Thursday, October 27, 2011

Is that a European Rescue Plan in Your Pocket, or Are You Just Happy to See Me?

Global equity markets are screaming across the board, as "the package" has been delivered - sorta.  A framework has been agreed to, and frankly it is nothing new from what has been reported the past week.  Essentially the 3 part deal: (a) a "voluntary" 50% haircut on Greek debt (earlier the rumor had been 60%) (b) a recapitalization of European banks to the tune of roughly $180B USD and (c) the ESFS levered to $1.4T (right on the dot to what had been the rumor) - but now partly due to levering and partly due to SPV [Special Purpose Vehicle].  With the SPV, the IMF should be involved which means the U.S. taxpayer gets to help bailout Europe.  Sarkozy is also to speak with China to get on his knees and beg for Chinese money.  While much of this had been discussed in the countless rumors the past few weeks, the market continues to rally both on the rumor and the news.  ('sell the news' is unfashionable, and old school)

Somehow the Europeans are claiming the 50% haircut is not a 'credit event' (I guess because it is "voluntary") and hence those who bought insurance on Greek default (CDS) should not get to claim their goodies.   There is also a 21B Euro kicker (sweetner) of aid to European banks - not sure where this money comes from.

In short, we have an epic kick the can.  All that is missing is changing the accounting standards to stop mark to market and then European banks can live in the same fantasy world the U.S. banks do.

If you want details here are various news stories:

  1. Reuters
  2. AP
  3. Bloomberg
  4. Marketwatch

U.S. futures are up around 2%, and we quickly approach that resistance area mentioned as the next area to deal with (mid June lows) once the S&P 500 cleared the 200 day exponential moving average.  This area is roughly 1260 to 1267.  A move to 1260 from the lows just over three weeks ago would be a 17% move - again remarkable in ferocity of the move.  It used to be a staircase up and elevator down in markets.... in the new era, it's an elevator both ways.

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