Monday, March 23, 2009

Kitchen Sink 2.0

Some midday sanity from Goldman's Bob Savage. Zero Hedge does not necessarily agree with some of the assumptions/conclusions here.

The doubters about the US PPIP and TALF are significant. Most point to three issues:
1) Where is the money coming from? The FDIC is guaranteeing a loan but the raising of new capital appears to be coming from market. So leverage of 6-1 is a limit put on that hope that money will rush in. FED and Treasury aren’t on hook for more than $100 bn, nor is FDIC providing loans just insurance like AIG.
2) Who will sell their toxic assets? The implicit point of the program is that it will clear banks of their bad assets – but unless forced its hard to understand this will happen. The inducement for banks to realize losses must be linked to the “stress test” upcoming.
3) What price works? The 84 cent price listed in the US Treasury fact page may be a wishful rate but it underscores the need for a market as many think it’s a 20 bid at 90 offered story with the in between a neverland of dreams over reality. But if you dwell on the negative you are likely to misunderstand what is going on today and over the last two weeks in the US. The government action is having an effect. The data isn’t getting much worse – the housing sales suggest stabilization. [Cornelius disagrees with this statement and rightfully so.] In fact the confidence of government officials is beginning to sink into the greater public. The Pew Research Center for the People & the Press reported a shift in the way Americans perceive the news they are hearing –with the mix of good and bad news rising significantly.

So as we sit through a 5% plus rally up in stocks to test the S&P500 805 resistance many are wondering why this is working – and that may be one answer. But in FX the story shifts from US to Europe with many wondering if the ECB will get it. The European trade data this morning shows some real pain – an over 10% drop in Exports. The value of the EUR isn’t going to help. The better US asset markets today has sent the EUR back down after an early rally in London. But the risk of a break in the uptrend rests on what happens to data and the ECB policy. Many point to AUD/EUR as the next logical trade. The AUD holds value due to its linkage to commodities while the EUR faces policy uncertainty. So we wait for more information even as the world wishes the Geithner plan will work so others won’t have to do something more extreme. If you want to be worried – read the IMF comments about the risk of war. In the interim – enjoy the mix of good and bad news. Sphere: Related Content
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7 comments:

Anonymous said...

the housing sales suggest stabilization. In fact the confidence of government officials is beginning to sink into the greater public.

I disagree with these 2 points.

ts said...

If you think confidence is an issue then you are playing a confidence game. Literally.

Anonymous said...

i think zero hedge had its head handed to it today.

Anonymous said...

> Who will sell their toxic assets? The implicit point of the program is that it will clear banks of their bad assets – but unless forced its hard to understand this will happen.

If the banks don't sell then we have a much higher lower bound on asset prices. Even moreso in that it is inflated by the govt backstop. If banks are still insolvent given these numbers, then there is no question that USG needs to nationalize them then if it ever is.

S said...

catch the little tidbit about the treasury assuming the aig liabilities. I guess when you lose money the taxpayer just takes it - all remove your wallet and put it in you mouth bite down - hanky panky bernanke a cometh

Anonymous said...

where can i find the imf comments referred to in the next to last sentence?

Anonymous said...

IMF comments reported here: http://www.reuters.com/article/bondsNews/idUSLN31921620090323