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Hopium - Again

Posted: Thursday, October 20, 2011 3:33:22 AM

Rank: Advanced Member
Groups: Member

Joined: 7/15/2011
Posts: 67
Location: Chicago, IL
Once again the markets experienced an early updraft due to short covering that was followed by yet another preposterous Hopium explosion. One more media source – The Guardian – broke a story that claimed the bankers “get out of jail” fund (the EFSF) would be leverage to 2-TRILLION Euros.
And hey, as long as the bankers don’t have to pay for their bad loans, why should anyone care that the innocent tax payer will have to pay for it? Let them eat iPads! The S&P500 went ape$#it - straight up to 1230.00.

However, there were a few problems with this story – like, it wasn’t true!

A long article on Zero Hedge explains why the math simply doesn’t add up and can be read in its entirety here

Italy and Spain together have just under €2.5 trillion worth of general government debt outstanding. Tradable Spanish and Italian sovereign debt alone amounts to €2.1 trillion. Adding Greece, Ireland and Portugal raises general government debt to €3.1 trillion and tradable government debt to €2.6 trillion. Adding Belgium would raise these totals to €3.5 trillion and €2.9 trillion. In the perhaps unlikely case that France would need sovereign debt insurance, targeting the stocks rather than the flows would require taking care of €5.1 trillion of gross sovereign debt or €4.3 trillion of tradable government debt.

These numbers are beyond the size of even the most optimistic estimates of the most audacious of rescue umbrellas.

…We therefore are sceptical that, if there is a reasonable expectation that the recovery rate following a sovereign default in the Euro Area could be as little as 60 percent or 50 percent, that the markets would be happy to fund these sovereigns at sustainable interest rates to the sovereigns, with just a 20 percent first-loss rate, even if this insurance were granted free of charge. A 40 or even 50 percent first-loss rate might well be required. And that would reduce the amount of new issuance that could be funded with an EFSF insurance pot of, say, €300 bn at most to just €750bn or even €600bn. That would likely not fund the Spanish and Italian sovereigns until the end of 2012. It would not be a big bazooka but a small pea shooter.

But that wasn’t all - France DENIED the story outright! According to Dow Jones newswire, French government sources said a 2-trillion Euro EFSF bailout fund was “totally wrong” and “simplistic.”

But wait, there’s more! After the close, AAPL shocked the markets by missing its earnings estimate for the first time in four years. And the ratings agencies aren’t finished yet: Moody’s downgraded Spain’s debt by TWO notches.

Given that The Guardian story is false (according to France itself) and if it were true wouldn’t even be workable…and AAPL earnings were off the mark…AND Spain was downgraded again…the ES futures have already taken back all of the ill-gotten gains, right?

Not on your life! As I write this, the ES is only down 2-points, or 8 crummy ticks, despite the aforementioned truth. Boo-ya baby – Hopium is a powerful drug.

Trade well and follow the trend, not the so-called “experts.”

Best Trade To You,

Larry Levin,
President & Founder- Trading Advantage

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