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Yesterday's Action

I've been out of the market for a few weeks, but yesterday's activity (S&P500 up 4%) still amazes me.  None of the news was that good, the Chinese reduce fractional reserves because their economy is slow (because Europe's economy is in terrible shape) and then a "concerted effort" by all the central banks that matter (and Canada) to make swap line arrangements to facilitate liquidity between the central banks.

First, this is not a new program (they've lowered the cost from 1% to 0.5%), but this is central bank to central bank lending -- they don't really care and frankly its not 50 bps that are going to make a difference.  The liquidity crisis is mostly between Europe's banks.  It is primarily driven by a dead Eurobond market (that banks use to fund their day to day operations), the banks have been repatriating cash (to meet their home markets needs as fast as they can -- hence the strong Euro), they've agreed to raise tier one capital to 9% (two methods reduce assets or raise new capital), so far only ONE bank has raised some capital Unicredit of Italy (they are planning on raising Euro 7.5 billion).  Second, the Bond market's decision not to lend to European banks is not driven by liquidity fears it is driven by solvency fears!  The Economist calculated that with their current asset base (and assuming limited write downs of Greek debt), that Europe's banking system needs more than Euro 200 billion in new capital.

Nothing has changed, banks in Europe are still screwed, PIIGS have too much debt (BTW neither France or Germany are in particularly "great" position).  The euphoria of the past few days is probably an overshoot, although lots of people (and they are smart guys) are saying that the advent of QE3 in the US (80% probability now) will probably support stocks till the year end.  This morning's "numbers" were depressing with initial claim rising over the 400k threshold again (and upward revision on previous week's numbers...again), and continuing claim (despite the 99ers falling off the unemployment rolls) rising again.

In Canada, no news today!  


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