Draghi Takes A New Tact at the ECB

Italy's own former head central banker took over the role of head of the ECB (European Central Bank) and came through the door with a bang, cutting rates within the first few days of becoming the new ECB head.

It seems Draghi must know Italian politics better then his predecessor, Jean-Claude Trichet and understands that the changes the ECB and EU expect of Italy, are not likely to bet met, thus he has delivered a new ultamatum this weekend.

The formerly promised reforms, in exchange for ECB support of Italian bonds, has been not only slow in coming, but rather DOA. That may or may not be about to change, but change one way or the other is coming.

Reuters reports:

The European Central Bank often discusses the possibility ending the purchase of Italian government bonds if it concludes Italy is not adopting promised reforms, ECB Governing Council Member Yves Mersch said.


And Thus Draghi seems to be putting all or nothing on the table.


"If we observe that our interventions are undermined by a lack of efforts by national governments then we have to pose ourselves the problem of the incentive effect,"


"the ECB did not want to become a lender of last resort to help the euro zone solve its debt crisis and said it was concerned that its job could be made more difficult by governments that "don't meet their responsibilities."

"Our job is not to remedy the errors of politicians," he said.

And just how serious is Draghi?

Friday this ECB intervention in the Italian bond market was noted...

As Italian 10 year was sliding to an untenable 6.3% yield and moving higher, the ECB stepped in with supporting purchases at the green circle, it seemed to be a failed intervention.

However, when this most recent headline is digested, it may very well have been a demonstration to Berlusconi of  "With us, without us".

The ball is now in Berlusconi's court, however the changes demanded including : Spending cuts, higher tax revenues and labor reforms; still seem unlikely.

As it is with all of the PIIGS nations, the ultimate reality is that they still hold the trump card. For evidence of this, just look at Greece this week. A bailout crafted almost entirely for Greece was just about scrapped by Greece and it didn't take more then 48 hours for Ireland, Portugal and Spain to start manipulating data to enhance the chances of sweetening their deals. The one thing every politician and finance minister in Europe understands is that if 1 of the 5 PIIGS goes down, the entirety of the EU goes down.

Judging by the rapid decay in the credit quality of the recent former back-stopper of the EU, France and the manufacturing read this week of the only EU back-stopper left, Germany, it may already be too late. 

Follow Up- 2008/2011 Market Action

This is an update of "History Doesn't Repeat, But It Does Rhyme" post, which compared the market recently since early August 2011 to present with a very similar market in 2008between January and May, which was the first breakdown below the 2007 top and led to a fall of over 50% in the S&P. You will see that the similarities are eery.

 This is the 2007 top and the following consolidation in 2008 which is very similar to the same consolidation and rally we have seen since the start of October.

This is the same 2011 pattern, the similarities include a H&S top, followed by a steep break down below neckline support and then a declining parallelogram formed (flag like pattern) with the very last rally being the largest rally and also in 2008, the last rally of the pattern, after that a decline set in that took us to the March 2009 lows with a loss of more then 50%.

 Here are some key reversal points in 2008, below the 2011 pattern is more detailed, but all of the reversal levels are the same.

This is the 2011 pattern, first working from the right shoulder of the top (left to right) there is a similar long upper wick candle that formed the top of the right shoulder in both 2007 and 2011, followed by a mall counter trend bounce, both ending with a long dark candle reversing the small bounce and both look very similar a they hit neckline support (the third red box from the left. Following that there was a sort of double camel hump pattern at the red arrow with the first high being higher then the second, in each case these were the last bounces in the top before a steep decline set in the S&P-500. Both declines were similar in 2008 and 2011 and ended with long bottom wick candles, both of which started the declining parallelogram pattern. In both Patterns there was an initial rally to resistance followed by a brief fall and an attempted rally that could not reach the upper trendline, followed by a pullback and a new leg higher that did reach the upper trend line for the second time. There was a similar decline from that second contact with the upper trendline and a fill to a new low which was the second and last contact with the lower trendline. In both cases, this rally from the second contact point with the lower trendline was the longest and strongest rally in both patterns. The last rally in both patterns penetrated the larger top's neckline-breaking out to the upside. From there, both fell back below the trendline and formed a bear flag (in the white box) which is what we saw this week.

 This is 2011 and the last rally of the consolidation pattern not only broke above the neckline of the top pattern, but also broke above the long term trend line, the flag pattern that followed found some initial support at that long term trendline.

You can see the exact same thing happened in 2008, a break above the long term trendlne with a flag finding initial support at the long term trendline.

 The 2008 50 day moving average (yellow) and the 200 day moving average (blue) crossed down (death cross) in the longer term head and shoulders pattern.

This is 2011, you see the same crossover just a few days later the in 2008. Both periods saw the 50 day turn up during the consolidation and the long term 200 day turn down.

 In 2008 that last rally (the same as the rally we have seen since the start of October) had similar reversal patterns, (both confirmed candlestick reversal patterns), each period saw several days of decline followed by a bear flag that held above the top trendline of the consolidation pattern and below the neckline of the H&S pattern.

Here in 2011 you can see nearly the exact same action.

Here is what happened after this period in 2008.

Over a 50% decline.

Some people wonder, with all of the bad news lately, how is the market hasn't already fallen apart completely. There is a longer more accurate answer to that which I have covered in posts talking about European bank recapitalizations and the selling of US assets/repatriating Euros to Euro banks by selling dollars and buying Euros (you may recall). However, even leaving that issue aside, below is some of the news during the last rally period in 2008 From January to very early June. You will see that despite so very negative news, the market was able to continue this, the longest of rallies in the consolidation. This is only the news from the last rally in 2008.

2008 timeline

March

A £1bn hedge fund run by Peloton Partners collapses (Similar to the collapse of MF Global)

3/14

JPMorgan and Fed Move to Bail Out Bear Stearns

3/17

Swiss banking giant UBS reduces its balance sheet by some $520 billion, or 20%, from last year. The dollar weakened to its lowest point in more than 12 years against the yen (We have a similar situation recently where the dollar weekend to new post World War 2 lows)

3/17

Wall Street's fifth-largest bank, Bear Stearns, is acquired by larger rival JP Morgan Chase for $240m in a deal backed by $30bn of central bank loans.

3/25

Seeking Fast Deal, JPMorgan Quintuples Bear Stearns Bid

3/28

Fremont Ordered by FDIC to Find Buyer; Curbs Imposed

April

Germany's Deutsche Bank warns of credit losses (similar situations apply now due to the 50% Greek bondholder losses)

4/1

^{Swiss bank UBS announces further $19 billion in debt writedowns, bringing its total to date to $37 billion -- the biggest hit of any bank worldwide. UBS Chairman Marcel Ospel quits.}

^{4/1 Deutsche Bank to write down $4B}

4/1

^{Moneyfacts, which monitors financial products, says 20% of}

mortgage products have been withdrawn from the UK market in the previous seven days.

Five days later the 100% mortgage disappears when Abbey withdraws the last home loan available without a deposit.

^4/4

^{MBIA Loses AAA Insurer Rating From Fitch Over Capital (Similarly, we have sen several downgrades and threatened downgrades of financial institutions)}

^4/7

^{Bear Stearns Sued for $1 Billion by Fund Liquidators (We have similar suits, for instance BOFA is trying to settle a suit regarding the subprime losses)}

4/8

Washington Mutual Raising $7 Billion (BAC is similarly raising nearly $3 billion and banks across Europe need to raise nearly $1 trillion dollars by next year)

4/8

^{The International Monetary Fund (IMF), which oversees the global economy, warns that potential losses from the credit crunch could reach $1 trillion and may be even higher.}

It says the effects are spreading from sub-prime mortgage assets to other sectors, such as commercial property, consumer credit, and company debt. (This is not too different then the amount needed by the EFSF in Europe to stabilize Greece alone, it has been suggested that the fund needs to be somewhere around $3 trillion dollars to be effective, both are large amounts and carry a high degree of uncertainty)

4/11

A warning is issued by the CML that the amount of funding available for mortgages in the UK could be cut in half this year.

It calls on the Bank of England to kick-start the money markets and ease the effects of the credit crunch. (In similar fashion, the European banking sector liquidity is now frozen as well as credit)

4/14

Credit Suisse to face writedown of 3-5 billion Swiss francs 

4/14

Wachovia's Loss a Grim Sign for Banks(The same could be said of MF Global and Jefferies currently)

4/15

^{Confidence in the UK housing market falls to its lowest point in 30}

years in March, according to the Royal Institution of Chartered Surveyors, because of the"unique liquidity blight".

4/16

JPMorgan Chase's profit drops 50 pct in 1Q on reserves boost

4/17

Merrill Lynch posts steep first-quarter loss on write-downs

^4/18

^{Citigroup Reports Loss on $15 Billion of Credit Costs (All of these losses are not much different then the losses European banks like ERSTE are taking because of CDS and Greek bond haircuts of 50%)}

^4/21

^{Bank of America's profit drops 77 percent in first quarter (Ironically BAC is in trouble again, needing to raise nearly $3 billion months after a $5 billion dollar infusion from Warren Buffet)}

^4/22

^{Royal Bank of Scotland announces a plan to raise money from its shareholders with a £12bn rights issue - the biggest in UK corporate history. RBS aims to raise $24B in new capital}

^{The firm also announces a write-down of £5.9bn on the value of its investments between April and June - the largest write-off yet for a British bank. (The banking situation in Europe is similar with over a trillion dollars needing to be raised and losses being taken on CDS that need to be marked to market as well as Greek debt)}

^4/22

^{Merrill Raises $9.55 Billion in Sales of Debt, Preferred Shares (Similar to what BAC is trying to do now)}

^4/24

^{Credit Suisse Q1 writedowns of $5.3B drives $2.1B loss}

4/25

^{Persimmon becomes the first UK house builder to announce major cutbacks, citing the lack of affordable mortgages and a fall in consumer confidence.Persimmon becomes the first UK house builder to announce major}

cutbacks, citing the lack of affordable mortgages and a fall in consumer confidence.

It adds sales have fallen by a quarter since the beginning of the year (AMD just announced mass lay-offs recently)

4/19

The CML says the number of new mortgages approved in March

slipped 44% to 64, the lowest monthly number since records began in 1999.

^4/22

^{SunTrust Profit Falls 45% on Provisions for Bad Loans}

^4/23

^{Ambac swings to 1Q loss as it takes $3.06 billion in charges}

^4/28

^{Royal Bank May Take C$4.2 Billion in Writedowns}

^4/29

^{Allianz Quarterly Net Falls 66% After Bank Writedowns}

^4/29

^{Citigroup Sells $3 Billion of Stock to Boost Capital (much like BAC-the same amount)}

^4/29

^{GMAC Posts $589 Million Loss on Home Lending Woes}

^4/29

^{HBOS Plans to Raise 4 Billion Pounds in Share Sale}

^4/29

^{Deutsche Bank Says It Had First Loss in Five Years}

^4/29

^{Countrywide Reports 893 Million Loss From Bad Loans}

^4/30

^{The first annual fall in house prices for 12 years is recorded by Nationwide.}

^{Later in the week, the UK's biggest lender, Halifax announces similar findings.}

^4/30

^{Citigroup Increases Stock Offering to $4.5 Billion}

^5/2 

^{More than 850 companies went into administration between January and}

March, government figures show, a rise of 54% on the previous year. Retail and construction

firms are hardest hit.

^5/6

^{Fannie Mae to raise $6bn new capital}

^5/6

^{Morgan Stanley to Cut 5% of Staff}

^5/6

^{UBS to cut 5,500 jobs in subprime wake}

^5/6

^{Fannie Mae loses $2.2-billion}

^5/6

^{Legg Mason Posts First Loss}

^5/7

^{Town of Vallejo, California goes bankrupt}

^5/9

^{AIG off 9% on record loss, plan to raise $12.5 billion}

^5/9

^{Allianz Profit Falls on EU513 Million Dresdner Loss}

^5/9

^{Fremont May Go Bankrupt If Asset Sale Plan Falters}

^5/12

^{IndyMac Reports Loss, Doesn't See Profit in 2008}

^5/14

^{Royal Bank taking $855M hit on writedowns}

^5/15

^{Blackstone Posts $251 Million Loss}

^5/15

^{Barclays reports a $1.94-billion writedown}

^5/19

^{Banks Keep $35 Billion Markdown Off Income Statements}

^5/19

^{AIG to raise roughly $20 billion in capital}

^5/19

^{Crédit Agricole boosts risk controls after writedowns hit €3.3bn}

5/22

^{Swiss bank UBS, one of the worst affected by the credit crunch, launches a $15.5bn rights issue to cover some of the $37bn it lost on assets linked to US mortgage debt.}

^5/22

^{UBS prices $15.6 bln share sale at 31% discount}

^5/23

^{Moody's Cuts AIG Rating}

^5/26

^{UBS Falls After Saying More Mortgage Losses Possible}

^5/28

^{Ambac shares hit record low after new disclosure}

^5/30

^{CIBC losses hit $6.7 billion}

^6/1

^{Japan firms post Y1.9 trillion in subprime losses}

^6/2

^{Morgan Stanley, Merrill, Lehman Ratings Cut by S&P}

^6/5

^{MBIA, Ambac, $1 Trillion of Debt, Lose S&P AAA Rating}

^6/5

^{MGIC, PMI Downgraded by Fitch on Poor Underwriting}

^6/9

^{Citigroup, Merrill, UBS Face Further Writedowns, Whitney Says}

^6/9

^{Washington Mutual Falls on $22 Billion Loss Estimate}

^6/9

^{Lehman to post $2.8 billion quarterly loss}

^{As you can see, this was the news for the last rally alone in 2008.}