Lunchtime Links 4-6

April 6, 2010

DB’s $1 billion financing for Riga (Wood, Risk Mag) From the folks that originally broke the Greece/Goldman derivatives issue way back in 2003: “A financing transaction arranged for Riga by Deutsche Bank shows how local authorities can lay their hands on spending money without reporting it as debt.”

Blackrock warns banks on distressed mortgages (Van Duyn, FT) Blackrock says banks need to write-off borrower debts before they’ll consider extending new credit via private-label mortgage investments…

Greek Bond Vigilantes out in force (Papadimas, Reuters) Greek bond spreads are back at January highs. See the next link for where this may be coming from…

Greece seeks new investors to sidestep IMF (Coghill/Dahinten, Reuters) An earlier story said Greece wants to find new buyers for its debt so that it can sidestep tough austerity measures the IMF is likely to impose. One wonders who would actually buy dollar-denominated Greek debt, especially considering it could be a ploy to avoid getting the country’s budget in order. Perhaps the same folks who bought similar Russian debt circa 1997. My colleague Edward Hadas says a Greek default may be the answer….

Financial Crisis Inquiry Commission wrestles with setbacks (Chan/Dash, NYT)

Fannie/Freddie touch off swaps scrap (Patterson, WSJ) Cool. Fannie and Freddie will use their heft in the interest-rate swaps market to force them through clearinghouses. Exchanges would open up more competition, but clearinghouses are a start.

Chart40 years of the Canadian dollar (Culp, Reuters)

Baseball season! (YouTube) Too bad my Cubs are terrible. (This is a 5 yr old reciting Herb Brooks’ Miracle Speech)

Product placement (imgur)

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By on April 6th, 2010 1:28pm Eastern Time
What a market! What a rally! Every single day since the February 5th, 2010 pivot low the major stock indexes have rallied. Every down tick intra-day is bought and the stock indexes move right back up. This morning was a perfect example as the SPDR S&P 500 ETF (NYSE:SPY) was gapped down at the open, only to rally higher from 9:30 am EST to the positive side by the lunch hour. This is typical action in this bull run spanning back from early February.

The SPDR S&P 500 ETF (NYSE:SPY) is now higher by more than 13% since early February. The SPDR Dow Jones Industrial Average ETF (NYSE:DIA) is higher by more than 11% from the same time period. Commodities, energy stocks, financial stocks, and even micro caps, are all joining into this rally. So far the markets are saying all is well.

Every time since the beginning of the markets existence it has been easy money and low rates that have lead to a bubble. In 1929, it was easy credit and loose money that lead to massive speculation and the worst financial crisis ever know to America. If one looks back at 2001-2002 it was easy credit and loose money that lead to the second greatest financial crisis since the 1929 depression. Now the words “recovery” and “expansion” are being thrown around as they were back in 2003 – 2007. Back then, those words sounded great until that bubble burst in late 2007. Currently the Federal Reserve Bank’s Fed funds rate is at zero. It cannot go any lower from here. Assets of all classes are flying higher. Now we are hearing expansion and recovery on every television news program out there. We are even hearing the term “jobless recovery.” Is it not jobs that are needed to be a recovery?

In 2002, many of the jobs created were high paying jobs. There was an abundance of mortgage brokers, making small fortunes,as well as construction workers across the U.S. making a good solid wage. This housing boom trickled down to the local sandwich shop and restaurants who all saw increased business. Let us not forget about the money that was taken out the homes that had equity for the purpose of vacations and renovations. All of that is gone and is not going to return for a while.

As we speak, the market continues to climb the wall of worry. Countries in Europe such as Greece, Italy, Spain, Portugal, Ireland, and even England are facing huge debt problems, yet the markets do not care and climb higher. In the U.S. another wave of foreclosed homes is about to hit the market place in April 2010, even considering this home builder stocks are trading off their lows. Oil and gasoline are trading at very high levels and the market views it as a positive while the talking heads say that it is due to demand.

It is still amazing that someone does not question where the toxic assets that the banks were holding have gone? Ever since the FASB “mark to market” accounting changes the so called toxic assets have seemed to simply vanish. Forget the commercial real estate problem; yesterday it was reported that commercial real estate vacancies are at a 16 year high and climbing. However, stocks such as Simon Property Group Inc (NYSE:SPG), and Vornado Realty Trust (NYSE:VNO) are at new highs for the year, and 200% off their 2009 lows!

This is looking like a replay of 1929 and 2007 all over again. The markets declined in 2000 only to find a low in 2002. From that low it rallied into the 2007 top. This time the top should not take 5 years to form. There is much more internal damage today than there was back then. Unemployment is very high and the housing market is still in trouble. However, until the market stops climbing, the rally can continue. Use caution over the next couple of years as this story is not likely to have a happy ending.

Nicholas Santiago
Chief Market Strategist

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