Financial Report for the week ending June 29, 2012; this is the thirteenth week of entry into the Second Great Depression.
1) …. Financial and growth stocks soared on EU plans to lend bailout funds directly to struggling banks
Breakout relates Stocks soar on EU plans but relief rally could be short-lived. Stocks are flying early Friday on the news that euro zone officials have agreed to lend bailout funds directly to struggling banks. But should you trust this “relief rally?”
In article EU leaders ease debt-crisis rules for Spain as Merkel retreats. Tony Czuczka and Josiane Kremer of Bloomberg report news of a Spanish bank bailout memorandum of understanding orchestrated by Herman van Rompuy. The leaders dropped the requirement that taxpayers, get preferred creditor status on crisis loans to Spain’s blighted banks, the European Union President Rompuy said. Banks will recapitalized directly by bailout funds rather than going through governments, once Europe sets up a single banking supervisor, he added. Euro governments were granted access to rescue loans without having to relinquish control of their economies. “We agreed on short-term measures that should apply to Spain and Italy,” said Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of euro finance ministers. Finance ministers will aim to enact the agreement at a meeting on July 9, European Union President Herman Van Rompuy said, calling the accord a “breakthrough.”
Germany had previously balked at changing the order of seniority on as much as 100 billion euros in emergency loans to Spanish banks and at committing to direct sovereign-debt buying through the euro-area bailout funds, saying on June 21 that such a move is “not up for debate.”
At the summit, euro-area leaders agreed to use the rescue funds “in a flexible and efficient manner in order to stabilize markets for member states” that respect rules including budget deficit limits and sign a memorandum of understanding, according to an EU statement issued in Brussels. Even so, the EU’s two rescue funds may only amount to about 20 percent of the outstanding debt of Italy and Spain, limiting the ability to lower the nations’ borrowing costs. The rescue mechanisms, the European Financial Stability Facility, EFSF, and the yet-to-start ESM, may have 500 billion euros available for purchases. Italy and Spain have about 2.4 trillion euros combined of outstanding bonds, bills and loans, according to data compiled by Bloomberg
Pooling of euro-area debt, a tool sought by Spain and Italy that Merkel called, wrong and counterproductive, in a speech to German lawmakers a day before the summit, wasn’t mentioned in the statement. Merkel will explain the deal to the German parliament upon her return to Berlin today before a vote on new EU budget rules and authorization of the ESM. A German official briefing reporters on the condition of anonymity noted that the Parliament in Berlin gets to approve changes in the ESM’s setup, such as allowing direct bank recapitalizations.
Relief may not be quick as joint EU banking supervision, seen as a way to make oversight more independent of national regulators, will take time. The EU will consider proposals “by the end of 2012,” according to the statement.
Bonds, BND, traded slightly lower; the highly margined Bond ETF, BOND, fell parabolically lower. Emerging Market Bonds, EMB, rose to a new high. Junk Bonds, JNK, rose to its previous hagh.
European Financials, EUFN, The Too Big To Fail Banks, RWW, World Financials, IXG, India Earnings, EPI, Small Cap Revenue, RWJ, and Growth Shares, RZG, IWO, JKH, JKE, rose strongly.
Metal Recycling, SMS, Steel, SLX, WOR, Automobiles, CARZ, Software, IGV, CDNS, Smartfone, FONE, Cloud Computing, SKYY, VMW, TIBX, Nasdaq 100, QTEC, Small Cap Energy, PSCE, Energy Service, IEZ, OIH, Copper Miners, COPX, Aluminum Miners, ALUM, Coal Miners, KOL, Homebuilders, ITB, and US Infrastructure, PKB, rose strongly led by Cement Manufacturers, EXP, TXI, JHX,
Automobile part manufacturers seen in this Finviz Screener rose as Ford, F, and General Motors, GM, traded lower.
Electrical Equipment Manufacturers, such as ETN, seen in this Finviz Screener rose strongly.
Small Cap Consumer Discretionary, PSCD, rose strongly.
Small Cap Industrial Shares, PSCI, led by CIR, HEES, SNHY, rose strongly. .
Industrial Aerospace companies such as Boeing, BA, and Honeywell, HON, rose strongly.
Paper Manufacturers, WOOD, rose strongly.
Dow Jones Telecom, IYZ, rose strongly to its previous high.
Beverage stocks such as BUD, SAM, KO, KOF, FMX, PEP, DPS, blasted higher.
Greece, GREK, rose 9..3%, Italy, EWI, 8.4%, Spain, EWP, 7.3%, France, EWQ, 5.9%, Germany 5.7%.
India Infrastructure, INXX, India Earnings, EPI, India Small Caps, SCIF, and Brazil Small Caps, BRF, led the Brics, EEB, 4.7%, higher; with India, INP, 6.7%, Brazil, EWZ, 5..4%, Russia, RSX, 5.5%, China, YAO, 3.7%.
South Korea, EWY, 4.0%.
Turkey, TUR, Philippines, EPHE, and Mexico, EWW, continued their upward trend, moving parabolically higher,
Emerging Markets, EEM, 4.4%. World Small Cap Stocks, VSS, 3.3%, World Stocks, VT, 3.1%. US Stocks VTI, 2.6.%
Trade based Japan, EWJ, gained 2.1%, United Kingdom, EWU, 2.2%, commodity based Australia, EWA, 3.8%, currency based Poland, EPOL, 5.0%, and Euro led Sweden, EWD 6.0%, all to the middle of a broadening top patterns.
Commodities, DBC, jumped 4.3%, as Oil, USO, jumped 7.8%. Silver, SLV, jumped 4.0%, and Gold, GLD, jumped 2.7%, from a double bottom to the edge of a descending triangle. Copper, JJC, jumped 4.8%, taking Base Metals, DBB, 4.5% higher to strong resistance. Timber, CUT, jumped 4.1%. Corn, CORN, jumps as CNBC relates Corn Crop Withers Away.
The Yahoo Finance chart of Volatility, TVIX, shows it 10.4% drop today.
Bullion Vault relates Euro news is “a shot in the arm” for gold prices. And Casey Research relates A ‘Lehman moment’ will ensure gold and silver will soar again
2) … The June 2012 Leaders’ Memorandum Of Understanding begins the regionalization of the EU. The Leaders’ Memorandum of Understanding, presented in PDF on Consillium Europa, for a bailout of Spain’s banks by the ESM and creation of EU banking oversight, pools sovereignty and is the first step into a Eurozone Political Union as foretold in both Revelation 13:1-4, as well as in Daniel 2;30-33.
Dr. Worden writes Incremental changes toward EU Integration. The decisions of the European Council to allow federal bailout funds to go directly to state banks and to approve the creation of a federal supervisory body for banks a par for the course for the E.U. in respect to its history. Integration, which is code for transfers of governmental sovereignty from the states to the federal level, has proceeded in incrementally in fits and stops since the Shuman plan in the early 1950s
Zero Hedge relates Farage in video on EU Summit ‘Breakthrough’: “It’s not credible; nobody believes you”. He states ESM is doomed before it starts. Legal challenges are coming in Ireland and Germany
Estonia Justice Says it will not fit their constitution. Link if video does not play: Nigel Farage on Euro Breakdown.
Wolfgang Munchau in FT Nothing has changed in Europe, and Merkel is still winning relates three points 1. A mandate to inject equity into the banks will be conditional on a political agreement for joint banking supervision. This is where Ms Merkel can still exact her revenge. Do not expect this to proceed easily. A joint system of banking would be a very big deal, and I doubt that a sensible agreement can be agreed by October.
2. Direct bank recapitalisations may require a change in the ESM treaty. I know this point is disputed. EU officials say they can do it by diktat. But I cannot see how one can conceivably let the ESM inject equity into banks directly when the treaty says specifically that the ESM lends money to member states for that purpose. Would the treaty not have mentioned this important detail? The head of the Bundestag’s budget committee also seems to think that a treaty change is now needed.
3. The new facility is still constrained by the same overall funding limits of the ESM as the bond purchases. I believe the Spanish banks will ultimately need a lot more than the €100bn earmarked for this programme once you take into account the effects of both the housing crash and the depression. The ESM is seriously overloaded.
Mike Mish writes EU Summit Winner Was Merkel The most important event last week was probably not the agreement at the summit anyway, but the statement by Ms Merkel that there will be no eurozone bonds “for as long as I live”. If Ms Merkel is right and there are no eurozone bonds in her lifetime, the eurozone will not survive. Without eurozone bonds or a change in ECB policy, Italy’s and Spain’s debt – and eurozone membership – is not sustainable. That was as true on Wednesday as it is today. What is not debatable is Münchau and others keep ignoring real constraints on Merkel, expecting – sometimes demanding – she do something she cannot do. Regardless, except for a single misguided sentence, Münchau made a sterling case for who really won in Brussels.Let’s see what the bond market looks like a month from now, and six months from now before jumping to conclusions. Meanwhile, Merkel took a soft blow to her reputation at home. Eventually these blows will matter, but this blow was the bare minimum anyone could have expected. The blow only looks significant because of purposeful media-manipulating statements ahead of the summit. The real battles are still ahead because the summit solved virtually nothing.
Simone Foxman in the Business Insider Willem Buiter relates There’s one big problem with dreams of a European banking union the lack of accountability in the ECB will render any European banking authority unreliable. As regards formal accountability, the ECB as interest rate setter, liquidity and credit manager, lender of last resort and market maker of last resort, displays less formal accountability than any other leading central bank. The best technocratic solution can come to nought if it cannot be made acceptable to a sufficient plurality of the people in the EA.
Christoph Drier of WSWS writes German parliament votes for European fiscal pact. The fiscal pact and the European Stability Mechanism are instruments for intensifying the assault on jobs, living standards and social programs throughout Europe, modeled on the austerity measures imposed in Greece.
Economic Policy Journal relates European Financials Institutions are highly leveraged Here’s a Plumer chart showing country by country eurozone bank liabilities as a % of GDP versus the U.S. and Canada. Note well that even “fiscally conservative” Germany’s bank liabilities are 3x those of the U.S. bank liabilities relative to GDP.
Irishcentral writes Ireland’s economic collapse worst global crash since the Great Depression: Country still in the grip of the banking crisis
Open Europe relates Cameron seek to distance the UK from EU oversight I will consider EU referendum but priority is renegotiation of membership terms, Cameron says
Writing in the Sunday Telegraph, David Cameron stated that “what I want – and what I believe the vast majority of the British people want – is to make changes to our relationship” with the EU. “Whole swathes of legislation covering social issues, working time and home affairs should, in my view, be scrapped,” he added, concluding, “As we get closer to the end point, we will need to consider how best to get the full-hearted support of the British people whether it is in a general election or in a referendum. As I have said, for me the two words ‘Europe’ and ‘referendum’ can go together, particularly if we really are proposing a change in how our country is governed, but let us get the peopl e a real choice first.”
Former Defence Secretary Liam Fox has today called for urgent renegotiation with the EU. Writing in the Sunday Telegraph, he argued, “I would like to see Britain negotiate a new relationship on the basis that, if we achieved it and our future relationship was economic rather than political, we would advocate acceptance in a referendum of this new dynamic. If, on the other hand, others would not accede to our requests for a rebalancing in the light of the response to the euro crisis, then we would recommend rejection and potential departure from the EU.” He concluded, “For my own part, life outside the EU holds no terror.”
The Times reports that Cameron will make a major speech in the autumn calling for powers to be returned from the EU. The Telegraph’s leader argues, “Mr Cameron needs to be clear about what he thinks is realistically attainable and to spell out how he proposes to go about achieving it.” Several backbench Conservative MPs have urged Cameron to make a commitment to a referendum before 2015. Meanwhile, Vince Cable, the Liberal Democrat Business Secretary, has called the idea “horribly irrelevant” at the present time.
Open Europe’s Director Mats Persson was quoted in Saturday’s Times discussing the impact of a eurozone banking union on the UK economy. He said, “A eurozone banking union is probably necessary in the long term, but is also a potential minefield for the UK. First, will it create barriers to UK financial firms doing business in the eurozone, in turn fragmenting the single market? Secondly, will supervision spill over to regulation, with the eurozone effectively writing the rules for all 27 countries? David Cameron could come under a lot of pressure to seek new safeguards.”
Mats also appeared on LBC this morning discussing the prospect of an EU referendum in the UK. Separately, Open Europe’s recent briefing outlining the potential alternatives to EU membership if the UK decided to the leave the EU altogether is cited by Austrian daily Die Presse.
Open Europe research Saturday’s Times Die Presse Sunday Telegraph: Cameron Sunday Telegraph: Fox Times Mail Mail: Editorial FT FT 2 City AM WSJ Sun Express Sunday Telegraph Sunday Times Guardian Sunday Telegraph 2 Sunday Telegraph: Leader Guardian: Leader Comment is Free: Alexander Times: Montgomerie Conservative Home: Montgomerie Independent on Sunday: Rentoul Express: Carswell BBC Radio 4: World this weekend Independent Mirror EUobserver BBC Irish Independent Irish Times Telegraph FT 3 Telegraph: Editorial
Open Europe relates Six legal challenges lodged with Germany’s Constitutional Court after Bundestag approves ESM and fiscal treaty … Schäuble and Westerwelle at odds over longer term introduction of Eurobonds
In a vote held on Friday evening, the Bundestag approved both the ESM and the fiscal treaty, with both passing the two-thirds majority necessary due to their constitutional implications. Over the weekend, six separate complaints against either or both the ESM and fiscal treaty were lodged at Germany’s Constitutional Court on the grounds they limit the Bundestag’s ability to enforce democratic oversight and also its sovereign budgetary powers.
Sigmar Gabriel, the leader of the SPD group in the Bundestag, has said that his party would vote against changes to the ESM treaty allowing the fund to lend money to banks directly, if the necessary amendments were put to a vote in the Bundestag. However, EUobserver notes that the European Council’s legal services believe that the changes could be made without needing another round of parliamentary approvals.
German magazine Focus reports that the German government plans to make aid for banks conditional on the introduction of a financial transactions tax in the concerned countries. Open Europe’s Raoul Ruparel was quoted in Saturday’s Telegraph discussing the changes to the eurozone’s bailout funds agreed at last week’s EU summit.
FAZ reports that German Finance Minister Wolfgang Schäuble (CDU) and Foreign Minister Guido Westerwelle (FDP) are at odds over the possibility of eurobonds being introduced in the longer term, after Schäuble hinted that this could be a possibility given the fulfilment of certain fiscal conditions. However, Westerwelle responded, “This is not a question of timing but a stance that is wrong in principle and we reject it.”
Writing in City AM, Open Europe’s Pawel Swidlicki argues, “With each successive summit, Merkel is running out of room for manoeuvre across a range of fronts. Economically, the German economy is resilient but it cannot remain immune to the worsening crisis forever. Politically, her latest concessions are only likely to feed the restless mood of many of her backbenchers and natural allies in the German business community. Finally, on the legal front, the limits of the current constitution have been stretched almost to the limit, and any full debt-pooling…would require a referendum. This latest episode has left Germany seriously frustrated and with a feeling of an ever-increasing weight on its shoulders. This may only harden German resistance to putting even more of its money on the table.”
Saturday’s Telegraph EurActiv EUobserver EUobserver 2 FAZ Focus Focus 2 Focus 3 ARD MA City AM: Swidlicki
Open Europe relates Greece to ask for cost of bank recapitalisation to be removed from government debt levels
The EU/IMF/ECB troika will return to Athens today to begin its re-evaluation of the Greek bailout programme following significant delays due to the elections. Kathimerini reports that the Greek government may request that the newly agreed powers to allow the eurozone bailout funds to lend directly to banks be applied retrospectively to the second Greek bailout – this would allow around €50bn to be removed from Greece’s debt level. Meanwhile, Independent Greeks leader Panos Kammenos has called for a parliamentary inquiry into Greece’s original bailout request following suggestions that Greek economic statistics were altered to make a bailout look necessary.
Kathimerini Kathimerini 2 Kathimerini 3 Les Echos EUobserver
Euro Intelligence provides the best of European News reporting and analysis. In its daily for fee newsletter it relates Mark Schieritz makes the point that the change of seniority rules is not important, as the public sector will always find a way to impose itself over the private sector;
Simon Black of Sovereign Man writes It’s time to connect the dots. hat we can see from this week’s events is:
- European governments are insolvent
- European banks are insolvent
- US governments are heading in that direction
- Even the best US banks are not as strong as believed
- Foreigners are abandoning the US dollar and seeking alternatives
- Gold is money
These events are all connected, and the trend is becoming so clear that even the most casual observers are starting to wake up. When you connect the dots, the next steps lead to what may soon be regarded as an obvious conclusion: the system, as it exists right now, is crumbling. No amount of self-delusion can make this go away. Rational thinking and measured action, on the other hand, can make the consequences go away… turning people from victims into spectators of the greatest bubble burst in modern times.
I relate that during June 2012, the Steepner ETF, STPP rose 0.71%, as the chart of the Interest Rate on the 10 Year US Government Note, ^TNX, shows a rise from 1.47% to 1.66, as the chart fg the 10 30 US Sovereign Debt Yield Curve, $TNX:$TYX, steepened. A steepening yield means stocks will be falling in the future.
3) … In today’s news
Patrick Chovanec, An American Perspective From China, writes in Business Insider A shadow lending system based upon real estate property in Zhejiang China poses a challenge to financial stability, as a line of domino lending falls. A bank in Hangzhou started calling in loans to other firms guaranteed by Tianyu,” said the owner of a company tied to the network. “That had a ripple effect and affected a number of other companies.” The reciprocal nature of the guarantee network stripped real bank loan guarantees of any value, argued another banker. The system has made all its participants mutually vulnerable to an economic downturn, he said. Now that property development can no longer guarantee profits, the banker said, borrowers and guarantors are in trouble together. Cash flow at some enterprises has fallen to dangerously low levels, said a bank loan officer, so that they’ve been forced to survive on credit. Many ran out of cash after pouring money into speculative property investments, he said, which flopped after the central government imposed real estate development restrictions in 2010. In other words, a lot of these firms are actually insolvent and are just borrowing from Peter to pay Paul, in order to postpone the day of reckoning.
Rolling Stone relates A huge break in the LIBOR banking investigation and Another domino, the RBS falls in the Libor Scandal.
Telegraph relates RBS and Lloyds drawn into rate-rigging scandal. Royal Bank of Scotland and Lloyds have been accused of systematically rigging financial markets in a growing international scandal which wiped billions off the value of shares in Britain’s biggest banks.
Reuters Barlcays plunges leading European shares Lower. European shares ended lower on Thursday, led by banks, with investors primed for disappointment from the latest European Union summit to tackle the debt crisis, but not expecting a further steep market selloff. A 2.5 percent decline in banking shares, led by a 15.6 percent slump in Barclays following investigations that found it tried to manipulate key market interest rates, also weighed on the choppy market that witnessed sharp swings on contrasting comments from European policymakers and leaders.
Telegraph relates Libor rigging ‘was institutionalised at major UK bank’. Interest rate rigging was institutionalised at one of Britain’s biggest banks, an insider has claimed, with market manipulation openly discussed between managers, staff and customers.
Zero Hedge relates “Everyone knew, and everyone was doing it”
The Telegraph relates Bank of England dragged into rate-rigging row
CNBC relates Bank risk is distorting our democracy, Stiglitz says
George Washington Blog Local governments which entered into interest rate swaps got scalped. Sometimes the big banks manipulated the Libor rates up, and sometimes down. Different groups of people got hurt depending which way the rates were gamed. Bloomberg’s Darrell Preston explained last year how cities and other local governments got scalped when rates were manipulated downward:
CNBC relates Here comes Financial Armageddon,Jim Rogers says
MarketWatch relates oil futures rally more than 5% after EU bank plan
MarketWatch relates Euro jumps most since October on EU moves
Bloomberg relates European banks bolster capital with shunned bonds
Bloomberg relates Japan’s industrial output falls most since 2011 quake. Japan’s industrial output fell the most since the March 2011 earthquake and tsunami as weakness in European demand limited automobile output. Production declined 3.1 percent in May from April, the Trade Ministry said in Tokyo today. That compared with the median estimate in a Bloomberg News survey for a 2.8 percent drop. The slide was 0.2 percent the previous month.
Daily Ticker relates Here Are the New Taxes You’re Going to Pay for Obamacare.
Bloomberg relates Chinese industrial companies profits drop for second month. Chinese industrial companies’ profits fell for a second month in May, a government report showed today, as slowing economic growth hurt corporate earnings. Income dropped 5.3 percent from a year earlier to 390.9 billion yuan ($61 billion), the National Bureau of Statistics said on its website today. That compares with a 2.2 percent decline in April and 4.5 percent gain in March. The deterioration adds to signs that government measures to stimulate the world’s second-biggest economy have yet to reverse a slowdown that may deepen for a sixth quarter
The WSJ relates Medicaid decision looms for states. The Supreme Court’s decision to let states opt out of the health overhaul’s Medicaid expansion without losing current funding for the program lifts a budget mandate from states could mean fewer Americans gain insurance coverage under the law.
Reuters relates NYC public hospitals see big financial hit from healthcare law. The New York City Health and Hospital Corporation expects to lose $2.3 billion over eight years from the Medicaid cuts included in President Barack Obama’s new healthcare law. The U.S. Supreme Court on Thursday upheld Obama’s signature healthcare overhaul requiring that most Americans get insurance by 2014 or pay a financial penalty. Alan Aviles, the HHC chief executive officer, said on Thursday that although more people will have insurance, this will not make up for the loss of Medicaid funds. HHC is the nation’s biggest public hospital system and it serves 1.3 million New Yorkers every year. Aviles did not yet know how much the city’s public hospitals would save by treating more insured patients. But “It is highly unlikely that it will come remotely close to $2.3 billion,” he said.
Telegraph relates Moody’s sees Affordable Care Act pressuring hospitals.
4) … Offshore investing news courtesy of Dollar Collapse
Three mountain retreats in Ecuador – International Living
Choosing an overseas bank – International Man
Ron Holland on moving offshore – Daily Bell
Argentina proposes new taxes on Pan American Silver mine – Yahoo! Finance
5) … Future reports on this blog are likely to be on a weekly not daily basis.