We've rallied almost 550 points on the Dow based on the rumor that we are all saved and that the ECB in coordination with the alphabet soup of Eurozone entities will create a Euro-version of the TARP (Trouble Asset Relief Program). As of this typing, Europe has created nothing real in terms of negotiating this facility although we've heard that it will involve a TARP-esque approach to trade poorly performing financial assets (Greek bonds that are garbage) for shiny, glimmering, and sterilized Eurobonds (that don't exist yet).
Clearly the market thinks this is a great strategy and solution to the sovereign debt woes of Europe and the developed world, however I don't think it does anything significant to really address the core issues that at driving investors to shun the financial debt obligations of countries like Greece, Portugal, Spain, and Italy.
JUST LIKE THE US?
In the US TARP, there was a panic-stricken financial world that didn't know how to value mortgage assets because every single debt instrument was being treated like trash. Good mortgages and bad mortgages were seen as untouchable and therefore the entire market seized up. Although government regulators and financial market wizards act like this was the worst thing ever, the market repudiation of all mortgage debt was an accurate response because the entire market was tainted. Yes, TARP eased things as a savior emerged (US Taxpayer) to backstop anything and everything that could be bad.
Unlike the US situation, markets in the Eurozone are operating extremely well AND there is no need for additional liquidity. Stronger countries that are not overspending like Germany have bonds that are well bid, while disasters like Greece that can't pay their bills or meet interest payments are completely shut out of the market. THIS IS EXACTLY HOW IT SHOULD BE. Franken-TARP is really about hiding the bad debt under an ECB SPV (special purpose vehicle --- Enron and other off-balance sheet manipulators should be coming to mind here) and asking the other countries to continue to write checks to Greece to keep its head above water and to pretend that the European banks that hold this crap are financially just fine. In other words the Euro leadership is asking everyone in the world to just pretend that all is well. To add to the awesome power of the approach, the ECB and IMF are rumored to intend to allow for levering up these debts too so they can get the biggest bang for their buck.
PROBLEMS WITH FRANKEN-TARP
The problem with the plan is that it still requires the richer countries to send money to the poor. This wealth "spreading" will come to a stop at some point as the citizens of Germany simply tell their leadership to stuff it.
Second, as much as the poor countries promise to change their ways, they are still in a depression and won't meet financial targets for spending reductions or for country economic growth, so we will see future shortfalls.
At this moment, I don't see anyone losing either. Healthy markets have losers (I hate to say it) and this Euro-Franken-TARP approach doesn't have any investors taking haircuts. The no-loss solution means that risky minded investors didn't learn a thing and can now be counted on to double down and increase the odds of a more cataclysmic implosion in the future.
THE RETURN OF THE PHANTOM.....RUMOR
Finally, I don't see any real action, just a lot of rumor floating and hoping! We have lots of phantom rumors and then we get other rumors that refute the initial market moving rumor. The problem with the EU is that you 17 members that don't have any real authority or central decision making power over each other, this is why a central Eurobond is actually the DESIRED outcome as it will bind them together even more and has the potential (based on new agreements that must be put in place to handle EU Bonds) to trump national and sovereign interests. Those silly conspiracy nuts have long suggested that the Eurozone currency union was really only an initial step toward unification and regional command and control that would result in the abdication of national rights and interests. As long as the citizens have a say in these accords, there will not be a move to go this direction, however we've seen time and time again political leaders trash their own people's will in an effort to maintain and improve the regional interests of the EU. (Just ask Greeks if this is true.)
So as much as I simply swoon over the notion that all is better and the all clear has sounded (although nothing has actually been approved or implemented) I just cannot help remembering the days in 2008 where each day a new facility and measure were created to stop the financial damage as bank after bank was swallowed up by their own financial mismanagement and leverage. It is interesting to me that we see that leverage of 30:1 killed Lehman, but the cobbling together of Greek and other damaged credit into some Frankenstein-like TARP will save Europe. Good luck with that.
TWO UPDATES
As I was typing and proof-reading the post I noticed that there has been a denial of the levering up for the EFSF.....we'll see if that is true or not.
Also, I found this nice summary of what could be happening as it seems like all of us are simply trying to put a finger on how the Europeans will try to do anything but take a write down.
CNBC - by John Carney - Officials working on a Sovereign Debt TARP for Europe? -
TRADING UPDATE
Oddly enough, I've been discussing a DJIA level of 11,300 for a week or so as I hoped that markets would bounce and it would give me a safer place to reload and short. We are almost there and I am starting to begin to add to positions. There is a risk here that we could trade up to 11,500 so I've set a stop just above it to give me some room. My lower end target here looks to see a retest of the support at 10,650 to 10,700 a move below that makes 10,000 very attainable. (Click on the chart to get a cleaner picture).
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