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Shock and Awe Euro Short Squeeze, Then What?

Currencies / Euro May 10, 2010 - 06:09 AM GMT

By: Mike_Shedlock

Currencies

Best Financial Markets Analysis ArticleThe ECB, IMF, and now the Fed have come out with bazookas blazing in all hands. The amount of ammunition the fools are willing to throw at "Defending the Euro" is now up to $962 billion.


Please consider EU Crafts $962 Billion Show of Force to Halt Euro Crisis.

European policy makers unveiled an unprecedented loan package worth almost $1 trillion and a program of bond purchases as they spearheaded a global drive to stop a sovereign-debt crisis that threatened to shatter confidence in the euro.

Jolted into action by last week’s slide in the currency and soaring bond yields in Portugal and Spain, the 16 euro nations agreed to offer financial assistance worth as much as 750 billion euros ($962 billion) to countries under attack from speculators. The European Central Bank will counter “severe tensions” in “certain” markets by purchasing government and private debt.

“The message has gotten through: the euro zone will defend its money,” French Finance Minister Christine Lagarde told reporters in Brussels early today after the 14-hour meeting.

“This is Shock and Awe, Part II and in 3-D,” Marco Annunziata, chief economist at UniCredit Group in London, said in an e-mailed note. “This truly is overwhelming force, and should be more than sufficient to stabilize markets in the near term, prevent panic and contain the risk of contagion.”

World Needs Dollars To Defend The Euro

Inquiring minds note Fed to reopen dollar swap program

The Federal Reserve is going to reopen a program set up during the financial crisis, to make sure foreign banks have the dollars they need, the European Central Bank announced late Sunday. The Fed will ship dollars overseas through the Bank of Canada, the Bank of England, the ECB and the Swiss National Bank. The Bank of Japan will be considering similar measures soon, the ECB said. The facilities are designed to help improve liquidity conditions in U.S. dollar funding markets and to prevent the spread of strains to other markets and other financial centers, the ECB said in a statement on its web site. The ECB said the first repurchase operations for dollars against ECB-eligible collateral would be carried out on Tuesday.

Gee, fancy that. The world needs more dollars to defend the Euro.

Credit Lines Will Expand Fed's Balance Sheet

Inquiring minds note Federal Reserve opens credit line to Europe

The Federal Reserve late Sunday opened a program to ship U.S. dollars to Europe in a move to head off a broader financial crisis on the continent.

Other central banks, including the Bank of Canada, the Bank of England, the European Central Bank, the Swiss National Bank and the Bank of Japan also are involved in the dollar swap effort.

The move comes after the European Union and International Monetary Fund pledged a nearly $1 trillion defense package for the embattled euro, hoping to calm jittery markets and halt attacks on the eurozone's weakest members. The ECB also jumped into the bond market Sunday night, saying it is ready to buy eurozone bonds to shore up liquidity in "dysfunctional" markets.

The Fed's action reopens a program put in place during the 2008 global financial crisis under which dollars are shipped overseas through the foreign central banks. In turn, these central banks can lend the dollars out to banks in their home countries that are in need of dollar funding to prevent the European crisis from spreading further.

The program reopened on Sunday will expand the Fed's balance sheet, economists say. However, the program poses little credit risk to the Fed because the arrangements are with other central banks, they added.

Hallelujah, All Praise the "Riskless" Transaction

Economists claim and the Fed appears to believe there is no risk because the arrangements are with other central banks. Hey, why not lend an unlimited amount if it's risk free?

That may be coming down the road.

ECB Press Release

Inquiring minds are reading the ECB's press release on measures to address severe tensions in financial markets.

In view of the current exceptional circumstances prevailing in the market, the Governing Council decided:

1. To conduct interventions in the euro area public and private debt securities markets (Securities Markets Programme) to ensure depth and liquidity in those market segments which are dysfunctional. ...

2. To adopt a fixed-rate tender procedure with full allotment in the regular 3-month longer-term refinancing operations (LTROs) to be allotted on 26 May and on 30 June 2010.

3. To conduct a 6-month LTRO with full allotment on 12 May 2010, at a rate which will be fixed at the average minimum bid rate of the main refinancing operations (MROs) over the life of this operation.

4.To reactivate, in coordination with other central banks, the temporary liquidity swap lines with the Federal Reserve, and resume US dollar liquidity-providing operations at terms of 7 and 84 days. These operations will take the form of repurchase operations against ECB-eligible collateral and will be carried out as fixed rate tenders with full allotment. The first operation will be carried out on 11 May 2010.

What's Next?

To defend the Euro, the ECB now is committed to throw up to $1 trillion at interventions in public and private debt.

What's next? Direct intervention in the stock market?

Bear in mind when this fails (which I guarantee you it will but I cannot state the timeframe), these clowns will think the reason was they did not throw enough firepower at it.

Step back for a second. The problems are too much debt, too much government spending, and a massively unbalanced global economy. None of these actions address any of the fundamental issues.

Short Squeeze Coming

Judging from the action in futures this evening, shorts are going to be forcibly ejected Monday, perhaps for several days.

This will create a huge air pocket underneath. We saw this action once before, in Fannie Mae and financials.

Flashback Wednesday, July 16, 2008: SEC Restricts Shorting 19 Financial Stocks

Big brother has now decided to step in and force the price of all financial stocks up with this SEC short sale order.

So now the SEC is issuing short sale restrictions on financials because Bernanke says it's important for them to rise.

I have news for Bernanke and the SEC. This won't work. China had short sale restrictions on and it did not stop the Shanghai index from falling over 50%. Insolvency cannot be cured by short sale restrictions and many of those companies are insolvent.

All these short sale restrictions are going to do is create a vacuum. Once the shorts are driven out these shares will plunge. And who wants to buy a bond or provide capital knowing or even thinking share prices were artificially inflated.

Flashback Friday, July 18, 2008: Short Squeeze In Financials Continues

Fannie Mae is up another 25% today to $13.66 in the wake of Selective Enforcement of Regulation SHO and Bernanke's statement: "It's important for Fannie Mae and Freddie Mac bonds and stocks to rise so they can keep raising capital and aid the mortgage market."

This move in financials is going to fail spectacularly once the panic buying ends, but for now the bulls are having a bit of fun.
That short squeeze was the beginning of a violent end.


It is a serious mistake to drive shorts from the market. Oh, it can work for a while. In the case of Fannie Mae for a week. Then what?

The hubris this weekend by central bankers is nothing short of amazing.

While the timeframe is unknown, these attempts to "defend the Euro" are highly likely to hasten its demise.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2010 Mike Shedlock, All Rights Reserved.


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