The T Report: You Can Lead a Horse to Water, But Can’t Make it Drink

Posted by on Oct 9, 2012 in Uncategorized | No Comments


Will Spain go through with the bank bailout? We Spain get OMT for the secondary market? Will ESM support Spanish new issuance?

In all likelihood each of these programs will be initiated, but I see them as likely being ineffective. They will be ineffective because they won’t be implemented with vigor. They will be lackadaisical attempts to calm the markets with minimal amounts of money.

Draghi gave a speech today, where from the sound bites I caught, he appeared to be backtracking a little. He spent more time emphasizing what Spain needed to do, and what the ECB couldn’t do, than offering a “whatever it takes” enthusiasm.

While I think plans will be implemented, the conditions will be tough and Spain will be constantly on the verge of not meeting the conditionality, giving the ECB and the rest of the EU the opportunity to back out. It will be Greece all over again. There will never be enough money to fix things and Spain will be constantly back at the table begging for more.

That is assuming Spain doesn’t decide to “go it alone”. The OMT was set up with Spain (and Italy) in mind, yet Spain seems reluctant to take the money. Spain is attempting to spin its own budget as all the conditionality that is needed. Even if you Ignore the fact that the Spanish budget is unlikely to work out and that the anti-austerity movement remains strong, it is hard to believe that Germany and the others won’t attempt to impose their own will on the conditionality.

I do not believe we are going to see meaningful improvement in Spain anytime soon. We may get some quick bounce if they finally agree to a plan, but I think it will be short lived as it won’t appear to be a long or big plan once the conditionality is analyzed.

Banking Something or Other

A banking union with pan-European depositor insurance is the latest plan to plan a plan of something that won’t happen anytime soon but makes markets happy, at least temporarily.

Banks weren’t regulated at all before? There weren’t any common practices? Big U.S. banks weren’t subject to Basel before they collapsed in 2008? Regulation isn’t new. It has been part of banking for ages and hasn’t stopped problems, so why this version will achieve such miraculous results is beyond me.

But ignoring that, something like deposit insurance works when all the banks are of similar and good quality. Is anyone going to give deposit insurance to Bankia right now? What about weaker banks? Who really believed those stress tests?

Either all banks will need to be recapitalized to a point where credit concerns diminish (not going to happen), or the plan to plan a plan will start with some initial group of big banks that don’t really need the deposit insurance.

More importantly, if deposit insurance doesn’t cover forced redenomination, it doesn’t help much, because that is a bigger problem that default risk for many banks. But if it does cover redenomination, speculation about who is leaving the Euro will run rampant.

I don’t see anything happening in the near term, and whatever does happen, won’t be enough to address the real problems. In the meantime, talk about making existing lenders take haircuts as part of some program are likely to spook investors. With the ban on naked sovereign CDS looming, the banks will once again become one of the few games in town for systematic risk hedges.


Liquidity is coming into the market, at least in the form of new money (not in the form of orderly, deep markets). The big question is where will all that new money go? The Fed would like to see it go into real estate, thus creating wealth, creating spending, creating jobs, and developing into a virtuous circle of growth.

The Fed may not get what they want. Investors have lots of options of where to invest that extra money and it seems as likely to chase after the ever increasing supply of treasuries used to fund our deficit as it is to chase stocks or home prices. Without creating real growth, QE won’t help the real economy, and in the short term, asset prices can struggle in spite of the Fed’s efforts.

The Great Unwind Continues

I continue to see signs that investors are taking fewer and smaller positions. Longs are being sold. Shorts are being cut. Apple is down about 10% from its highs. HY is seeing outflows.

I am not sure where this leads to, but I think it is bearish. Investors see too many markets where the pricing is “controlled” with treasuries the most obvious, but sovereign CDS now joining the party. Then the other markets are “just a number”. Algos don’t care how many iPhone’s were sold, just what the last price was and what the movement is. It is hard to look at the markets and not come to the conclusion that stop loss seeking algos control more flow than anyone trying to pick value (short or long).

I remain bearish. S&P futures are currently up 4 at 1,454. They were at 1,454 at midnight, got down to 1,445 as Europe opened, so they have already travelled a pretty good distance. I don’t think that sort of movement is positive, nor is a down day when the fixed income market is closed, like yesterday. So we can bounce headline to headline, but I expect them to ultimately disappoint, and a weak earnings outlook to weigh on stocks this week.