Sunday, Sunday, Sunday, Monster Truck Madness….or EU Summit
It is bad enough when you get a song stuck in your head, but today, I have those Monster Truck commercials stuck in my head. The deep voice, pitching the excitement that Sunday, Sunday, Sunday, Monster Truck Madness was coming to your town. Maybe the EU should hire that person because that is about the only way to generate any enthusiasm for this summit.
A plan to create a plan will be done by the end of this year so that it can be implemented in 2013. The reality is the banks have been supervised, just poorly, so this won’t fix much. The plan won’t be implemented in 2013. If you think it is hard for the EU to give money to countries, wait until they squabble over the banks. This will not change anything in the near term and isn’t going to create a system where there is no risk at the banks. In fact, any bank that gets in trouble is now going to be subject to the whims of some bailout crew and creditors won’t be able to rely on the law. Why the market gets excited, I just don’t know.
Greek Debt Fiasco
I can’t quite tell what is going to happen to Greek debt, but nothing I hear makes sense.
One plan is to buy back the PSI bonds at a discount. Yes, that will reduce debt to GDP today and help the 2020 goals. But it is a stupid plan. Greece pays 2% on these bonds and the first maturity is 2023. Other than meeting some artificial Troika target, this plan has no meaningful impact. Greece will have to borrow money from the ESM to pay for these bonds. Depending on the price they pay and the coupon on the new debt, they will likely receive cost savings of far less than €1 billion per annum. If the average price paid is 50% of par (seems likely once the deal starts) and the borrowing rate on the ESM loans is 2%, the cost savings would be €600 million. That would be okay, the ESM loans are likely to have maturities less than 10 years, so the debt acceleration is a problem. This is basically the exact opposite of what a company in trouble would do.
The other version would have the ECB selling its bonds to the ESM and letting the ESM take a write-down. This would be a classic example of form over substance. This would let the ECB avoid a loss – which is good because it has no capital, but it is a shell game and would once again indicate that Europe is willing to defy the laws of accounting to get what it wants. The ESM would then take a loss, which would impact the paid-in capital. It means the loss would be shared by all the countries that back the ESM, including the 25% or so that is backed by Spain and Italy. This would at least benefit Greece, but I think it sends a message that the ESM is just a piggybank that can be used at will in whatever way the EU chooses. That will not make some countries (Finland) happy.
With Spanish short term bond yields now potentially lower than the backstop rates that the ESM and ECB would support it isn’t surprising that Rajoy isn’t asking for a bailout package. If the markets will drive the price of credit so low without a plan, he would be silly to ask for one. It causes problems for him domestically and with the 2 year bonds at 2.75% he has no incentive. I think we need one more nasty sell-off for him to ask.
First we had the sell-off in Apple for no real reason and now we had Google selling off, but at least there was a reason for Google’s steep decline – awful earnings. As far as I can tell these are the two most loved stocks in the market. They are big positions for many hedge funds and this sell-off may well continue as they are forced to sell to mitigate the damage to their monthly returns. While both companies are great companies, the valuations may be excessive and the need to cut positions could be high. Apple has bounced off the lows of last week, but has continued to struggle and could break those today. Google could well experience the same sort of price action, and with Google it could be worse because it actually sold off on bad news.
With big tech, traditional tech giving warnings (IBM, INTC, etc.) and now the new darlings facing some trouble, we could see continued pressure on the sector and that might be enough, coupled with lack of resolution out of Europe to drag the markets back down.