TDIMG Inside Edition – 9/28/2011: Lipstick on The PIIGS

September 28, 2011 10:32 am

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Stocks rallied around the world on Tuesday, and the dollar and the yen declined against higher-yielding currencies on optimism European leaders are nearing an agreement to contain the debt crisis. German Chancellor Angela Merkel and Greek Prime Minister George Papandreou met in Berlin today and spent time today trying to solve some of the obvious problems.

Greek lawmakers voted today on a property tax that is key to convincing the the EU and IMF to release an aid installment and avert default of Greece. This is simply a ploy to cook the books in a way that shows there will be money available to pay down debt. In actuality, the extraordinary cost of the increase to taxpayers will slow the economy to a point that the taxes from other areas will suffer. More lipstick on a PIIGS. (more below)

In economic estimates: The S&P/Case-Shiller index of property values in 20 cities probably fell 4.4 percent in July from a year earlier, economists forecast, Consumer confidence comes out at 10am along with the Richmond Fed Manufacturing Index.

On a year-over-year basis, the Case-Shiller 20 index is starting to stabilize. Although this is not saying much as the level is still off of a very low base. But, the good news is that downtrend in housing prices is starting to level off on a month-over-month basis.

The Conference Board’s reading of consumer confidence is at very low levels. Between the unusually high level of unemployment and the global stress, consumers are continuing to retrench.

Manufacturing in the Richmond area saw a bit of an uptick, although still showing contraction. There is reason to believe that the next set of ISM numbers will show a reading under 50.

Hooray! The Senate reached a bipartisan deal on stopgap spending designed to avoid a government shutdown. Is this actually a good thing?

Europe markets: Spain sold three-month bills at an average yield of 1.692 percent, up from 1.357 percent in a previous auction, and six-month debt at 2.665 percent, up from 2.187 percent. Italy sold 182-day bills to yield 3.071 percent, up from 2.14 percent.

Some interesting points of news:

  • U.S. Consumer Confidence Stagnates Near Two-Year Low on Concern Over Jobs
  • Apple Plans an Oct. 4 Event in California to Discuss New Version of iPhone
  • China Banks Shunned by Investors Anticipating 2003 Low as Credit Goes Bust
  • Health-Benefit Costs Rise Most in Six Years, Surpassing $15,000 per Family
  • More Americans Say They’re Skipping Medical Care to Save Money
  • Home Prices in U.S. Cities Fell 4.1% in Year Ended July
  • SEC Reports Proposals to Revise Market-Wide Circuit Breakers
  • Italy, Spain Sell $24 Billion of Debt; Bonds Rise After Sale

Europe equities staged a major rally after the initial plan for a leveraged EFSF was announced. The actual denial by the EIB came after the close, so there may be some collateral damage on Wednesday when some of these returns are returned. France and Germany were big winners as they are the countries with some of the biggest risk if Greece and/or Italy defaults. France is the one country that we have had our eye on as their banks and financial institutions hold the greatest amount of PIIGS debt.

We are back in the Silver short trade. After an impressive reversal from the lows on Monday, Silver pushed higher again toward resistance. Unable to hold, the metal backed off during the day down under the area that we believe will serve as a point of upside resistance. Two positions were initiated again. Once being an October $29 PUT option on SLV and a position in the 2X inverse ETF (ZSL). If there is additional fallout due to the Greece bailout vote, we may once again see some forced selling of recently added positions from the past two days.


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Below is a chart that depict the potential P/L scenario of the Put option.

As we are inclined to invest on the short side of this market, close to the high of the day we entered a few positions that add short exposure to the financial sector as well as energy companies and European stocks.

Reuters runs headline pertaining to yesterday’s EIB report, EIB says they have not been approached to take part in any bailout program involving the EFSF.

Below is the commentary from Trader:

The European Investment Bank says it maintains “no bailout” stance; has not been approached and has no plans to be involved in special purpose vehicle in connection with the EFSF

According to the EIB, “there have been media reports about a potential involvement of the EIB in a special purpose vehicle in connection with the EFSF, for the purpose of bailouts. The EIB has not been approached and has no plans to be involved in this. The EIB will continue to focus on its mission which is financing viable investment projects.”

See 09:11 comment for details of EIB statement. Very curious that rumor of this program (via CNBC) would stay afloat overnight & gain so much traction, then be denied in such strong terms.

EIB statement seems pretty straightforward & in fact they seem to be flatly rejecting the whole idea. They state that they have no plans to be involved.


In addition, the 3pm (again well timed – see this for more on the 3pm Maurauder) news that hit from the Financial Times, shot down the big rally of the the day.

Euro Zone Split On Private Creditors’ Burden In Greek Bailout -FT

The euro zone is divided over how much of a hit private creditors should take in the second, longer-term bailout of Greece, the Financial Times reported online Tuesday, citing senior European officials.

As many as 7 of the 17 states that use the euro currency have started pressing for the private sector to bear a greater share of losses, now that it’s clear Greek financing needs are greater than when a deal with bondholders was reached in July. Leaders in the zone agreed, along with co-lenders the International Monetary Fund and the European Central Bank, to provide EUR109 billion in loans to cover Greece’s financing needs for the next several years.

Hard-liners within member states Germany and the Netherlands are leading calls for a greater private write-down, but France and the ECB fiercely resist such a move because reopening the bond deal could spark a fresh sell-off of shares in Greece-exposed European banks, according to the FT’s sources.

As for trading, NYSE volume was lighter than average, aside from the opening and closing hours. This ties out with the notion that short-covering was occurring during the beginning of the day and the selling intensified in the final hour as the above news item was released.

A final note on Silver. The chart snippet below shows the important levels of support that we are watching. Even though the current price is in a “drop-zone”, there is some level of support, if it can hold at $31.08, then it has a chance of stabilizing. If not…


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