The T Report: The ECB brought at Water Balloon to a Bazooka Fight

Posted by on Aug 2, 2012 in Uncategorized | No Comments

No Bazooka, Not Even a Water Balloon

So the ECB delivered absolutely nothing. No follow up on last week’s speech. No new programs. No details. Basically nothing new was delivered. His press conference is at best confusing, and at worst has become defensive. He brought out the “don’t short the euro” statement. I liked when he said that countries won’t go back to old currencies, but the “don’t be short the euro” line was just silly. I don’t think the Japanese Yen is going away any time, but doesn’t mean I can’t think it is over or undervalued.

Why Aren’t We Lower?

That is a question. Stocks are down, but barely 1%. CDS is wider, but even IG18 is only back to 107.5 (2.25 bps wider). Spanish stocks are hit but Spanish bonds doing okay.

The takeaways that are easing the damage are that

  • Spain and Italy have to ask for help and until they do, he cannot do anything
  • attempts to assert the ECB’s independence
  • the mystique that they may be there if needed, the threat of action

It is strange, but as I wrote earlier, the market seemed to be hopeful that something good would happen (as was I) but was positioned for disappointment (I was long but had taken profits coming into this week).

Am left staring at the screens, wondering if have been given a gift, to get out and even short the market at these high levels, or whether something has shifted in the market mentality. That for whatever reason the market has shifted back to “buy the dip” mode. That decent jobless claims can help stocks and that underweight longs take comfort in all the talk.

The bear case makes so much more sense, but still isn’t really working.

I think the market is going to accept the potential good and retrace the initial negative move.

The Dark Knight    

It is truly shocking that they can lose that much money that quickly. The $440 million loss is more than 1 quarter of the entire firm’s typical revenue. So 1,400 people work for 3 months and they don’t generate as much revenue as the program lost in 45 minutes. That is simply mind boggling.

At least I can understand how the JPM whale trade occurred. I can even believe that JPM will make policy changes and implement new systems to prevent something like that happening again. It doesn’t mean it won’t happen, but at least I can understand how it went wrong and how to try and deal with it.


How can you have a program that could lose that much money? I can’t understand how you could have a program that wouldn’t have checks and balances. That wouldn’t have code to track the positions and losses. That no flags instantly went off because moves were large. It is simply horrific to think that a program could go that horribly wrong. Clearly no one there understood what they had.

I assume at this stage, KCG needs a new investor because I can’t imagine that clients won’t be considered about simple settlement risk after a loss of that size. It is a shame and I don’t know what the long term consequences of this will be for Knight or the industry but the push to move back to a simpler, less complex financial system will continue to gain steam.