Rosenberg: Europe Shock and Awe Bailout Plan Means Recession to Perpetuity

So $1T bought us... only 400 points on the Dow index. An indication of the current sad state of affairs. In addition, by offering to do QE it lost the ECB most of its credibility, overnight.

The conditions for accessing the bailout funds are strict and will require significant tightening. Spain has unemployment over 20%. The government tightening expenses does not increase employment, certainly not initially. In fact, GDP will be reduced, tax revenue drops, and chances are deficits as percentage of GDP increase. How on Earth they will make it without devaluing the currency (since that is the Euro) is a huge enigma.

David Rosenberg today states that if Europe were to revert to the 3% deficit ratios (which are required by the Maastricht criteria), this will reduced European GDP by 1% per year and it will be particularly tough on the PIIGS countries. The numbers for them are really scary:

• Ireland: -4% GDP, annually
• Greece: -3.5% GDP, annually
• Spain: -2.8% GDP, annually
• Portugal: -2.2% GDP, annually
• Italy: -0.8% GDP, annually

That is "recession to perpetuity".

And it's not only the PIIGs:

• France: -1.1% GDP, annually
• Belgium: -1.0% GDP, annually
• Netherlands: -0.8% GDP, annually

Germany also will drop -0.1% GDP, annually

Those are reductions every single year for the next three years.

Rosenberg adds:

• Greece is the same canary in the coal mine that Thailand was in 1997, and that New Centure was in 2007. The risks are still high that it spreads to Portugal, Spain, Italy, even the U.K.
• The uncertainty is much wider that it was before.
• More downside on the short term

As for the Euro, please see our various FXE posts on how to profit from its going higher or lower.

European Bailout Is A Giant Ponzi Scheme And Giant Moral Hazard; Euro To Suffer

Europeans are waking up. Quoted by Bloomberg, the European bailout package is “a kind of Ponzi game at the highest level,” Stephan Kolek, a strategist at UniCredit SpA in Munich. It risks creating “more debt instead of cutting debt, as it obliges EU countries to buy troubled debt from member states.”

The Euro is dropping badly today back to "pre-bailout" package. FXE straddles anyone?



Did they really expect to make the Euro stronger by flushing Euroes down the toilet of the fiscally irresponsible countries?

"Germany, France and the three other largest top-rated euro area states may compromise their AAA grades by standing behind the debts of weaker members with their 750 billion-euro ($955 billion) stabilization fund".

Moral Hazard Increased Exponentially

The Germans are fuming too. According to Jim Reid, head of fundamental strategy at Deutsche Bank AG in London, the rescue package, risks compromising the independence of the European Central Bank, It is also part of a process that is increasing so-called moral hazard “exponentially”.

The package “is not particularly pro-growth,”. It may “be looked back on as a landmark day for the ECB. Their total independence may now be increasingly questioned.”

Roubini: Break Up the Banks; Prevent Them From Short Term Borrowing, Pop The Bubbles

Nouriel Roubini has an article on Newsweek this week, with co-writer Stephen Mihn. Some of his points:

• Many of Obama's reform proposals are good, but they don't go far enough.
• More drastic changes can and should be imposed, including breaking up big banks and imposing new firewalls.
• Use monetary policy to prevent speculative bubbles.
• The recent crisis highlighted the "too big to fail" problem: many institutions had become too large, leveraged, and interconnected; their collapse could have systemic and catastrophic effects
• Those banks are not only too big to fail, they're too big to exist, and too complex to be managed properly. They should be pushed to break themselves up.
• Reinstating Glass-Steagall would be good but not good enough. What is needed is a 21st-century version of the legislation that creates new firewalls.
• Investment banks and broker dealers should be banned from doing any kind of short-term borrowing.

Commenting on the banks' claim that the global economy today can't function without them, he says that this is preposterous: "the financial-supermarket model has been a failure". he cites Citi as a prime example of unmanageable;e company selling thousands of products and services.

He adds that even "healthy" firms like GS are threat. "Not that you would know it listening to the firm's CEO, Lloyd Blankfein, who in early 2010 defended handing out record bonuses by claiming, 'We're very important. We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. We have a social purpose'.

To this Roubini says: "Spare us."


Bubbles:

On bubbles, he says: "Apologists for the status quo argue that central banks can't intervene against rising asset prices because of 'uncertainty.' This is nonsense: uncertainty doesn't stop central bankers from targeting inflation; it shouldn't stop them from countering bubbles, either".

Euro Flatly Rejected at 1.30, Needs a 10T Bailout

The Euro was flatly rejected at 1.30, and did not hold 1.28 either. Perhaps they need a $10T bailout.

Of course issuing 1T debt in exchange for debt is very bad for the currency.

Roubini: Europe's $1T Bailout Still Has Conditions and Open Questions; Europe Was on Verge of Precipice

New York University professor Nouriel Roubini said European leaders realized they had to “get their act together” after weeks of delays agreeing a support package for debt-stricken nations threatened to destabilize the euro.

Bloomberg radio reported today that Roubini said that European nations were on the verge of a precipice, and "they realized they had to pull resources together, act together, otherwise the risk was the collapse of the euro zone, the collapse of the euro.”

“For the last few months, the European Union looked behind the curve, they couldn’t get their act together,”

“In the short run, it is going to calm the markets,” However, there is an “open question” on whether countries such as Greece, Spain and Portugal will be able to accelerate their budget deficit reduction plans".

“While money is available now on the table, it’s conditional on fiscal adjustment, structural reform,” “Whether they are going to be able to do it fast enough is an open question.”

Moodys (MCO) Down 11% on SEC Notice; Straddles +76%

The attack on the rating agencies continues. Moodys is down 11% today, this on a day that the market is soaring.

"The company did its own review of how it rated the risk in 2008 and found that it had erred in the way it rated some debt obligations. The ratings are unrelated to the mortgage backed securities for which the agency is already under fire."

May 6 we posted straddles on MCO. Here is an update, May straddles are up +76%, so far.



Computed with StraddlesCalc Tool

OECD Spoils European Bailout Party: Economic Activity Slowing Down; Libor Stays High

By the way, does anyone now what really happened to the German financial minister yesterday? We wonder if he refused to sign on the "plan".

Nevertheless, the OECD is spoiling the party a bit today by publicly stating that the world economy is slowing down. It includes not only European countries, but China and Brazil as well.

"10/05/10 - OECD composite leading indicators (CLIs) for March 2010 point to a slowdown in the pace of economic activity. In most OECD countries signs of slowing growth are tentative, but stronger signals have appeared in France and Italy, and some evidence of a potential halt in expansion is emerging in China and Brazil".

Those who down't use straddles like myself may wish to consider this an opportunity to exit.

Libor Stays High

The Libor, the rate banks say they pay for three-month loans in dollars "stayed near the highest level in about nine months on concern an almost $1 trillion European loan plan may not be enough to restore confidence in markets".

The reports quotes M. Oswald, a fixed-income strategist in London: “The package has only partly given the all-clear to money markets,” “There’s still a little bit of wariness over counterparty risk. In many ways, the problems that already exist in terms of exposure haven’t been expunged. The financial sector is still in a pretty dicey situation.”

Goldman Sachs Trading Perfection: 100% Success Now

In a SEC filing GS reported that its traders managed to best their one record and made money every single day of the first quarter.

GS had never accomplished this before (we wonder if they shorting theselves too?).

Simply Perfect: 100% Successful days

Yes, we know, we thought it was impossible before, for the rest of us, but apparently not for GS.

"Daily trading net revenue was $25 million or higher in all of the first quarter’s 63 trading days, [...] The firm reaped more than $100 million on 35 of the days, or more than half the time".

It's like Usain Bolt besting his world record again.

Why The Markets Crashed Thursday: Outright Deceit

Bill Cara, with over 40 years experience trading this markets, explains in his weekly review his opinion on why and how the markets tanked last Thursday.

It makes a lot of sense... unfortunately.

"There are people who say that once these momentum-based programs start selling, they cannot stop. I say hog-wash. Why would any banker write software that would destroy the bank under certain conditions? Even an over-rotating windmill in a storm is programmed to cut out. The problem, as I say, was erroneous trades, which happen at times when emotions are running red hot. To compensate, bankers have risk managers in place to save the computer programmers from killing the bank. Life isn’t perfect, so erroneous trades are reversed by the exchanges frequently. I don’t think anybody will be going to jail for such mistakes, although it wouldn’t be a bad suggestion to line up the media who ranted on this subject.

What bothers me most by what happened Thursday, and something the regulators must look into, is that when prices were collapsing there were traders who tried to enter buy orders but couldn’t. Why were sell orders being accepted?

If anybody’s listening, I am going to throw out a challenge. I say, these broker-dealers trading desks, using proprietary capital plus their own, purposefully delayed those orders in order to help push the prices lower, and then went in as principals to make the buys at stunningly low prices.

Yes, I am accusing the industry of outright deceit, which is to say that maybe people like Lloyd Blankfein were not directly involved, but they know the game, and they are responsible for the actions of their traders. I hold them all accountable.

Following the worst market sell-offs in 1981-2 and 1987, the SEC instituted direct electronic trading rules that permitted the public to have small order access directly to the order flow on NASDAQ and NYSE. Computer technology today is infinitely superior and capable of delivering a seamless service under conditions that occurred this week. I hold the operators responsible, and as an old Big Four auditor from Toronto, I was taught to follow the money, which in this case passed through the hands of the broker-dealer trading desks at the bottleneck. Then I was taught to look for motive. Found money was the motive. Theft was the result.

Prove me wrong. I doubt you can."

The 500B (or 900B) Euros Solution: A Tragicomedy, Euro's Death Sentence

European countries came out with the big (and expected) announcement today that they will have 500B Euros ready for loans. Some reports say 900B! Or 1T, whatever, all funny money anyway.

Given that Italy’s ($126 billion), Greece, Spain, Portugal, Ireland and Italy have a total of $215 billion of debt coming due in the next three months (as per JPMorgan), I was wondering which countries are ponying up the money or where this money is coming from.

I loved Mish's quote today:

"I do not know what tomorrow or even next week brings, but what I do know
is you cannot defend the Euro by printing 440 billion of them."

This whole situation and the positive reaction to this news is absolutely bizarre and tragi-comical. It's laughable, but they should really cry. If they are really creating hundreds of billions of Euros, that currency will die.

This must all be a joke, a terrible, very bad joke. What a circus they have made.

Best Oil ETFs For Oil Rebounding

Oil has taken a very significant tumble in recent days, as seen above by the chart of West Texas Intermetiate contracts, and below by the chart of the USO ETF:



We track all oil ETFs live as one of our live tracking sites.

Oil is oversold in the short term. Shall it rebound, the question is which ETFs stands to benefit the most. This can be usually determined by the relative strength values.

We computed the relative strength values of all of them and sorted them by short term frames, as well as the average of all time frames.

Short term:



Most oversold are OIL, DIG, HOU.to, USO, and OIH.

DDG and DUG, on the other hand, are the most overbought.

Overall:



In terms of RSIA, results are similar, most oversold are HOU,to, OIL, OIH and USO. Note the most overbought ETFs are DUG and SZO.

ETF names:




You may receive technical analysis and alerts of these stocks, sent automatically to you, by entering the symbols in the Technical Trend Analysis Tool.

The Top Gold and Precious Metals ETFs For May 2010 and Since Jan 2009: Be Careful

We track all gold and precious miner ETFs live on our live tracking site. An analysis of their performance reveals that investors should be very careful as gold is deeply overbought. However, the best PM ETF performers are not gold.

Gold certainly continues to rise:



These are the current performance and charts of all gold and precious metals ETFs as EOD Friday.

Performance (since January 2009):


(please click to enlarge images)

Best performer is AGQ (ultra long silver). Worst is ZSL, ultra short silver (please click on links to receive alerts)

Charts:



Relative Strength

In term of relative strength indicators, here they are ordered by our favorite indicator, RSI-A:



You have to be very careful with these indicators. PTD (actually ultra short platinum) is deeply oversold, as are DZZ and DGZ.

UBG was down 17% on Friday, after a huge spike. Note that ZSL went throught a 10:1 reverse split, so it does not count. These reverse splits demand extreme caution. Being an ultra short silver, it is deeply oversold, as indicated by the tables on top.

Then you have DGL and the popular GLD in deeply overbought territory.


Note: You may receive technical analysis and alerts of these stocks, sent automatically to you, by entering the symbols in the Technical Trend Analysis Tool, (powered by INO).Please do your own due diligence.

Profit From Oil, the Euro, or Gold Going Up or Down

Here are updated straddles and strangles for gold, the Euro and oil, with prices as of 1:20PM.



Computed with StraddlesCalc Tool. The tool indicates the maximum moves required to achieve profitability. Actual moves may may smaller if volatility increased or they happen earlier as there is still premium left on the losing side of the straddles.

Note: You may receive technical analysis and alerts of these stocks, sent automatically to you, by entering the symbols in the Technical Trend Analysis Tool, (powered by INO).

Please do your own due diligence. This is not advice. Options are very dangerous and may cause 100% loss.

AIG Dismisses Goldman Sachs as Corporate Advisor

Certainly only the first of many, A.I.G., has replaced Goldman Sachs as its main corporate advisor, according to the New York Times today.

AIG will be hiring Citigroup and Bank of America.

"The move is the first in what some analysts warn could be a series of defections among Goldman’s clients after accusations — vigorously denied by Goldman — that it defrauded customers in a complex mortgage investment.”

It was about time.

Citigroup Predicts A 20% Correction and a Very Volatile Period

Today Citigroup issued a prediction of a near-term correction of up to 20% due to sovereign debt contagion over Greece.

According ot them (in MarketWatch,) the Greek crisis is "graver than other crises" such as Northern Europe in 1992, Southeast Asia and South Korea in 1997

Citi also states that global stock markets have perhaps rallied too far, too fast.
"With global equities having rallied 79.9% in a scant 13 months through April, we feel it would be only natural to go through a correction of around 10% or 20% over two or three months," says a research note.

Global stocks should resume their "upward trajectory in June," but the period in between could be volatile.

Latest Marc Faber Interview: Fed Has Encouraged a Casino, Greece Will Default, China to Crash

ongoing, updated as the interview goes on.

Marc Faber, the famous author of the Boom, Gloom and Doom Report, is on BNN for a lengthy interview today. From Vancouver, Some of his points:

• Fed has encouraged a casino.
• Greece has defaulted as much as Argentina in the last 200 years and will continue to do so, except this time they have a big uncle called EU.
• Some countries in Europe are strong, like Norway and Switzerland, but they have banking problems.
• On gold becoming new world reserve currency: problem is CBs may take gold away from us (confiscation).
• If the US were a corporation it would go bankrupt; if you include Freddie and Fannie, medicare, etc, its total liabilities would be over 600% over GDP
• Conditions favor Canada
• By end of 2010 Chinese economy may crash, lots of speculation in properties
• How to make money: on a rebound sell copper, industrial commodities, short Australia
• There is a very clear property bubble in Australia
• If there is indeed slow down in China it will have profound effect globally, Canada, Brazil will be affected
• He is surprised that people still listen to what President Obama has to say; the jobs reported are not real jobs, but a statistical assumption
• Asked if everything is so rosy, he says "Everything is horrible"; if there is an economic recovery, it will not be sustainable
• Is India a good place to invest? India grow between 5% and 10%, it has high education standards for 10-20% of population. Investors are grossly under weighted in India.
• On GLD, favors physical gold for when the time will come for governments to grab gold
• India vs China: In China we have order and no law; in India we have law and no order; Some problems in India, ethnic, Pakistan
• It was a mistake to bailout GM, AIG and Greece. If you own a small business nobody will help you.

The 1,000 Point Plunge: Death Sentence For The Stock Markets

There is no way out of this. If the 1,000 point plunge was a computer trading glitch or algorithmic trading, as the media still insists today, the system is broken. If it was not, the market is horrible anyway.

If the markets can drop 1,000 points in 30 minutes, imagine how much it can drop on a longer time frame.

Either way, small investors are right in staying away from all this. The system appears rigged. Why would any retail investor put money in the stock market?

As we pointed out yesterday soon after the close, a misplaced trade on PG was not what triggered the sell off. A hedge fund liquidation, that is more possible. A controlled dump to show the politicians what the big banks in the US can do to the market on whim, that is possible too. A trading or computer glitch? I suppose that is possible too.

Any of these options is not good for retail investors.

We continue with our strategy of straddles and oil and natural gas. They are hugely profitable, on paper at least, because I could not cash in as the system froze yesterday afternoon. That is another reason for retail investors to stay away. I should point out that in my registered funds I am 95% money market and 5% gold miners. '

However, this volatility is not going away any time soon. There is Greece and Portugal, Spain, ...

This morning on BNN someone was saying that P/E multiples are extremely attractive. I could not believe it. These people should be jailed.

By the way, our system of buys and sells (not yet released to the public) also indicates those sets of parameters and conditions that have 10% success ratio for buys and sells. These continue to be 100% success after the latest plunge.

Oil May Continue Plunging to $60

Bloomberg reports today that oil may continue plunging to $60 a barrel.




Jason Shencker, president of Prestige Economics LLC, a Texas-based energy consultant said that “The oil market is being hit by a double whammy,”

“The rise in the dollar is pummeling crude. Also, there are global growth concerns which have increased because of the credit downgrades in Europe and the Greek debt crisis.”


"Crude oil may fall to $60 a barrel in New York after the biggest three-day plunge in almost 15 months, while investors fleeing riskier assets pushed gold up toward a record.
Crude sank and gold surged yesterday as the Dow Jones Industrial Average had its biggest intraday loss since the market crash of 1987".


"An 11 percent drop has brought the front-month crude contract on the New York Mercantile Exchange down to its 200-day moving average at $76.37 a barrel. If prices fall below support at $75, “it could spark a $15 decline,” according to technical analysis by Jim Stellakis, an independent analyst".

Crude oil for June delivery dropped $2.86, or 3.6 percent, to settle at $77.11 a barrel yesterday on the Nymex. Oil touched $74.58, the lowest level since Feb. 16, at 2:45 p.m. as stocks plunged".


Disclaimer: the author has a sizable position in UCO puts and calls, so he is happy either way it goes.

The Silly Plunge Excuse: IWM Was Heavily Selling Off Well Before PG

Apparently CNBC is telling its viewers that today's plunge was due to someone pressing B instead of an M, as in selling billions of shares of PG instead of millions. How odd.

Plotting PG and IWM (Russell 2000) for today:



PG is not even part of the Russel 2000.

If CNBC were correct, the system would be totally broken anyway and these banks should not be allowed to trade or use quants.

You'd think that a big fancy broker like that would have safeguards to prevent this. At least a little pop-up alert "do you really want to sell billions of shares"?

On 2nd thought it could Blankfein's computer "do you really want to crash the markets today?" ;-)

How to Survive A Market Crash And Make Money

This was no glitch no matter what TV says.

Here is the ROI during todays's plunge of some of the straddles I have posted over the last couple of days:

MCO: +140%




UCO: +133%:



FXE +131%

Even today's 11-13 UCO had an ROI of +56% in just over 2 hours:

This is why it is so good to have straddles in times of volatility.