E-piphany

When I came in this morning, it looked like another brief EU-inspired rally was over. S&P futures were slumping by 13-14 points, and when I looked for a reason it seemed obvious. Like all of the other packages, this latest from the EU is mostly promises although it also includes some parts that are even less than that.

I hadn’t realized it before, but a friend pointed me to a Reuters article that quotes the number 2 guy at the IMF. Recall that the package announced on Sunday night trumpeted 250mm Euros in direct support from the IMF, loan guarantees from other EU participants, and ECB intervention in markets. We know that the intervention happened, and will (theoretically) be sterilized. By now, having seen these packages before, we all know that the promises of loan guarantees must be approved by the relevant legislatures and may or may not happen. But this package had the large IMF loan as a centerpiece. Or did it? From that article:

While an EU statement said the IMF would make available 250 billion euros, Lipsky said the institution had not earmarked any money for euro zone countries and financial help would be provided on a case-by-case basis.

The 250 billion euros cited by the EU was “illustrative” and a “hypothetical” figure of what the IMF could pony up if needed.

“We haven’t made any blanket commitments,” he said.

No commitment from the IMF means this package is almost the same as the previous packages: mostly words and little substance. Clearly, the cat was out of the bag, and stocks were already headed lower.

Then a funny thing happened. As the day wore on, news outlets simply ignored this not-unimportant detail that the IMF money was not only not guaranteed, but in fact hadn’t even been promised!

I warned yesterday that institutions can sometimes cheat when they are threatened. “Selfish memes,” Richard Dawkins would call it. (See The Selfish Gene: 30th Anniversary Edition–with a new Introduction by the Author)
What I overlooked was the fact that the media is part of the institution. Now, it might merely be incompetence; maybe no one is scanning the Reuters wire. But I rather suspect that it is more likely that, consciously or unconsciously, producers decided that it is “better news” to applaud the saving of Mankind by all-knowing politicos. Or, perhaps, they skimmed the article and all the chatter about how this “clarifies” the IMF role without noticing the little detail that nothing is promised at all.

Whatever the reason, many investors seemed not to have heard the news that the package is something less than 750bln Euros. Closer to zero than to 750bln, in fact. But stocks recovered early losses, and actually had a nice rally on the day (8 points on the S&P or so) for a while.

Illiquidity is a sword that cuts both ways, and it isn’t clear to me that the liquidity is back. The ECB reported that it completed an 8-day tender for 9.2bln at the quite-high rate of 1.22% as part of the liquidity action. That level indicates that some stress is yet in the system, happy smiling faces aside.

Even though no one was throwing the story out there, some observers may have had an unconscious inkling that something was amiss, because Bloomberg was attributing the rally in stocks to the fact that the UK resolved its hung Parliament with a coalition government formed between the Tories and the Liberal Democrats. Because, as we know, the status of a coalition government in England is very important to U.S. equity prices. That sounds like a reach to me.

At around 2:15ET, Bloomberg included the Lipsky quotes in a story on their top news page – right about the time that stocks peaked. Better late than never. At the end of the day, the S&P had lost 0.3%, which is near enough to unchanged given recent moves. Volume fell further, to a mere 1.4 trillion shares. TYM0 rose 2.5/32nds, with the 10y yield at 3.53%. Not everything was unchanged: Gold rose $32 to a new all-time high and frankly looks like it may be entering a blast-off phase (see Chart, source Bloomberg). I am not a gold bug, because gold pays no dividend, but I am invested in the gold juniors ETF (GDXJ), which Fred Hickey of the High Tech Strategist has been talking about for a while.

Someone in the monetary world smells a rat.

I might be wrong, but I don’t think the stock market is out of the woods yet. Because institutions cheat, I’m not bold enough to take a stab at the short side and options are no longer cheap…but I suspect we will see Thursday’s lows again.

There is again no data due tomorrow. The Treasury is selling $24bln of 10y notes tomorrow, and $16bln 30y bonds on Thursday. Does the coiling in the equity market continue, or do we make a move? For some reason I have a bad feeling in my belly. But that might be caused by the spectacle we’re watching.