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Stocks Slip On Fears Euro Crisis Will Spread, On China Bank Tightening And On Basel III Accords

Financial Market Report for November 22, 2010

I … Introduction
David K. Randall of the Associated Press wrote in early morning trading that Stocks Slip on Concerns Euro Crisis Will Spread: Stock prices fell Monday as investors worried that Ireland's application for financial assistance from its neighbors may not be the last bailout needed in Europe. Chart of World Shares, ACWI.  

After falling into a financial crisis brought on by mounting losses at three of its nationalized banks, Ireland, EIRL, formally requested help from its neighbors Sunday.

The rescue package from the European Union and the International Monetary Fund will likely total $100 billion. This is the second time that the European Union has come to the rescue of one of its 16 members that use the euro.

In May, the EU and the IMF committed $140 billion to Greece to prevent the country from defaulting on its debt. Euro zone members have been willing to prop up each other's finances in hopes of avoiding a financial crisis that could cause the value of the euro to plummet.

Ireland's request for assistance does not put an end to the questions facing the euro zone. Fellow members Spain, Portugal and Italy are also saddled with heavy debt burdens and investors fear that they may also need a financial lifeline, putting additional pressures on the budgets of EU members.

The Euro, FXE, fell 0.6 percent against the Dollar, $USD.

II …  Currency traders continue to drive currencies lower.
The fall seen in the chart of the small cap value shares relative to the small cap pure growth shares, RZV:RZG, indicates that the debt deflationary bear market that commenced on November 5, 2010, is becoming more entrenched.

The US Dollar, $USD, rose 0.17% to close at 78.64

Currencies falling today included:
BNZ, -0.75%; The WSJ reports S&P Shifts Outlook on NZ's Foreign Currency Rating To Negative
BZF, -0.36% Brazilian Real
FXE, -0.48% Euro

Commodities, DBC, rose 0.3%; but several fell today; these included:
Base Metals, DBB, -.4%
Timber, CUT, -0.8%
Oil, $WTIC, -0.4% Given that oil has likely topped out, the energy service providers, OIH, have likely topped out as well.

The high level of stocks relative to commodities, ACWI:DBC, cannot be and will not be maintained. Short sellers are having success selling the Proshares 200% ETFs. Those falling today included:
Financials, UYG -2.3%
Brazil, UBR -2.1%
Europe, UPV, -2.1%
Oil, UCO, -0.8%

III … World stocks,
ACWI, fell 0.5% as the end of credit commenced today.
Bloomberg reports China’s stocks fell, after policy makers increased the amount of money that banks must set aside to fight inflation. This means that profitable investment opportunities have ended in China as the policy makers are terminating the liquidity trade. And Louise Heavens of Reuters reports: “The new Basel III banking rules will leave the biggest U.S. banks short of between $100 billion and $150 billion in equity capital, with 90 per cent of the shortfall concentrated in the top six banks, the Financial Times said, citing research from Barclays Capital.”

Peak credit was attained on November 4, 2010 when Junk Bonds, JNK turned down to 41.12,

The world passed through an inflection point on November 5, 2010. It has passed from an age of investment liquidity coming from the world’s central banks providing credit liquidity through low interest rates and quantitative easing and passed into an age of diminished credit coming from sovereign debt shocks as Herman Van Rompuy related in Press Conference, China bank tightening, bond holder haircuts, sovereign rating writedowns by agencies, rising credit default swaps, and rising international banking standards.

Bond vigilantes have demonstrated success in calling interest rates higher globally on sovereign debt default risks and monetization of debt by QE2. Following in the foot steps of the bond vigilantes, the currency traders have commenced a global currency war, calling out competitive currency deflation, that is competitive currency devaluations. The liquidity trade is a relic of a bygone era. We have passed from an the age of asset inflation and floating currencies and passed into an age of deleveraging and an age of debt deflation.          

IV … Peak credit is reflected in the fall of the financial stocks today

Banco Satender Madrid, STD, -4.5% Moody’s says Spain Banks Face Debt Challenge as ECB Cuts Cash.
International Financials, IXG, -1.8%
European Financials, EUFN, -2.9%
Financial Services, IXG, -1.9%
Emerging Market Financials, EMFN, -1.0%
Banks, KBE, -1.7%
Community Banks, QABA, -1.0%
Private Listed Equity, the LBOs, PSP, -0.8%
Nicholas Financial, NICK, -0.8%
Capital Market Providers, KCE, -1.5%
Fortress Investment Group, FIG, -1.2%
Bank Of America, BAC, -3.1%
Nelnet, NNI, -0.9%
American Express, AXP, -1.2%
Insurance, KIE, -0.8%
Lazard, LAZ, -1.0%
Blackrock, BLK, -1.3%

V … A number of  sector stocks fell today

Clean Energy, ICLN, -1.6%

Seagate Technology, STX, -3.9%
Western Digital Group, WDC, -0.8%

VI … European stocks fell today as investors worried that Ireland's application for financial assistance from its neighbors may not be the last bailout needed in Europe.

Spain, EWP, -3.5%
Ireland, EIRL, -1.6%
Italy, EWI, -2.6%
Developing Europe, ESR, -1.2%
Austria, EWO, -1.0%
Poland, PLND, -1.6%
Europe, VGK, -1.5%
United Kingdom, EWU, -1.2%

VII … A number of country stocks fell lower today as the liquidity trade in China is ending.
China, FXI, -0.45 … Bloomberg reports China’s stocks fell, after policy makers increased the amount of money that banks must set aside to fight inflation …. This means that profitable investing long opportunities have ended, as the policy makers are terminating the liquidity trade in China  
China Real Estate, TAO, -1.7%, falling from a head an shoulders pattern.   

Turkey, TUR, -2.6%
Hong Kong, EWH, -1.2%
Brazil, EWZ, -1.2%
Brazil Small Caps, BRF, -1.2%
South Africa, EWZ, -1.2%
Sweden, EWD -0.7%
Korea Small Caps, SKOR -0.6%
Emerging Markets, EEM, -0.3%
Hong Kong, EWH, -1.2%

VIII …. Bonds rose

Total Bonds, BND, rose to resistance at 82.00.

The 30 Year US Government Bond, EDV, rose to resistance at 84.95.

IX … Ireland and its banks receive seigniorage bailout from The EU, IMF, and the UK establishing a region of global governance that now includes the United Kingdom

A … My commentary is: Jean Claude Trichet, Dominique Strauss-Khan and David Cameron are now Ireland’s sovereigns and seigniors. Their supranational budget rules impose regional global governance, specifically economic governance, upon Ireland. The bailout clearly constitutes fiscal federalism, and unifies not only Ireland, but the UK into a European region of global government. This is simply part of the vision of the Club of Rome in 1974, when it called for the creation of ten regions of global governance. Ireland’s budget is now directed by others from outside and means more internal devaluation, that is more austerity.

International Monetary Fund chief Strauss-Kahn, in a speech at the European Banking Congress in Frankfurt, Germany, spoke of sovereign crisis. The crisis is now held in abeyance, it has not been abated,  

The issue is that people participate in a currency union where there are different interest rates, cultures, trade account balances, and labor rates, as well as known and unrevealed debts; history shows that currency unions usually fail.

In as much as Mr Strauss-Kahn says there is a sovereign crisis, I believe a sovereign will arise to address the crisis. And I also believe this leader will be complemented by a seignior, an Old English term meaning top dog banker who takes a cut, and that he will provide seigniorage for all the people, and pave the way for a global currency system, to replace all current currencies as they expire in the current bout of global debt deflation that commenced that November 5, 2010, when the currency traders sold most of the world’s currencies, as the bond vigilantes sustained the Interest Rate on the US 30 Year Government Bond above 4%, causing the US Dollar, to rise to 76.59; it closed even higher today at 78.64. 

Evidence abounds and is clear, cogent and convincing that fiscal seigniorage is failing. As the end of credit approaches, then the Government, will be the sole credit seignior: it will be the first, last and only provider of credit.       

B … Open Europe Press Summary relates that the UK To Contribute Around £7bn To Irish Bailout:  Irish Prime Minister Brian Cowen announced yesterday that Ireland had applied for a multi-billion EU-IMF bailout and that the request had been accepted by the EU. Although the exact amount of the bailout package has yet to be disclosed, it is understood that it will range between €80bn and €90bn to be paid out by the EU and the IMF over the next three years. During yesterday's press conference, Irish Finance Minister Brian Lenihan confirmed that the sum involved would be less than €100bn.

A statement by EU finance ministers welcomed Ireland's decision to apply for a bailout and specified that support should be guaranteed through both the €60bn European Financial Stabilisation Mechanism, EFSM,   which former Chancellor Alistair Darling signed up to in May, and the €440bn eurozone's own rescue fund, the European Financial Stability Facility, EFSF) The Irish Times quotes the EFSF Chairman Klaus Regling saying that "drastic conditions" will be attached to the Irish bailout and that the interest rate on the loan should be around 5%, as it was for Greece. AFP reports that, in a study published on its website, credit rating agency Moody's warns that "a downgrade by several notches [...] is now likely after our analysis of [Ireland's] sovereign debt".

The Guardian notes that the UK is likely to participate in the Irish bailout in three separate ways: as a member of the IMF, as part of the EFSM and with an additional bilateral loan. The UK's total contribution is therefore expected to be worth an estimated £7bn. Speaking on the BBC's Today Programme, Chancellor George Osborne has said that the figure "is around that. It's in the billions, not the tens of billions". He also explained: "What we have committed to do is to be partners, as shareholders in the International Monetary Fund, in an international rescue of the Irish economy. But we have also made a commitment to consider a bilateral loan that reflects the fact we are not part of the euro and don't want to be part of the euro."

It is still unclear whether Ireland will be required to increase its corporate tax rate as a condition to receiving support from the EU and the IMF. However, AFP quotes French Economy Minister Christine Lagarde saying that a reform of corporate tax in Ireland would be "desirable". German centre-right MP Michael Fuchs, the economic expert of Chancellor Angela Merkel's CDU, is quoted by Der Spiegel saying: "It cannot be that Ireland gets money from European financial funds, when its citizens and firms are paying much lower taxes than in other countries, for example in Germany."

In an interview with FAZ, German Finance Minister Wolfgang Schäuble refused to say if, from his point of view, Portugal will be the next to need financial assistance. "You can reason like that, you are journalists. I can't: I bear a responsibility as Finance Minister", he argued. ECB board member Lorenzo Bini-Smaghi is quoted by Sueddeutsche Zeitung warning: "If the financial markets see that Europe is having a hard time solving a problematic case they could select the next victim."

Peter Chatwell, rating strategist at Credit Agricole CIB, is quoted in the Guardian saying: "I don't think this does anything to take Portugal and possibly Spain out of the firing line." ING economist Carsten Brzeski is quoted in Les Echos warning: "Will [the Irish bailout] avert contagion? Maybe in the short term, but not in the medium term [...] Portugal, above all, is not yet out of the woods."

In the Telegraph, Ambrose Evans-Pritchard notes, "Portugal will have a current account deficit of 10.3% of GDP this year, 8.8% in 2011, and 8.0% in 2012, according to the OECD. That is to say, Portugal will be unable to pay its way in the world by a huge margin even after draconian austerity. This is the worst profile in Europe."

Meanwhile, on Saturday, when asked on the BBC's Today Programme whether the eurozone is in danger of imminent collapse, Foreign Secretary William Hague said: "Well, I hope not. No one has pointed out more of the problems than I have over the years in having a currency where we lock together the exchange rates and interest rates of countries with different economies. But I very much hope not. Who knows?"
FT BBC: Today - Osborne Times Telegraph 2 Telegraph: Pritchard Independent Irish Times Irish Times 2 Irish Times 3 Sun Irish Times 4 Mail on Sunday Sunday Times Sunday Times 2 Sunday Times 3 Sunday Times 4 Independent on Sunday Independent on Sunday 2 Mirror BBC: Peston La Stampa European Voice Le Figaro 2 Le Figaro 3 Euractiv France Le Monde Le Figaro AFP AFP 2  AFP 3 Telegraph Irish Indepedent Express Bild Welt FAZ  Sueddeutsche Guardian Guardian 2 Guardian 3 Guardian 4 El Pais El Pais 2 IHT WSJ Expansion Europa Press WSJ 2 WSJ 3 El Pais 3 Telegraph Mail Telegraph FT Weekend FT Weekend 2 Independent Times Die Zeit Die Presse Welt Spiegel AFP 4

C … Open Europe Press Summary also provides a Eurozone comment round-up:  In the Independent on Sunday, Hamish McRae argued, "Two down, Greece and Ireland, how many to go? The eurozone will, I am sure, be pulled together for a few more years, but there will be further political ructions against austerity, further tensions in the markets, more crisis meetings in Brussels, more bail-outs. Not good, not good at all."

La Razon Brussels correspondent Jorge Valero comments on the "sweet decadence of Europe" arguing, "The slow exit from the recession, in comparison to the US and emerging economies, has revealed the shadows, imbalances and contradictions of the jewel in the crown of the European utopia: the euro". Writing in FAZ, Werner Mussler argues, "Portugal and Spain are economically much worse than Ireland".

A leader in the Observer argued, "Ireland has been betrayed by its leaders", arguing, "The EU can bail out the budget; only a public vote can clear out the government." In the Times, Bronwen Maddox argues, "But the institutions of Brussels deserve some of the blame for the crisis, and if they fail to find a role in negotiating the tough deals that must now be struck, they will find themselves redundant." In Die Welt, Thomas Exner describes Ireland as an "unwilling applicant" for an EU bailout, writing that the "government in Dublin could not do anything but abandon concerns over national sovereignty and become an applicant [for a bailout package]."

The Weekend FT's leader argued, "The ugliest expression of naked self-interest is the idea of exploiting the control over Dublin's economic affairs that a European loan would imply to force up Ireland's 12.5 per cent corporate tax."

Writing in the NOTW, Fraser Nelson argued that David Cameron should use the euro's difficulties to renegotiate the UK's relationship with the EU. On the Spectator's Coffee House blog, Nelson argued "There is a gaping democratic deficit here, and there's only so long we can ignore it. This is Cameron's chance to correct it: he can tell the Lib Dems that he's acting to save our membership of the EU. Because as things are going, an in-or-out referendum would probably deliver an 'out' verdict."
Sunday Express: Ferrari Independent on Sunday: McRae Observer: Keegan Observer: Leader Sunday Times: Smith Sunday Telegraph: Booker Irish Times: McManus Conservative Home Spectator: Coffee House blog Spectator: Coffee House blog 2 WSJ: Martin's blog John Redwood's diary Coulisses de Bruxelles La Razon: Valero FT Weekend FT Weekend: Editorial Times: Maddox WSJ: Stelzer Express: McKinstry Express: O´Flynn FT: Barber Times: Emmott FT: Muenchau FT Weekend: Analysis Welt: Exner FAZ: Mussler

D … provides the transcript of remarks by European Central Bank, ECB, President Jean-Claude Trichet to the European Parliament in Strasbourg on Monday in regard to the proposed European Semester which provides vetting of national budgets before they are presented to national legislatures; excerpts follow:  This is no time for complacency. The challenges lying ahead of us are manifold. All relevant authorities as well as the private sector must assume fully their responsibilities; governments and parliaments, central banks, regulators and supervisors, private sector and financial industry. In particular, the current crisis has clearly demonstrated that implementing ambitious reforms in economic governance is in the interest both of the euro area countries and the euro area as a whole. The proposals put forward by President Van Rompuy on the reform of the EU's economic governance and approved by the European Council meeting of October 28-29, 2010, represent an improvement to the current surveillance framework at EU level, and seem broadly appropriate for the EU countries not participating in Monetary Union. However, as regards the specific requirements of the euro area, they fall short of what the ECB views as necessary to ensure the best possible functioning of the single currency economy. I am convinced that, over the coming months, the European Parliament will help Europe making the necessary quantum leap in economic governance a reality. With its legislative role concerning financial supervision and the ESRB, the Parliament showed its determination when it comes to major issues. As it has done over the past 12 years, the ECB will continue to deliver on its mandate. This is what the Treaty calls upon us. And this is what our fellow citizens expect from us.

E … Open Europe Blog relates: Terms imposed from the outside seriously undermine the ability of the borrowing countries to democratically govern themselves.

F … Bloomberg reports:  Anglo Irish investors to swap $950m debt at 80% discount

G … Archbishop Cranmer in article Irish Sovereignty 1922-2010 writes:  The Republic of Éire didn’t quite make it to the centennial celebrations. The Irish Times mourned the passing: ‘Having obtained our political independence from Britain to be the masters of our own affairs, we have now surrendered our sovereignty to the European Commission, the European Central Bank, and the International Monetary Fund.’ Yet even as the UK stands ready to assist quite generously from the empty basket of our own financial woes, the bail-out is being dubbed the ‘Oliver Cromwell Package’ which Mr Hannan notes ‘reflects the atavism of a certain kind of Irish Europhile: anything that Britain does to Ireland, even offering it money, is part of a wicked plot.

But it also reflects a justified concern about the loss of national independence.’ You recall, the wise and proud people of Ireland rejected the Treaty, and so they were ordered to vote again until they gave the right answer. It shows a marked lack of political discernment that the Irish Times didn’t realise at that point that Irish sovereignty had ceased to be. For the UK, this bail-out is about assisting a long-time friend and trading partner whose history, culture and traditions are tied to our own: for the EU, this bail-out is about saving the euro, and so saving ‘Europe’.

Are Ireland’s politicians so incompetent and obtuse that they could not grasp that the abolition of the punt heralded the end of national sovereignty? Did they not understand that there can be no ‘pooling’ of the essential sovereignty by which the independence of the state is defined? The control of money is at the core of politics, self-government and sovereignty itself. The monarch’s head upon a nation’s currency is a symbol of that sovereignty: the denarius that bore the head of Caesar belonged to Caesar; the sterling that bears the head of the Queen means that her authority in Parliament is absolute; the euro that bears the insignia of the European Union shall be rendered unto the European government because it belongs to the European government.

The introduction of the euro was not only the crowning of economic integration, it was a profoundly political act, because a currency is not just another economic factor but also symbolises the power of the sovereign who guarantees it. Those who control the credit of a nation direct the policy of governments, and hold in the hollow of their hands the destiny of the people. Thus does ‘ever closer union’ transgress the laws of economic morality.

Those EU countries which have transgressed that Maastricht criteria by which the credibility of the euro is sustained have a stark choice: large cuts in public expenditure or increased taxation. Neither is a recipe for growth and job creation. The Single Currency removed the ability of member states to reduce their interest rates below that set by the Central Bank. This will have the effect of deepening the present recession. Ireland, Greece (and doubtless Portugal, Spain and Italy) will become increasingly uncompetitive and face prolonged unemployment to force down wages. This is a moral issue, since such policies ‘trample on the heads of the poor...and deny justice to the oppressed’ (Amos 2:7).

X … In today’s news
A … Tyler Durden relates RealtyTrac Opines On The Coming Wave Of GSE Foreclosure Buybacks: "The Final Liability Will Be Enormous"

B … Evans-Pritchard writes Portugal Next As EMU's Máquina Infernal Keeps Ticking

C … Jonathan R. Laing of Barrons reports: The potential liability facing bankers arises from the $2 trillion in subprime, alt-A and option-adjustable rate mortgages that they underwrote and sold to investors, mostly as mortgage-backed securities during the home-lending boom of 2005 to 2007. The losses on the mortgages will be horrendous before the dust settles—over $700 billion on these and other so-called nonagency mortgage securities, according to New York mortgage-research specialist and broker Amherst Securities Group.

And now investors—from the federal housing giants Fannie Mae and Freddie Mac to major bond managers like closely held Pacific Investment Management and BlackRock, BLK, are fighting back. They are seeking to put back the mortgages to the banks from whence the investment flotsam came and force the banks to eat much of the mortgage losses.

The argument hinges on the arcane contract principle of representations and warranties, known as reps and warranties in legal jargon. Namely, did the mortgages go bad because of the unanticipated nationwide collapse in home prices (a so-called exogenous factor) or are the banks responsible for the mess because they "misrepresented" to the mortgage purchasers the shoddy quality of the mortgages they put in securities and pools?

D.  Between The Hedges reports: The Greece sovereign cds is jumping +5.69% to 1,039.14 bps, the Portugal sovereign cds is surging +9.68% to 453.97 bps, the Spain sovereign cds is climbing +7.73% to 282.08 bps, the UK sovereign cds is rising +3.81% to 62.52 bps and the Ireland sovereign cds is gaining +3.29% to 522.29 bps

Disclosure: I am invested in gold bullion