Market Talk

Talk about an Alfred E. Neuman morning. Bulls sporting the “What, me worry?” attitude after the collapse of Portugal’s government late yesterday and expectation it’ll join Ireland and Greece in asking the EU and IMF for a bailout, currently pegged around $113 billion.

It certainly doesn’t come as a big surprise, but the reaction in European stock markets, euro rallying seems just a little too cheery. There’s consequences for Spain, Portugal’s biggest trading partner and Moody’s downgraded Spanish banks in the wake of the Portugal developments. That’s among the items being shrugged off this morning, along with percolating oil and a weaker-than-expected February durable goods orders.

European stock markets have strengthened, rallying across the board, and that’s putting US investors at ease. Portugal? Spain? Well, if the Europeans aren’t worried about it, why should we? Or so must go the thinking.

S&P futures up 7.60, off earlier highs. Ten-year note lower, yield at 3.37%.

The Bailout Nation culture has reached such a sad state of affairs that bailouts are now being forced on recipients that don’t even want them. At least that’s how it seems, now that Ireland apparently is willing to negotiate an aid package.

It’s like Bailout Nation on steroids. I don’t see how this can possibly be a good thing.

The Irish have been resisting an aid package for some time now, and the Irish, recall, stepped out to handle their own problems long, long before Greece and the PIIGS were even on anybody’s problem-child radar. They never passed the hat around to begin with, but now not only is a hat being shoved in their hands, it’s being filled with money at the same time.

This is, ostensibly, to “shore up” confidence in Ireland’s solvency; which is supremely ironic when you consider that the very act of accepting outside aid in order to pay off ones’ debts would seem to be the very definition of insolvent (“not able to meet debts.”)

But the Europeans aren’t very concerned about semantics and irony right now. They’re concerned, very concerned — again — about a general meltdown of the sovereign picture among several nations. This concern is coming back to light because nothing was actually done to address the issue last year, and not much seems to be getting done about it now.

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Um, is anybody really surprised? Surprised that Europe’s version of the Great Recession Bank White-Wash, i.e., the “stress test,” is being exposed as the Potemkin Village we all knew it was? The Journal’s David Enrich reports today that the way the tests were conducted allowed the banks to mask a substantial portion of their sovereign-debt risk (it’s still unclear just how much.) It may be a bit surprising that the truth is coming out just now, but it’s not at all surprising that it’s coming out.

The day the results came out, we wrote:

Let’s be frank: there is no way, no way, these tests were designed to rigorously test the strength of the European banking system. Like their American counterparts, the tests were rigged exercise designed to shore up public confidence. The truth never entered into the calculations, and why should it? Everybody already knows the truth. American banks failed a very real stress test in the fall of 2008, when the government had to come in and save the entire industry. European banks similarly failed their very real stress test this past spring.

The tests were a carefully orchestrated exercise designed to shore up public confidence. To that extent, they worked. Temporarily. Because the fact of the matter is that what’s happening now, the unraveling of that carefully orchestrated exercise, has the potential to be more damaging than if they had just come clean from the start if the public perceives that a fast one was pulled. Fool me once, shame on you. Fool me twice?

From Enrich’s story:

The findings undermine a primary goal of the stress tests—namely, to reassure investors and bankers world-wide the soundness of Europe’s financial system. “That would certainly be unhelpful to people’s perceptions” of the tests’ credibility, said UBS banking analyst Alastair Ryan. Reducing banks’ reported holdings of government debt “was clearly helpful for the thing [regulators] were trying to achieve: convincing you that there’s not a problem.”

You’re seeing already in the credit markets that debt insurance costs are rising, for both private and public debt. As Wolfgang Munchau notes in the Financial Times, which I saw via naked capitalism, spreads between German debt and debt for the “periphery” countries (as if they’re not really part of Europe) is rising at an “alarming rate,” going back to where it was before the big EU bailout fund was unveiled. This means, simply, people are worried. Again.

- BofA, Citi, JPMorgan and Goldman Sachs all racked up perfect trading quarters in 1Q, but the Kid Dynamite blogger is less than impressed with the ensuing analysis. “See, the probability of winning when your cost of funds is near zero and you can invest at positive interest rates at assets which are already being supported by the Government is probably closer to 100% than 50%.”

- “It’s no wonder that Goldman Sachs–perhaps the largest market maker in the world–consecutively avoids trading losses quarter after quarter,” FT’s Alphaville blog says. “That’s because when you’re making markets with no obligation to do so, you are in complete control. You dictate the terms. It’s very hard to lose.”

- EU’s nearly $1T bailout package stabilized Europe’s stock and bond markets this week, but hasn’t done much for the sliding euro.

- The online advertising business is improving from its dismal
performance a year ago, but how much of an improvement is tough to quantify.

- Paul Volcker’s candidness is undermining Obama. “It’s one thing for people in the private sector to express negative views about the future on the Eurozone, quite another for someone of Volcker’s stature who is playing a policy role for the Administration to undermine an initiative deemed so important that the President has thrown its weight behind it,” Yves Smith says.

- The number of people considered long-term unemployed sits at its highest level on record even as the economy has experienced four-straight months of net payroll growth. “Think about what that means: The new jobs that have been created so far seem to be going disproportionately to people out of work for only a short period,” Catherine Rampell writes.

- NBC canceling Law and Order could mean 8,000 people will join the unemployed ranks.

- Bespoke compiles a list of companies whose stocks have performed well on their earnings release days, but then declined the most since then. Topping the list, First Solar (FSLR) which rose 18% after posting earnings April 28, but since has dropped 20%.

- Well, that experiment didn’t last long. Google plans to stop selling its Nexus One on the Web.

- The summer of LeBron officially starts now. Mayor Bloomberg says he’ll give LeBron a “big sales pitch” to come to NY, but President Obama hopes the King goes to Chicago. LeBron, you can guest post here at Market Talk anytime you’d like if you become a Knickerbocker.

- Eurobail package is keeping the wolves at bay, for now. “The package is clearly an effective short-term palliative,” Richard Alford writes at naked capitalism. “Its curative powers remain in question. In the absence of market signals and discipline, it is not at all clear that the political elites in Europe will have the will to discipline each other.”

- The duration of Apple (AAPL) and AT&T’s (T) iPhone exclusivity deal has long been a mystery, but Engadget uncovers some new details pertaining to the pact. Blog reports both companies agreed to five-year iPhone exclusivity in 2007, based on court documents filed by Apple. AT&T says it has a great relationship with Apple and doesn’t comment on specifics.

- George Mason economics professor Tyler Cowan offers his “simple thoughts” on Europe and the EU’s nearly $1T bailout package. “The fundamental cause of the financial crisis has been people and institutions thinking they are more wealthy than they are; this spread to Europe as well and now we are seeing the comeuppance.”

- Bespoke dissects yesterday’s rally and concludes that short covering was only part of the story.

- Eurobail euphoria eases. “I’m glad to see that the immediate crisis has been delayed, but I don’t see how all of this goes according to plan,” Ryan Avent writes at The Economist’s Free Exchange blog.

- Mark Thoma tackles the issue of bank lending. “I think the problem is on both sides. Supply has tightened up due to poor economic conditions — as noted above banks are unwilling to loan to firms who look shaky during the downturn, firms that might have looked very solid and worthy not all that long ago. But the demand for loans has fallen as well since firms have little reason to invest in such bad economic conditions.”

- Apple’s not too concerned about a recent report showing Android devices are outselling the iPhone.

- Intel (INTC) CEO Paul Otellini predicts sharp growth for its business in new markets over the next few years.

- Europe’s turmoil and high debt levels in America won’t derail this economic recovery, says Jim O’Sullivan, chief economist for MF Global.

- A-Rod’s run to become home-run king may not be such a sure thing like many expect.

The Greek chorus sings a new song.

Let’s face it, the Greeks invented drama, and they still know how to do it pretty well.

Having fun watching Greece devolve live on TV? The Greeks have been protesting for months, but this is the first time we’re seeing it over here. Of course, previously the journalists were on strike as well as everybody else. And the protests have turned into full-fledged riots, which no journalist, even a striking journalist, can resist.

The European Union is in the spiral, make no mistake. The only question is how far they allow themselves to get dragged down. Remember, this was supposed to be an austere, responsible monetary union. No deficits above 3%. No bailouts. The ECB wouldn’t ease off collateral rules. This was basically going to be a union with German-type rules.

That was, apparently, a pipe dream. Every day, the European Union moves further away from the kind of monetary policies it started with. Despite a very clear clause in the Maastricht Treaty, a member nation is getting bailed out, and with that Pandora’s Box opened, there are very real expectations that more bailouts will be forthcoming, no matter what Germany says. Once you go down that road, it’s very hard to turn back.

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Apologies for the scant posting lately. John and I have been pretty consumed with producing “The Upshot,” for which we’ve got about another week and a half. But there’s so much going on elsewhere, and this Greek thing just needs a comment.

Now, if you think the Greeks will roll over and go along with the draconian German demands just in order to get some money (a lot of money, actually, but still,) well, just remember, the Trojan War took 10 years. This can be a pretty stubborn group. Dateline, Athens:

ATHENS (AFP)–Greece has turned down proposals by the European Union and International Monetary Fund to cut salaries under austerity measures to shore up its crisis-hit economy, the Greek labour minister said Wednesday.

“We have been asked for a cut which we don’t accept. Neither we as a state, nor our social partners,” Andreas Loverdos said after a meeting with the Hellenic Federation of Enterprises, a key business lobby group.

The main sticking point — essentially Germany wants the Greeks to take severe auserity measures, and the Greeks are like, hey, Germany, give us back our gold you scoundrels — the one that has held up this entire sordid process, remains firmly in place. Germany won’t agree to a deal until the Greeks agree to severe budget cuts, not painful, severe. The Greeks won’t do it. That is where we are, and that is where we’ve been. Meanwhile, Rome (not the literal Rome, the figurative one) continues to burn.

It’s all got the feeling of the guns of August, as UBS’ Art Cashin says, even if it is only spring.

We said on the global conference call last week that the Greek rescue effort reminded me of Barbara Tuchman’s Pulitzer prize-winning book, “The Guns of August”. In the book, Tuchman skillfully detailed how the world headed into World War I because leaders on all sides believed the other side would fail to take the next step – knowing the tragedy and chaos all out war would bring. Yet neither side stopped at step after step until they found themselves at war.

Germany and Greece may be engaged in a similar mis-assessment. Greece seems to believe that Germany will recognize that the European Union must avert the negative consequences of a Greek default. Therefore, Germany would not dare to let it occur. The Greeks seem to believe the Germans will be compelled to put up the money in the end.

The Germans, on the other hand, think that Greece will come to its senses and reform in order to get the needed funds. They don’t want to give money to a guy with a drinking problem so that he may buy another drink. They will give him money to go to a sanitarium to straighten out……as of this morning the standoff continues.

Where's a leader when you need one?

I know I mentioned this movie before, but I’ve been catching bits and pieces of “Thirteen Days” a lot on basic cable lately, and to the extent that the movie’s an accurate depiction, I’ve been gaining a lot of respect for John Kennedy. I always thought he was just this good-looking, charismatic guy with a penchant for sneaking girls into the White House through underground caves. But apparently, he was a real, actual, in the flesh leader, something sorely missing from the world stage these days.

During the Cuban Missile Crisis, as the very real threat of total nuclear war loomed, Kennedy was dead-set about two points: his team of advisers had to come to a consensus opinion on a course of action, and they had to come to it within, well, 13 days. Now, I know it’s just a movie, but it’s not just a movie the way, say, “Attack of The Clones” is just a movie (and a bad one at that.)

The events depicted in “Thirteen Days ” did actually happen. Kennedy’s, dare I even say it, leadership drove the nation to action, and his wisdom kept the nation from doing something stupid that very easily could have led to World War III. An important point, that last one. I bring this up as a contrast with what’s going on over in Europe, where there is not a shred of leadership from the various capitals about how to handle the Greek situation. Or wisdom, for that matter.

What should have happened a long time ago was that somebody among the EU leadership should have demanded a consensus from the group, money or no money, by a set date (we’ll get to the no-bailouts issue.) Instead, we get month after month of jawboning, of Europeans making vague pledges of support, of Greeks insisting they’re not asking for money, Germans insisting they won’t give them money, everybody knowing they desperately need money, the IMF saying it’s ready to give them money, the Europeans saying they don’t want the IMF to give the Greeks money, the Greeks saying they don’t want money, the Europeans insisting they will support the Greeks, the bond market saying show us the money, and the Germans once again saying they won’t give the Greeks the money.

Where’s a leader when you need one?

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So nothing happened on the Greek front today, but the markets didn’t act that way. And while the Grecians are the focus today, next week it’s going to start turning toward earnings.

I’m not really sure what I can say about the Greek thing that I haven’t already said. Sure, there’s news today, there are new developments, new newsy news out there, but there isn’t anything new about the situation. That’s the biggest point, really; that the Greeks are still in an awful bind.

There isn’t anything surprising about what’s going on now, and anybody who thought that so-called, purported EU-IMF rescue plan last month was anything more than more jawboning is finding out the truth now. Of course, some of those anybodies included the Greeks, the Germans, the French and maybe even the IMF.

Greece has exhaustively said it isn’t asking for money, it only wants some vague assurance of “support” that will get those nasty speculators off its back and get the yields on its debt down, so it can afford to run a government. I don’t recall Greece exactly specifying a level at which its debt would be so expensive that the interest payments alone would overwhelm its austerity efforts, but it’s a fair bet that a record 7.58% yield is above whatever level PM George Papandreou had in mind.

And the belt-tightening has to be it, the solution, the way out, the path, because it should be fairly obvious to everybody that, much as Greece hasn’t been asking for it, no money’s coming their European neighbors, and the Argives themselves have doubts about the net benefits of getting money from the IMF. Those strings attached can be rather constricting, you know.

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