is $CPCE spiked down today, masses buying the dip today? If so, no good news for bulls short term. I have to admit the charts are very ambiguous now and I have no frigging idea what will happen next.

The only thing I know for sure we have the lowest exposure to gold miners since the later part of 2008, but still above the 2008 nadir.

I talked about this analogy back in late Oct/early Nov. This is what convinced me to go short then. I'm not convinced anymore it will play the same way. Note the dollar was heavily shorted then, bonds hated, and copper/silver topping. Inflation was the only concern of the day. Now we have the opposite sentiments. Actually, these sentiments are comparable to end of 2008. This is why I'm betting on gold/silver/miners. Probably, a bit early.

Not yet, the model I want starts coming in the stores nearest weeks, not freely available yet. You are looking at the wrong tablet in that comparison - search for Transformer Prime, that's the real butt-kicker!

nyugrad-

"...finally the last component was learning that not trading, is also trading."

Indeed! Possibly the hardest lesson to learn, i.e., not to overtrade. "When in doubt, stay out!"

i agree. they are more exercises in fun. just thought i would share

Scary NYU,
I see similar patterns from basis libor and other spreads today and those of mid 08. May 2010 spreads were about the same (TED etc.) but reversed quickly when it became clear that QEII was all but certain and the European campfire girls were just then beginning to point fingers at the Greek girl who showed up topless, forgot the marshmellows and was banging on a tin cup for donations. Methinks the financial global debt glut cannot be pasted over again this time with more liquidity unless it is massively co-ordinated worldwide.

Your pattern recognition is probably far superior to mine. I rely on fundementals for the most part and I confess I do not see how the U.S. can avoid at least a mild recession. We may already be in one that won't be 'discovered' until a quarter or two after.......well,you know the drill. Economists for the most part are comfortable in herds where they feel protected with a tenure fence...

Europe is in recession and China is in the early stages of a negative feed-back loop as well. Japan relies on China and the conclusions seem obvious. The question becomes, where is the engine to pull the deadweight down the tracks. I can't find one.

Where is the fiscal stimuli. Not in Europe or the U.S. Maybe China can reflate and inventory commodities they don't need yet. I sense that game has been already played.

The charts of most commodities have been busted. Everyone knows the commodities food chain and will be watching for pre-announcments from other Joy Globals.

Prices are set at the margin. If the last ton of copper produced cannot find a home, then prices will decline until they find equilibrium which as we have witnessed over centuries can be really stupid silly both up and down.

To avoid plebisites on austerity, the powers that are and would be need only do one thing.....print. They will. They have always done so. I have always believed in the power of the press.

Ditto.

yes the SPY weekly chart shows similarities. The possibility of an ascending triangle to get the bulls hopes up that highs can be retested in 2008, which fails with subsequent sell off.

The ascending triangle I was alluding to at present in a weekly time frame looks like failing, unless bonds reverse here which may be a possibility, along with the dollar.

Given UXG's failure to turn around yesterday I pulled up a weekly chart of UXG.TO (I want to hold in Canadian dollars on a Canadian exchange, not American) and plotted what I thought would be a likely course. Note similarities to 2008. Maybe a drop to firm support at 2.25 before bouncing? JMO

could be a bear trap or Dave could be right. JPM and GS behaving like dogs yesterday. We are being strung along here, to what end I cannot yet see.

Ambrose EP again:

Euro rage is reaching new heights over Britain's latest outrage.
Our refusal to pony up a further €31bn we cannot afford, to prop up a monetary union that was created against our wishes and better judgment, and with the malevolent purpose of accelerating the great leap forward to a European state that is inherently undemocratic. It is being presented as treachery, Anglo-Saxon perfidy, and the naked pursuit of national self-interest.

Let me just point out [that] the eurozone has the means to tackle its own debt crisis, if it is willing to use them. These include fiscal pooling and the mobilisation of the ECB. As eurozone politicians never tire of reminding us, their aggregate debt levels are lower than those of the UK, US, or Japan. They are right. So get on with it and stop begging.

Euroland is of course entitled not to deploy eurobonds or the ECB if these mean a) a breach of the German constitution b) violate the ECB's mandate. But that is entirely their choice. Both the Grundgesetz and the ECB mandate can be changed. If they are unwilling to save EMU by serious action – ie fiscal union – they should organize an orderly break-up.

http://blogs.telegraph.co.uk/finance/ambroseevans-...

Amen. These remarks frame the game being played here. How far the ECB and German government want to take it is up to them. But they shouldn't be surprised by the consequences of their actions if things turn sour in a big way.

Les - "We are being strung along here, to what end I cannot yet see..."

Yes I get the same exact feeling. I try to impose my own sense of what the end might be, but its just speculation. But the sense of being strung along is quite clear.

Wow the buck is getting hit pretty hard. I'm not seeing PM react quite as dramatically as I might have hoped, but at least it isn't going DOWN.

Vad,

Thanks for the light show. The best to you and yours for a Merry Christmas and Happy New Year.

Grym