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Random Thoughts: The Hope Trade Cometh


Policymakers float potential solutions through the media.


It's Turnaround Tuesday in the 'Ville and the legend is living up to its name. Equity markets are indicated higher, the dollar is down a full percent, and Europe is getting some groove on -- although the German market has simply rallied back to the global line in the sand at DAX 5500.

Why the sudden spring in the equity step? European "hope," consistent with what was communicated yesterday. It would appear, however, the Policy Bazooka may take a different form, although any solution is subject to sovereign scrutiny and, by extension, political risk.

As shared (with permission) by the astute Phil Rosato:

"CNBC's Steve Liesman broke the European Financial Stability Facility (EFSF) expansion story yesterday and the Dow breached 11,000. We know the ridiculousness of the statement -- it's not a new story, and implementation is still a ways off -- and the risk to the upside is continued momentum (and/or performance anxiety).

The EU has heard from the entire globe (including Treasury Secretary Tim Geithner) at the World Bank/IMF meeting. Let's circle back to what (new) form the EFSF may take along with possible ECB measures (on October 6?):

  • Lever money from EFSF(10x?) and seed money for Euro International Bank (EIB).
  • EIB forms a special purpose vehicle; SPV issues bonds and purchases sovereign debt.
  • EIB bonds used as collateral with ECB (loosen credit, provide liquidity).
  • Part of EFSF money to shore up bank capital and alleviate suspicions regarding capital strength; opens up interbank funding markets.
  • ECB could re-launch covered bond purchase (stealth QE).
  • EU banks may use covered bonds as a funding mechanism.
  • ECB could re-launch 12M loans (presently 6M).

Please note that Germany is voting on EFSF ratification on Thursday/Friday but this has nothing to do with the above-mentioned plan. Rather, it would allow the EFSF (in present form) to purchase bonds in the open market. Thirteen other EU nations will have to do the same (some votes aren't until November).

What's different now from last week when EU finance ministers were taking Geithner to task regarding a potential Euro TARP? The market. We retraced another 6% last week with the banks taking the brunt of the selling.

Would such measures, if adopted, rally markets? Absolutely. However, we're dealing with a 17-block Union that has done nothing but drag their feet and an ECB that raised rates two of last four months. Yesterday's rally -- like most in the second half of 2011 -- was a "risk to the upside trade". All of the above is market chatter and none of it is concrete. The market will continue to dictate policy, not the politicians.

Random Thoughts

  • The S&P out-performed the NDX yesterday (to the tune of a full percent), consistent with the theme we shared out of the Monday morning gate. I've updated the chart below for a sniff of the current chasm.

    Click to enlarge

  • The financials -- led by European banks Barclays (BCS) and Deutsche Bank (DB) -- were the immediate tell and BKX 35 (where they closed on Friday) is a level that must hold if Hoofy hopes to retain S&P 1100.

  • If you took the percentage decline in silver -- 35% on yesterday's low -- since I left the office last Thursday, the broader tape would be trading at S&P 780.

  • The scariest part of that equation? Commodity volatility typically precedes equity movement.

  • Last Wednesday, we threw a Feline Flag on behalf of "Crash the Cat". Nuts.

  • Jim Rogers offers a slightly different take that arrives at an unfortunately familiar theme.

  • The dollar is a headwind for the carry trade, as evidenced by the recent price action. It's not as 'apples-to-apples' as it once was (due to the tango in the Euro), but it's still a decent tell through a big picture lens.

  • 6000 miles in 24-hours is a long trip in a short time no matter how you slice it. When I arrived home Friday night, I was informed that we didn't have sufficient popcorn for movie night. Whereas I may have once grumbled about having to head back out in the rain, I found myself smiling as I walked to the corner store (in my PJ's) on behalf of the kids. There is, indeed, no place like home.

  • As always, I hope this finds you well. See you on the Buzz.


Twitter: @todd_harrison

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