Thursday, August 2, 2012 All red is mine. Joan McCullough, East Shore Partners, 1-212-226-1223 Trading: 1-800-222-8723 joanmccullough@eastshorepartners.

com This is totally pathetic.

All times ET.

As mentioned this morning, there was a ray of hope held out in anticipation that the Rajoy/Monti tag-team would have something to say about the status of any buyback of their sovereign debt following their meeting in Madrid. The press conference kicked off around 10:50 a.m. And its a more pathetic nothin done than the one Draghi gave us at 8:30. If you pull the day chart, you can see them peaking around 10:53 a.m. And then they turned and subsequently started on their uninterrupted way to probe the days lows. (A classic hairpin turn. Sound familiar? ) They cannot be this incredibly stupid, can they? So unless theyre plannin on some wild rounds of intervention in the forex markets, theyre gonna have a lotta splainin to do, Lucy. Particularly to the geeps who bought 10-year notes at Spains auction THIS MORNING ahead of the un-bazooka non-announcement. Results: 3.1 bil, slightly above target with an average yield of 6.647%. Last at 7.119%. Bend over, Rover as they say in the south of France! Or is that the Bronx? Yee-ha. Got that? Any LTRO-funded bank is welcome to support these auctions. And I am certain they did so with a gusto, in anticipation that Draghi was gonna put out. Lets go to the Video, February 29, 2011, courtesy of Goldie: The ECB has today --- through its long-term refinancing operation (LTRO) --- fully allotted 529 bil of 3-year funds to 800 banks. Together with the first auction, the ECB has now injected 1 trillion of 3-year funds into the system. This is an extremely high amount and equals, for example, 131% of total (249% unsecured) European bank bond maturities in 2012 and 72% (130% unsecured) for 2012 and 2013 combined. European banks are now effectively prefunded through to 2014. The fact that Goldie opined back then that the sheer size was so big in relation to secured/unsecured maturities, makes its flash-in-the-pan failure that much more outrageous. Think about it: Two LTRO operations, $1.2 tril give or take of free money for the askin (which a favorite muse reminds me all matures on the same day! Brilliant!) Vs. collateral boasting considerably-reduced eligibility standards. (It pains me to write this, believe it or not.) The so-

called Sarko trade urged them to take the cheap do-re-mi and go buy sovereign debt. And the financials obliged as we know. The idea is to benefit from the spread between the borrowing rate of 1% and the high yields on this sovereign paper. But these carry trades are not without risk, no sir. They are borrowing cheaply short. And investing long-term for higher yield. Which becomes a huge problem if the funding side (the ECB) dries up. Hello? Because the long-term positions are not gonna fill that void in the time allotted which is about 45 minutes, give or take. Just ask Jimmy Cayne. The other PIA is if the long side of your trade (sovereign debt) defaults. Hello? Isnt this a fine kettle of fish? I know. Its wholly exquisite in its stupidity. Now lets think about that Spanish auction, amigos. We have a case where the banks loaded

up this morning on 10-year paper funding themselves with 2 1/2-year money.

On top of God-knows-what other dead-dog positions they are already carrying with the same, sand-thru-the-hourglass, LTRO funds. Now that its clear to you how a carry trade can wipe you out, do you copy the rock/hard place of this whole situation? Good. So this reality leaves two TALL ORDERS on the table: The ECB must keep offering the banks cheap, LTRO money. Right. Regularly. In perpetuity. Thats how they distinguish between the roles of lender of last resort and printer of money. Or so they think. Because an honest person will acknowledge that theres not a damn bit of difference between perpetual repos and outright coupon passes! The second part of the TALL ORDER requires the ECB to steer the sovereigns away from default which has the double benefit of seeing the ECBs own fanny covered as well as that of the banks with the carry trades in place. And the only way that they can keep the sovereigns from default is to shovel schmitt against the tide. Right. While the EU (Read: Germany) is squeezing the sovereigns to death with austerity, driving them closer to the cliff, the ECB is acting mechanically to stave off the cliff by making efforts to keep borrowing rates for the PIIGs, as low as possible. (Not unless the FED vs. Congress here.) Therefore, there is a critical need for the ECB to keep low-cost funding available as well as supporting the long sovereign positions that the banks are carryin. (Read: keep money free and abundant to the system while supporting debt buybacks.) Draghi addressed neither today. Why?

Well, they cant do two things at once. So at the moment they are concerning themselves with providing liquidity as buyers of this paper from the banks rather than providing the banks with the money to buy more paper. I said at the moment. You gettin this? If you are, then youre in bigger trouble than you think! Right. The LTRO gives the banks the money to buy the paper. The second LTRO tranche was released on 2/29/11. Aside: Wanna really get ill? Ponder this: Draghi stated more than once that the goal of the LTRO was to get money to the regional banks. To fund the local economies. As his principal interest was in helping ameliorate the dire employment picture. (Not a peep about bringing down Spain or anybody elses borrowing rates; it was all about the people; bullschmitt.) As you know, on 7/31, we got the 17-member EZs unemployment rate: another record at 11.2%. With the awful highlight of the 15-24 year old segment hitting 34.3% Spain was the highest at 24.8% (young folks over 50%). Even Italy hit a 13-year high of 10.8%. So, so much for channeling his $1.2 trillion genius to the point of jobs creation, eh? SOS. Okay, where were we? Right. LTRO second tranche on 2/29/11. By 8/8/11, the ECB announced that it had expanded the SMP (Securities Market Program, i.e., debt-buying scheme) to include buying up of the paper of Spain and Italy. Why did they move to include Spain and Italy? Because they were tryin to help make the Sarko carry trade work. Because if that baby goes down, game over, kids; the dominoes will fall so fast and furious, theyll be nothing more than a big blur to the naked eye. This is the kind of hair-raising risk we get when the central bank, the sovereigns, the private-sector banks and any other investor/hangers-on you can conjure up get boozed up and drugged out, then jump in the sack together. After a few rolls around and around and around, they awake the next morning desperately hung over in a twisted heap of decrepit nakedness. Not knowin where one ends and the other begins. Take the visual. And then you tell me what serious investor would touch this pile of degenerates with a barge poll. Right. But of course, they will never cop to keeping this scam going. So they cited as reason for including Spain and Italy on August 8, 2011 as follows: We welcome the announcements made by the governments of Italy and Spain concerning new measures and reforms in the areas of fiscal and structural policies. The Governing Council considers a decisive and swift implementation by both governments as essential in order to substantially enhance the competitiveness and flexibility of their economies, and to rapidly reduce public deficits. The ECB will actively implement its Securities Markets Program," in effect acknowledging that the two countries had met the criteria for support by committing to fiscal reform.

Newbies: Make sure that you understand whats goin on here. The SMP buys sovereign debt in the secondary market. This was with a view to take certain paper off the hands of the banks in exchange for liquidity. To offset that liquidity, the ECB conducted weekly sterilizing operations so as not to trigger inflation. And they managed to keep up with the SMP purchases very nicely. The stated goal, though, was to get the EFSF up to snuff so that the SMP could bow out (Germany was opposed to this program off the get-go, please remember). Then, the EFSF could take over this operation by buying in the primary market. Thats when we started reading about the debate as to exactly what level of funding they would agree for the EFSF and if this funding number would be added on top of the ESMs number. What was supposed to happen was that the ESM would be in force by July 1, 2012. And that it would run concurrently with the EFSF for one year when it would replace the EFSF in July of 2013. As you know, despite the grand plans, the only thing that happened is that the SMP was put on ice. The EFSF still exists with a 500 bil purchase cap and the ESM (targeted to be 700 bil strong within 5 years) still has not been agreed by German Parliament (9/12 vote). Its absolutely pathetic, isnt it? You bet. But not as pathetic as this: the ESM contributions by the top 4 member states: Germany is 27% of the pie or 190 bil. France is 20% and 142 bil. Italy, 18% or 125 bil. Spain, 12% and 83 bil. Hot stuff? You bet. Theyre on crack. Spain is supposed to get its contribution up to 83 bil over 5 years. Meanwhile, they need 100 bil YESTERDAY for the banks alone! Okay. Lets wrap this diatribe up, shall we? The ECB is really up against it. Draghi is the bleary-eyed pivot man in a world-class financial circle smirk. Hes got to find a way to keep two-way liquidity available for the banks while lookin over his shoulder to make sure that the issuers of the sovereign debt dont default. Knowing that the ECBs balance sheet is dangerously overexposed, highly sensitive to even a glitch. Thats how thin the ice is. In just this glimpse of the big, ugly picture.

You shoulda taken the job at the Pork Store in Ronkonkoma when you had the chance. $14 an hour, medical and all the sausage you can stuff. LMAO. Hasta manana!
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