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Fading Official Sector Mucky Muck


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#1 Russ Winter

Russ Winter

    Grizzly Bear

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Posted 01 July 2012 - 11:02 PM

This is not your father’s (my generation’s) market. Back in the day one could let bases form, and accumulate stocks and be at least an intermediate term investor.  Today you are subject to hail Mary spikes (and fades) derived from pure merda and almost exclusively the product of increasingly impotent official pronouncements. So much for the best laid plans of mice and men. My copious notebook on serious energy trades has been put away into my file.  At least I am nicely informed on the topic, and hopefully passed a little on to “youse all”.  Still we need to remind ourselves that this is a marathon, not a sprint.On the topic of merda from Europe, the most important aspect of the latest summit was opening the “possibility” of the ESM (European Stability Mechanism) providing bailout loans directly to banks rather than through loans to sovereigns (which would then recapitalize the banks).  The ESM has an upward limit of $500B euros of funds that it could eventually deploy. These funds are purely theoretical at this point because they have not even been raised yet and the countries involved in putting it up are already stressed.  Further the amounts involved are peanuts relative to the problem.The possibility of the ESM getting levered financing from the ECB – was excluded as a possibility. The idea has been flatly rejected by various nations and the ECB time and time again. Some countries like Finland are asking for gold as collateral for these loans to insolvent banks (not sovereigns).The text of the agreement makes it clear that ESM funding will only be possible after the centralized regulatory mechanism is established and that the matter should be “considered” by the EU Council before the end of 2012. Thus, the prospect of direct ESM bailouts for European banks is neither immediate nor even certain.And I say again:  Once Spain takes the money, then their obligation in the EFSF would be taken over by others.  And apparently despite reports and subterfuge to the contrary, the operation is a EFSF loan to Spain, not the banks.  Those “others” are Italy, whose share rises from 19pc to 22pc. France’s share rises from 22pc to 25pc, and Germany’s from 29pc to 33pc. The smaller core countries like the Netherlands, Belgium, etc will pick up a little more of the bill as well.By piling more on Italy, and Belgium, and for that matter France, means the credibility of the guarantees given to the EFSF and ESM would collapse. The whole concept really isn’t that complex: dazzle them with vague plans designed to take inadequate amounts of money from the stressed countries Germany, France and Italy and give it to insolvent countries Spain, Greece, Portugal, and in due course Italy.Testosterone Pit has an article from George Dorgan that summarizes the EU summit hype and sleight of hand:Posted ImageThe notion that this is only about Germany blinking is patently false. Further as Zero Hedge points out, there have been plenty of rustlings within Germany that this bailout motivated mutual assured destruction integration needs to be put before the German people as a referendum.  When that happens, the end game is over.One of the better comments about Europe was this one alluding to the hook, from “Fueled by Randomness”. I would add that the market has already priced this in.

I think what eventually will happen is that the markets will tire of the Euro-zone kabuki dance and start ignoring the whole thing, effectively “pricing in” the idea that they’ll pull another rabbit out of the flea-bitten hat and save the EU (i.e. kick the can further down the road) again. It is at this point that a euro failure will occur.

The eagerness to jump on these risk trades in this environment gives me real pause about my own increasing bullishness on energy.  It is just that I think my scenario will take time, and play out gradually, without a quick reward, and not be all about official merda mucky muck as the driver.  So my modus operandi will be to fade mucky muck every time.Much of Friday’s Hail Mary seemed to be about squeezing out the last of the remaining shorts.   Judging from the bizarre thin volume flurry into the close, somebody was goosing quarter end window dressing.  The McClellan Oscillator popped up to a very high 237, and the VIX contracted to 17.Accordingly over the course of the day I bought puts in the IWM 77 weekly (July 6) at an average of 17 cents. I bought XLP July 34 puts (only a 10 IV) at average of 13 1/2 cents, and picked up a little XLI 34 puts at 17 cents.  I use about 0.25% of my total capital for these kinds of trades. In the new just started Ditto Trading accounts (designed to be invested, not just holding cash) I committed up to 45% of the funds and picked up SKF (banking double inverse) @ 43.82, SRS (REIT double inverse) @ 26.61, RWM (100% inverse Russell 2000) @26.71, and shorted XLY at 43.69. DNN was bought Thursday at 1.29.Posted ImageCommercials are getting short Eurodollars, so may be a good opening to join them.Posted Image

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