OldLimey

Preview from Europe: Inactive Obama Leads Indices Lower

"We have two interest rate decisions from Europe today. Markets expect the Bank of England to cut rates by another 50 basis points at noon GMT, to a new record low of 1%. In contrast, at 12.45 GMT, the dangerously inflexible ECB is universally expected to cowardly hold fire and hide in their blinkered bunker until next month in the face of imminent deflation."

And indeed, that's what has happened. The headless chickens at the BoE panicked into another pointless rate cut (against the advice of the building societies) to please Bubbles Brown and his motley crew of incompetents. Meanwhile, the much-maligned ECB again took the prudent path of waiting to see the impact of previous easing rather than closing their eyes and rushing headlong into more.

As for Friday, the odds must favour atrocious employment numbers being 'balanced' (in Wall Street's mind) by new spin on the Bad Bank/Badder Bank initiative. Will the markets ever tire of being manipulated? Probably not.

Obama's 'Bad Bank' Plan Is a Turning Point

The market might be getting ahead of itself.

First, regarding the bad bank idea the devil - as we can see from just the comments made on this post - will be in the detail.

1. Valuation of the toxic stuff is not just an exercise in manipulating numbers, something which is difficult enough, it is also a highly political issue. Indeed, even defining what is to be encompassed will be an interesting exercise. Will the next wave of bad assets flowing out of the residential and commercial real estate markets be taken into account, or will the good banks be left with these - an early hit to their newly 'clean' balance sheets?

2. What are the international implications? Cross-border interbank flows could very well become tiered to distinguish between 'good' US banks and 'bad' European banks. More broadly, who would want Barclays or Deutsche Bank as a counterparty if they could instead have a freshly-minted BoA or Citi? Why would high net worth individuals leave money with UBS' wealth management people if deposits with a US bank become palpably more secure? This plan is, after all, a straightforward US taxpayer subsidy which many countries cannot afford to replicate because they don't print the world's reserve currency.

Second, the economy remains dire and whilst a properly-constituted bad bank plan should eventually ease the flow of credit, the Disney-esque turnaround so many people seem to be reaching for is in all likelihood still several quarters away. Maybe Friday will give us a feel for just how many quarters.

Third, if the market is so fundamentally cured, why is it still being manipulated? Looking at the timing of the after-hours GE and bad bank announcements yesterday, it sure seems as though somebody somewhere doesn't trust the market's 'foresight'.

Whilst it would be nice to think we've found our way onto the 'sunlit uplands', I personally will be more of a believer if and when we breach trendlines converging around the 920-930 level. Until then, 'buy the rumour, sell the news' could still be an adage worth bearing in mind. Back in the Dark Ages when TARP was originally unveiled last autumn, the Financial Times ran with the headline "The Market Roars Approval". Less than a week later the roar had turned to a whimper - long before we found out that the original purpose of TARP had been hijacked. This may indeed be a game-changer, but caution is still warranted.

Contemplating the Demise of Bank of America, Citi and JPMorgan

It is interesting that the author, in his final paragraph, apparently finds outright nationalisation of banks to be more offensive than:

1. Writing off the debts of dead-beat borrowers.
2. Shafting the taxpayer with a 'bad bank', whilst leaving good banks to move on up to the sunlit uplands (doubtless accompanied by an eventual resurgence of dividends and executive bonuses).

Be that as it may, kelm is most probably correct. Nationalisation in some form or other, both in the US and Europe, seems from the outside at least to be inevitable; the issue is moving from whether it will happen to how politicians will spin it.

Preview from Europe: Techs Trump Banks But Possible Trouble Ahead

"The Euro Tortoise And The US Hare"

Good info as usual, but tarnished by yet more trite ECB-bashing from another member of an English-speaking financial establishment which seemingly won't rest until prudent central banking has been driven from the face of the earth (cf MacroMan). What, precisely, has the Hare's hyperactivity achieved so far - other than utterly dienfranchising savers and priming them for another bout of speculation of course? Which curve, precisely, is JCT behind - the let's build another bubble and re-inflate Goldilocks back to life curve, perhaps? Having been cajoled into this catastrophe by the Hare (as well as Britain's New Labour rabbits), excuse us tortoises if we take our time in deciding how we can best avoid becoming fiscal and monetary road-kill.

Preview from Europe: Stocks Hold Up While Waiting on Obamulus

Given that it's impossible yet to get a handle on bank balance sheets (i.e., whether write-downs have to date been adequate and asset values are realistic), earnings reports belong on the 'fiction' shelves. Perhaps the range of estimates reflects the breadth of scope open to managements for a bit of creative accounting. Still, the Street will continue to live in its parallel universe and do its best to suck our money into it.

Preview from Europe: Stocks See Red Despite Collapse In Oil Prices

"Sheer genius from Credit Suisse (CS). They are giving their senior employees bonuses in the form of $5 billion of the toxic mortgage-backed assets that nobody wants."

Bottom's in, then?

Do Paulson and Bernanke Really Understand What's Going On?

Andy1234: "Most people in Europe cannot afford homes"

The situation in fact varies widely from country to country. In the UK around 70% of housing is owner-occupied; whilst this country doesn't have the subprime issues afflicting the United States, it does have the same overinflated house prices pumped up by a government that wants consumers to feel rich, borrow more than they can afford, and keep the economy - and the financial system - growing (no matter how narrowly focused that growth is). Ireland and Spain also have high rates of home ownership, and each are also on the cusp of the same housing meltdown now affecting the UK. In the case of Ireland the problem lay in joining the EUR and applying interest rates set primarily with Germany in mind and far too low for the Irish economy. As for Spain - think Las Vegas and you'll be on the right track.

On the whole, German-speaking countries have avoided these excesses, in large part because they have barely been infected by the idea of residential property as an investment rather than a roof to live under. There are exceptions of course (e.g., Berlin apartments and Swiss resorts), but on the whole the generalisation is true. Switzerland, for example, has had no housing bubble outside the ski stations, and even senior corporate and banking types are quite happy renting because that's part of the culture.

The Problem with Hedge Funds

Good post.