SymbolPriceChange
C34.16+0.39DB46.80-0.39GS115.86+0.95MS19.31-0.10SPY128.60+1.17Addison Wiggin, On Saturday October 29, 2011, 12:56 pm EDT
[caption id="" align="alignright" width="180" caption="Baring assets in Playboy"]
[/caption]
Markets worldwide rallied last week on confirmation of the news that traders have been waiting for: Renowned monetary policy authority Lindsay Lohan will, indeed, pose for
Playboy. Cmon. You have to admit it makes about as much sense as saying there is a fix for the euro crisis. European leaders really mean it this time. Cross your heart, hope to die. The highlights:
- Holders of Greek government bonds will see the bonds value cut by 50%
- The euro zone bailout fund, heretofore totaling 440 billion, will be leveraged to 1.4 trillion
- European banks will be required to raise their Tier 1 capital ratio a measure of their core capital relative to their assets to 9%. The banks will need to scrounge 106 billion from somewhere to make this happen
The SPDR S&P 500 ETF is back he S&P 500 is back to levels last seen before Standard & Poors downgraded U.S. sovereign debt on Aug. 5. Banks like Morgan Stanley, Goldman Sachs, Citigroup and Deutsche Bank have seen monstrous share-price gains in October. Don't get too excited, though. Th e bump in stocks last week will prove at least as ephemeral as the bump in
Playboy newsstand sales from Lohan's appearance. The announcement in Brussels poses more questions than answers, so its puzzling to see stocks soaring on this announcement, says
Strategic Short Reports Dan Amoss. F! or one t hing, the 50% haircut on Greek debt is closer to 30%, because it excludes debt held by the European Central Bank and the loans the EFSF made to Greece since early 2010. This cut in Greeces debt is obviously not enough to put its economy on a sustainable footing. It will not stop the riots and strikes, and it will lead to another round of funding stress sooner than expected. Then theres the Humpty Dumpty nature of the announcement, which is extremely relevant to the health of U.S. banks. When I use a word, said Humpty Dumpty in Lewis Carrolls
Through the Looking Glass, it means just what I choose it to mean, neither more nor less. In the case of the news from Brussels, a 50% haircut on Greek government bonds is not repeat, not a default. Thus it does not trigger the credit default swaps that U.S. banks wrote on the European banks that loaded up on all those Greek bonds. This means, explains Amoss, we could see some turmoil at big bank trading desks. Those parties who held both Greek debt and CDS will find that their insurance is not as valuable as they thought. So EU bureaucrats, in their haste to stick it to speculators and short sellers, may actually bring about a collapse in demand for the debt of other PIIGS countries, as CDS is no longer a reliable hedge. If so, the need to refinance Italian debt would quickly burn through the 1.4 trillion leveraged bailout fund. One more problem: The aforementioned 106 billion the European banks need to shore up their balance sheets? Most credible sources place the capital shortfall at more than five times this amount, says Amoss. Plus, its unclear how banks are supposed to raise this capital, since most of their stocks are trading far below book value. They cant raise this much in the private markets, so some form of Euro-TARP or bank nationalization still looks inevitable. Ultimately, the PIIGS crisis wont be close to resolved until we see the ECB overtly or covertly monetize a lot more PIIGS debt. Such action would worsen the slow-growth, rising-inflat! ion cond itions facing the global economy. Like the initial rally in the wake of the late July EFSF announcement,this rally will probably fail quickly. Sorry to burst your bubble. But you still have the January issue of Playboy to look forward to.
A Fleeting Bump in Stocks? by Addison Wiggin originally appeared in the Daily Reckoning.Follow Yahoo! Finance on ; become a fan on Facebook.
[/caption]