Week of 11/13/11

Farage On The Eurocrisis

Nigel Farage, Co-President of the EFD group, told the European Parliament earlier this week that Europe is on the edge of financial and social disaster and that the area’s leaders lack democratic legitimacy. “We are now living in a German-dominated euro. … I don’t want to live in a German-dominated euro.”

He believes that the former PMs of Greece and Italy were replaced by puppet leaders and that all the Eurocrats should be fired. He questioned the body’s right to tell the Italian people that “this is not the time for elections, but the time for actions. What in God’s name gives you the right to say that to the Italian people?”

So far, the new puppets in charge haven’t made a bit of difference. Italian bond yields remain elevated at more than 6.7 pct. Investors are still awaiting details on how the size of the eurozone bailout fund will be grown to $1.3T. — 11/18/11

Italy Still Teetering

Italy’s 10-yr bond yield is on the rise again, up to 6.76 pct yesterday and 6.88 pct as I write this at 3:40am Tuesday in New York. Jim Leaviss, head of fixed income at M&G, one of Europe’s largest fund managers, told FT yesterday: “There is no real recovery today, no turnaround in sentiment. It feels like people are having to liquidate positions and there is no one willing to take the other side of that. There is no real marginal buyer.”

Most money managers believe it will take the new government under Mario Monti years to get Italy’s debt and economy on a sustainable path. Most analysts say the ECB must step up as lender of last resort, but Germany’s Bundesbank president, Jens Weidmann, rules it out due to European law and also says it might weaken the incentive for economic reform in Italy. The ECB evidently sides with Weidmann: it spent only €4.5B on government bonds last week, less than half the amount it spent the previous week. — 11/15/11

Brace For Italian Bank Run

From a recent report by Samsung Securities: “One of the key leading indicators of a bank run is the bank’s increasing reliance on ECB’s refinancing facilities. Over the past three-to-four months, we have seen increasing reliance by Italian banks on eurosystem refinancing.

“Whereas in 2008 and 2009, Italian banks were average users of ECB facilities, accounting for only 3-4 pct of the total vs Italy’s share of 13.7 pct of the eurozone’s banking assets. However, since July, the share of ECB’s refinancing attributable to Italian banks rose to a historically high level of 18.8 pct (end-October). For example, in August, Italy got €85B from the ECB, a further €105B in September, and €111B in Oct 2011. Although as a percentage of total assets, countries such as Greece and Ireland are far more reliant, Italy’s share is going up rapidly.

“Markets remain frozen. Banking refinancing markets remain largely closed. Whether one looks at OIS spreads (90bps on the euro), ECB deposits or CDS spreads between the eurozone’s senior and subordinated debt (235bps) remain at extremely elevated levels, indicating extreme reluctance of banks to lend to each other for longer than overnight or preference for depositing funds with the ECB rather than lending.”
— 11/15/11

Kass: Preparing to Buy

Doug Kass: “If share prices remain weak and assuming that my economic and profit expectations are unchanged, I expect to expand my long positions in the weeks ahead. But I will be disciplined, wait for the right pitch and not chase stocks higher. … Imperfection and vulnerability are now universally recognized and are arguably reflected and more than discounted in reasonable/current valuations.” — 11/15/11

Kelly Letter on Siri v. Google

From Sunday’s Kelly Letter: “Before you know it, you’ve booked your trip without clicking a single Google search link. Uh oh, as far as Google is concerned. What part did Google play? Showing you articles and entries at Wikipedia, all free and worth zilch to Google. What part did Apple play? Handling the revenue part of your experience, and collecting a fraction of the money involved. You didn’t think the Siri team neglected that part, did you?

“No, and in fact they took a smart approach. They mapped the 3,000 or so e-commerce service APIs that are open and available online. Siri can integrate with any of them. She’s fully extensible and easily incorporated into new ones that follow standards. The Siri team realized that relatively few internet searches produce transactions such as the travel booking we just considered, plus purchases at stores, restaurant bookings, and other revenue-generating activities. It’s not necessary to handle everything that happens online in order to capture the bulk of the revenue.

“Smart, and even smarter when you realize that the biggest hassle in buying anything online is putting in your details. That’s one reason Amazon is popular: it remembers you so you can just one-click your way to getting whatever you want with your usual details. Siri will be able to offer that same friction-free purchasing capability at almost any e-commerce portal online because she will be pre-certified almost anywhere you go. That is, the store will know Siri even if it doesn’t know you. When she tells the store your details, the store will trust her and make the transaction lickety-split.” — 11/15/11

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