Thus Far In Europe

I have made mention several times of the decieiving window dressing that is being engaged in by financial institutions to make their cash balance sheet look much better then t actually is. The ECB's deposit facility shows us first hand what this looks like and how it works as Q4 and 2011 come to an end.

It is barely perceptible, but as of Jan 1st, the ECB said deposits were $414 billion (near an all time record high after much or most of the LTRO money went straight back to the ECB's deposit facility), this was a modest drop of $32 billion from New Year's Eve at $446 billion with the record high being $452 billion set last week. In other words, about $32 billion was parked at the ECB for window dressing purposes to make banks' Tier 1 capital look stronger then it actually was, avery common window dressing event in financials. Still as you can see the drop on Jan. 1 2012 is barely perceptible as the day the ECB carried out the LTRO, cash deposited at the facility was $265 billion, meaning approximately $150 billion of the net $220 billion in LTRO cash was taken from the ECB by banks on a 3 year 1% interest loan and parked right back at the ECB within a week or so to help stabilize the capital shortfalls banks in Europe are facing. Or put another way, the LTRO facility, like every other bail out attempt in the EU has been an utter and total failure. The ECB hoped the banks would take that money at 1% interest and buy things like Italian debt (BTPs) at 7% interest and the banks would net a 6% carry trade, instead the banks said, "Thank you very much, we needed that money to stabilize liquidity problems" and promptly parked the money right back at the ECB's deposit facility at an earned interest rate of .75%, taking a reverse carry trade loss of -.25% just to shore up their capital base.

As for the argument, "Well maybe they plan to use it in future auctions", Italian BTPs were yielding 7% last week, why wait, why take a loss instead of a 6% gain? The answer is simply they have huge capital shortfalls and would much rather use the money to patch those holes rather then buy toxic debt that they have been desperately trying to off load for over 6 months now. In any case, you get an idea of the banks' mentality as well as a view of what actual bank window dressing looks like as they move money overnight after t has served its purpose for Q4/End of year reporting or what we would call 10-Q/10-K filings. This is common practice in the US as well.

More frightening is the off balance sheet Shadow Market / Shadow Financial system not reported on 10-Q/10-Ks, this is a much larger funding source and the banks, hedge funds and brokers have figured out ways to hide hundreds billions of dollars from shareholders. It is also a much riskier form of banking, cheaper, but riskier. For example, a Broker can easily hide a Hedge funds transactions run through the broker, up to nearly unlimited amounts. So for any of you who are believers of fundamental analysis, forget it, you don't have even half the facts to work from.

If you are really interested though, look in the 10-Q/K filings under foot notes and "pledge-able assets received", this is what gave away Lehman brothers as they saw a nearly 50% decline in assets coming from hedge funds as the funds understood there was a problem at Lehaman. Shortly after 2 reporting periods were analyzed and the report came out that Funds were not doing business with Lehman via the foot notes regarding pledge-able assets, it only took about a week for Lehman to fall in to the abyss. There are ways to track these off balance sheet transactions, but the stock price tends to be an easier way overall unless you are a CPA.

Out of Spain...
Not a great start to the New Year as Spain says that they are going to be running a debt to GDP deficit of 8% rather then the original 6%.

From the FT/Reuters:

"BRUSSELS: The European Commission regretted missed fiscal targets announced in Spain on Friday, but hailed the government's announcement of an austerity plan intended to slash the Spanish public deficit.

"I regret the sizable fiscal slippage" to a deficit of 8.0 percent of GDP instead of 6.0 percent initially targetted, Economic Affairs Commissioner Olli Rehn said, while welcomng the new meaures announced from Madrid."

If this wasn't enough, poor Olli may soon have to conduct another press release as Span says that the revised 8% number may be re-revised within a few days to a worse number.


European PMI Release...


No great shocker here, a trend whether in stocks or in physics is a hard thing to overcome. European PMI was released today and shows a 5th consecutive month of contraction and now at the weakest level sine Q2 2009. 


Reuters:


LONDON (Reuters) - Euro zone manufacturing activity declined for a fifth consecutive month in December, although at a slightly slower rate than November's 28-month record low, a survey showed on Monday, suggesting the decline would continue in the early months of 2012.


Survey compiler Markit said levels of production and new orders fell in all of the euro zone countries covered by the survey for the second month running.


"The survey also points to a strong likelihood of further declines in the first quarter of the new year, with producers cutting back headcounts, inventories and purchasing."


Business and consumer confidence in the currency bloc has been eroded by a weakening global economy and by euro zone policymakers' failure to make progress on resolving the euro zone debt crisis. Austerity measures imposed to try and cut high debt levels in the currency bloc risk further undermining euro zone economies this year, analysts say.


"Worryingly, new orders are falling at a far faster rate than manufacturers have been cutting output, meaning firms have been reliant on orders placed earlier in the year to sustain current production levels," said Williamson. Which also means more deterioration is virtually guaranteed.


"This is particularly evident in Germany, and suggests that operating capacity will be slashed in coming months unless demand revives." AH... the kicker, CORE CONTAGION.


The Euro...

 The Euro since last Wednesday and in to today in white. Remember the bounce I spoke of last week, one of the reasons I kept all 3 short trades at 1 day trades (IWM puts +10%, BAC Puts +30% and IWM puts on Friday +5%) that would likely test the $1.30 area, here you can see it clearly failed. This is pretty much what I expected to happen based on 3C, but more so just on how the market has behaved recently. The first break below $1.30 served as warning to the large open long position at $1.30, the Euro bounced and I thought it would bounce before it even started as a way for the $1.30 longs to sell in to strength. After that bounce, the Euro, as expected, broke $1.30 again, this time in more serious fashion and we saw the test of $1.30 (now resistance) fail. These bounces are very common after a break of an important support level and up until now, $1.30 has been the psychological line in the sand for the Euro as there was a large cadre of $1.30 longs expected to defend the $1.30 area.

 Here is today's action with the New Year marked in red, a slow leak down in the Euro, although markets are very illiquid today with the US stock and bond markets closed until tomorrow.

 The longer Euro trend

And an even longer view of the Euro, once could probably redraw the trendlines and come up with a reasonable triangle top.... In any case, it looks as if $1.20 will be the next target. It's important to remember that the Euro is highly correlated to the US stock market, thus is part of our analysis.

Euro triangle top? The head fake moves produced the right effect, so this possibility cannot be discounted.


Finally, IRAN...


If you have kept up with the news over the long holiday weekend, you know that last week Iran started a 10-day war games exercise in and around the Straits of Hormuz in very close proximity to the US Aircraft Carrier John C. Stennis.


As an apparent jab back at the U.S. for imposing sanctions on Iranian Crude imports, something the EU is also considering and something Iran says will escalate tensions and cause them to close the Straits of Hormuz. They have fired two missiles in the war games thus far, one medium range SAM missile yesterday with an accompanying statement that they have made their first independent nuclear fuel fords and a second missile was fired today, a long range missile that the Iranians claim could hit targets in Israel as well as US bases, I suspect the Bahrain naval base.


I have not kept my usual close eye on the situation, but it does seem to me that the US and maybe the EU are intentionally provoking Iran as Obama signed legislation Saturday that not only boycotts Iran, but any Central Bank or financial institution that does business with Iran which almost immediately makes me wonder what this means for Europe, which for the time, is still engaged with Iranian oil imports. As a side note, Italy is the biggest importer of Iranian oil.


More coming later today, enjoy your day off.