Short Covering in the Euro

06.29.2012                                     www.bkassetmanagement.com

In Plain English: What EU Leaders Delivered, What is Missing By Kathy Lien, Managing Director of FX Strategy for BK Asset Management The Europeans did it! Early this morning, European Council President Van Rompuy stepped onto the podium and announced a breakthrough agreement with a clear outline to provide short term support for peripheral countries such as Spain, Ireland, Greece, Portugal and Italy. In other words, the Germans caved and it was a double whammy because Germany lost the semi-finals of the European Football Championship to Italy hours before Merkel was forced to make more concessions than she initially wanted. Expectations were extremely low going into the Summit with investors expecting nothing more than a growth pact and the formation of a single banking supervisor. When Van Rompuy delivered more, the EUR/USD soared in approval.  These gains have extended into the North American trading session with all the major currencies trading sharply higher against the greenback.  U.S. equity futures are up significantly while Spanish and Italian bonds have declined sharply in a full risk on move. None of this enthusiasm can be attributed to this morning's U.S. data, which were right in line with expectations.  Personal incomes grew 0.2 percent in May, the same pace as the previous month while spending remained flat.  The PCE, a measure of inflation dropped 0.2 percent while core prices rose a mere 0.1 percent.  Manufacturing activity in the Chicago region accelerated slightly. As with most of this week's U.S. economic reports, the changes are not significant enough to alter the Federal Reserve's outlook for monetary policy. As for the EU Summit, we attempt to explain to you in plain English what was delivered and what is still missing.  An official statement will be released later this afternoon but 4 key announcements have been made. Four Key Announcements: 1. EUR120 billion Growth Pact - While the growth pact was preannounced on Thursday, it was the bargaining chip used by the Spanish and Italian Prime Minister to get Merkel to cave on debt issues. The money will come from existing EU funds and will be used for short term growth boosting measures such as building highways, railways and air links in the same spirit as the Franklin D Roosevelt's economic programs to promote growth during the Great Depression. 2. Quasi Banking Union and Direct Rescue of Banks - A banking union is one of the core solutions to Europe's debt crisis that the market did not expect so quickly from Europeans Leaders. However the Italians got the Germans to relent on allowing the European Stability Mechanism (ESM = Europe's rescue fund) to give money to banks directly without adding to the debt burden of individual governments.  What is wonderful about this is that it helps to cap the rise in European bond yields and hopefully prevent further downgrades by providing a bailout for banks without adding to the total debt sovereign owed by countries like Spain and Ireland. U Leaders aim to start allowing direct rescues of banks as quickly as year end instead of 3 years from now, when the crisis will probably be behind us.  This is the short term rescue that the market desperately wanted and the main catalyst for the EUR/USD rally.  The ECB will also become the sole supervisor of banks and any loans will be attached with strict rules. 3. Give Spanish Bondholders Seniority Over the EU - EU Leaders promised to not subordinate Spanish bondholders, giving creditors the confidence that they will not lose their place in the debt restructuring line to the ESM. As the second groundbreaking announcement from European Leaders this morning, loans from the rescue fund will now be on equal footing with loans from private investors, giving them the reassurance they need to continue buying Spanish bonds. 4. Allow EFSF/ESM To Buy Bonds Directly - Allowing the EFSF/ESM to buy bonds in the secondary market is also a big deal because it is an aggressive and quick way to prevent the crisis from worsening by allowing the EFSF/ESM to control bond yield. What was missing however are guaranteed deposit insurance and a roadmap for a fiscal union, which EU Leaders have tasked EC President Van Rompuy with delivering by the October summit. While there is no question that EU Leaders have announced more aggressive measures today than investors had anticipated, without fiscal changes or anything directly targeted at Italy, everything now rests on the hope of lower bond yields.  In light of this, we are skeptical about whether steps taken today are enough to turn things around for Europe and end the crisis.

Regards, Kathy Lien  Managing Director  BK Asset Management  295 Greenwich Street, Suite 281 New York, NY 10007

Blackrock's Take on the Natural Gas Glut

Blackrock seems to disagree with Goldman that gas prices will double any time soon, although they point out that the number of gas rigs has declined to 588 from 936 in October 2011. Positives include the roll-out of engine maker Cummins’ 12-liter natural gas engine for long-distance trucks. This could trigger a quiet revolution of LNG stations popping up across the US, leading to wider adoption across the car industry. (A medium to long-term hope.) The problem—and opportunity—is getting the energy to market. "We favor companies that facilitate the transport of energy, such as pipeline operators and those that benefit from investment in building out the US energy infrastructure." If that sort of information is valuable to you, visit the link below. This paper makes 'general statements only' regarding investment opportunities. They set up the arguments for focusing on certain areas, but don't mention any specific companies to invest in. How disappointing! That must cost money. This is a freebie. The paper is available from Blackrock Investment Institute at the following link--a 12 page pdf https://www2.blackrock.com/webcore/litService/search/getDocument.seam?venue=PUB_IND&source=GLOBAL&contentId=1111166831

Goldman Sachs Sees Natural Gas Prices Doubling in the Next 12 Months

Go to this link to get the simple tables you want to see

http://www.businessinsider.com/goldman-sachs-economic-market-outlook-tables-2012-6



This may be overkill, but worth a look.

Historical Note on JP Morgan Chase London Problem

Bruno Iksil, aka The London Whale

Although the swirling details of the big loss trade have been purposely vague, to mitigate the blood-in-the-water feeding frenzy of the sharks (financial and political), this article from May 11 seems to shed some light on what it was.

http://blogs.reuters.com/felix-salmon/2012/05/11/chart-of-the-day-the-cdx-na-ig-9-basis/

See also

http://usa.greekreporter.com/2012/05/20/achilles-macris-the-greek-executive-who-lost-2-billion-in-one-month/

http://nymag.com/daily/intel/2012/05/jpmorgan-london-whale-bruno-iskil-2-billion-loss.html

Jan Hatzius Predicts Fed Easing to Continue

Meredith Whitney on JPMorgan Mess