The Euro had its short-term bounce, but when Germany announced a ban on naked short selling, the Euro began to fall and got below $1.215 after-hours. The reaction from Goldman and other banks has been shock and awfully negative criticism that boils down to: run from the Euro!
ZH has been on a roll on this issue, predicting chaos tomorrow in markets:
One bond trader said he expected Wednesday's trading session to be one of the most volatile in living memory: "It will be complete chaos, I really don't know what the Germans think they are doing."
The Euro is not directly affected, yet. The naked short ban applies to sovereign debt and CDS's. The Euro, however, is a way to play this.
The received wisdom on short bans is a short ban has a temporary boost, as shorts close out their positions, so the Euro may initially bounce; but then the short ban undermines confidence in the instruments affected. When you remove shorts, you do not remove sellers; you remove liquidity. Shorts add liquidity for the longs - they are the other side of the trade - and if the longs can push them back, they rush to cover in a short squeeze, driving prices up, losing capital quickly, and often losing their ability and appetite to continue. Mish succinctly summarizes:
All these short sale restrictions are going to do is create a vacuum. Once the shorts are driven out these shares will plunge
Will we see a crash in the Euro? The Germans are banning naked shorts, not all shorts. This is a ban of a different character. The shorts can still play, but they cannot short beyond the number of instruments, in effect engaging in highly leveraged shorts. As an example, normally to short a stock one needs to borrow each share first, so the total shorts cannot be more than the public float, and are usually a small fraction. In a naked short, one can take a position without borrowing the underlying instrument, or in the case of derivatives, having someone on the other side. Naked shorts allow positions much larger than the float, or more commonly, larger than normal daily trades.
Karl Denninger applauds Germany for taking this move, and wishes it on Obama as well, to take control back from banks who have made huge mischief fleecing markets both before and after the financial meltdown. His point is well-taken in that traditionally the financial sector takes 10-12% of profits as a "vig" for its services, but during the Greenspan Bubble took 33% of all US profits ($2T of $6T over the period), and at the peak in 2007 was sucking 40% of all profits from American industry into its maw.
Others agree, including ZH and Jesse's Cafe Americain, and see the broader political design in the German move:
- the ban is a hammer that can be used to default on CDS's without consequence, putting more control back onto the German government
- the ban is also a reaction to the failure of the US to reform its financial system, and a repudiation of the current US financial reform bill
To some degree this is a battle between the politicians and the markets. But I am firmly resolved -- and I think all of my colleagues are too -- to win this battle....The fact that hedge funds are not regulated is a scandal," she said, adding that Britain had blocked previous efforts to do this. "However, this will certainly have taken place in Europe in three weeks," she said, without giving more details." Reuters 6 May 2010.
This is but the opening salvo. A transaction tax may follow, as well as measures impacting the Euro directly. ZeroHedge has a series of posts tonight, including this comprehensive look at what may be ahead.
Politics aside, the other big move today happened in Australia, where the RBA did not raise rates on fears of turmoil in Europe. As predicted here a week ago, the carry trade is rapidly unwinding, with the AUD falling hugely in the last two days, rushing to an 82c support level it seems.
Massive head and shoulders top in the EURUSD going back to 2005, very clear on the monthly chart, has violated the neckline. The best case scenario could see a pullback to 1.28 - 1.3 to test the neckline, but dont try and be a hero and try to trade the pullback. PLAY WITH FIRE AND U WILL GET BURNED!
Credit where credit is due, EWI has been spot on with USD bull market. Pity all the central banks who sold off USD for EURO and GBP. It is true central bankers are the worst market timers in the world.
Posted by: trailblazer | Tuesday, May 18, 2010 at 10:38 PM
Bombay SENSEX dished out a trendline break, and may be heading for a correction:
http://trendlines618.blogspot.com/2010/05/sensex-trendline-break.html
Posted by: trendlines | Wednesday, May 19, 2010 at 12:33 AM
I think the end has just about begun for all World Markets,Currency,commodities,stocks etc.Sell whtever one can.Ofcourse at every intermittent rises
Posted by: Account Deleted | Wednesday, May 19, 2010 at 04:16 AM
DG !!
Can u please have a look at the following chart.These are daily,weekly,monthly charts of the same stock,Usha Martin Education and solutions(UMESL).Here is the link :
http://yfrog.com/fvqlvjx
Regards
VB
Posted by: Account Deleted | Wednesday, May 19, 2010 at 05:38 AM
Great post!
Yelnick, any thoughts on how this AUD carry trade might unwind? E.g., do you expect to see a repeat of a 2008 style collapse (i.e., fall off a cliff), or more bumps along the road this time around? Bit of a perfect storm at the moment.
http://www.youtube.com/watch?v=pWa0dZMHYeE
Posted by: A | Wednesday, May 19, 2010 at 05:42 AM
>ZH has been on a roll on this issue, predicting chaos tomorrow in markets: One bond trader said he expected Wednesday's trading session to be one of the most volatile in living memory: "It will be complete chaos, I really don't know what the Germans think they are doing."<
Well, so much for ZH opinion!
Posted by: Mamma Boom Boom | Wednesday, May 19, 2010 at 07:12 AM
I guess it is easy to look back and find fault but the whole concept of a Eurozone seems ludicrous.
Did someone really believe that Greece (without the brains to even collect taxes) could go toe to toe with Germany? I find it hard to believe:
http://tinyurl.com/26kuxjr
Hock
Posted by: Hockthefarm | Wednesday, May 19, 2010 at 08:25 AM
nspolar stated gold would top on or before the 17th of May. Is that gonna hold? Hui tanking.
1st predict was Shanghai topping on or before 14th of April. Dead nutz.
Commodity shorts doing fine.
All gold shorts now in the black. It pays too 'anticipate'.
Next major prediction will be the Big Bottom. Long ways out for that one however.
ns
Posted by: nspolar | Wednesday, May 19, 2010 at 08:27 AM
Being realized...progressing to at least DOW 10200, then may get an early June bounce to position further short for the rest of the decline to the target month.
Posted by: upstart | Wednesday, May 19, 2010 at 08:29 AM
Yelnick:
I just read the Karl Denninger post- it was a real eye opener. Do you agree with his premise?
Any chance for a follow-up post discussing this issue?
Seems to strike at the heart of the problem and may explain why so many average Americans are really pissed off.
Hock
Posted by: Hockthefarm | Wednesday, May 19, 2010 at 08:59 AM
The "market" still believes the system can be saved or there's still hope. Still in the triangle or GS wedge. The chart is Simon property group(REIT)
It will break.
Roger D.
http://www.screencast.com/users/parisgnome/folders/Default/media/70192611-23ae-445c-858a-6c747f1ce7a9
Posted by: Roger D. | Wednesday, May 19, 2010 at 09:32 AM
Hi Yelnick,
Shanghai Composite is due for a rebound in the very short-term. Here's the chart:
http://trendlines618.blogspot.com/2010/05/shanghai-composite-very-short-term-due.html
Posted by: trendlines | Wednesday, May 19, 2010 at 09:34 AM
The Dow
http://www.screencast.com/users/parisgnome/folders/Default/media/9bf2a09c-b376-48a4-9d36-e499863d5769
Posted by: Roger D. | Wednesday, May 19, 2010 at 09:48 AM
Roger, nice charts and comments on the '29 crash. I am in agreement.
I believe we are now in a 'C' of a big ABC here. C's imo come in various variety's. I have thought the most likely C we will have here is much like the one in the '29 crash. A meat grinder, that is long in time (relatively speaking), and fairly tight on the channel.
But history is never the same, so we shall see.
ns
Posted by: nspolar | Wednesday, May 19, 2010 at 09:56 AM
Looks like Mish doesn't know the difference between restrictions on ?NAKED short-selling vs short-selling.
How absurd.
Posted by: marketman | Wednesday, May 19, 2010 at 10:04 AM
Mish's chart is instructive about what the warning and destruction that was to come.
This close-up shows repetition of the same whipsaw were not buying opportinuties. They were 2nd chances to GET OUT.
http://stockcharts.com/h-sc/ui?s=FNM&p=D&st=2008-01-19&en=2008-11-19&id=p08106718914
Can it happen again ,,,, Now? or, Later? FNM won't work because it is at "zero".
So, what will be the 'canary in the sinkhole' this time?
wave rust
Posted by: Wave Rust | Wednesday, May 19, 2010 at 10:05 AM
Duncan,
Fancy the paradox:
Germany bans short sellers at banks versus the just announced that Sen. Dodd will drop the requirement for banks to spin off derivatives operations!
That is hilarious to me. At least, Dodd's learning while reforming the disease's symptoms.
The disease is still prospering.
wave rust
Posted by: Wave Rust | Wednesday, May 19, 2010 at 10:14 AM
Wave,
Why is it that people's READING COMPREHENSION is so horrible these days???
The German short-selling restriction is on NAKED shorting and NOT natural short-selling!
Posted by: marketman | Wednesday, May 19, 2010 at 10:23 AM
marketman;
Yes but can you explain what this really means to an individual investor?
Correct me if I wrong. I can naked short equities in the US, but my clearing house can not. I.e. my broker has to find shares to lend me to go short, else I can not do it. AND my broker's balance sheets always have to add up. They can have more short short shares than what they have long. Not too many years back I never had a problem going short individual equities. Following an apparent crack down by the SEC in the US, I often had trouble going short individual equities. So I more or less quit all that and use the inverse ETF's and just short indices.
If I am correct what does the German ban really mean? Did they previously allow net naked shorts ...i.e. there could be more short shares than long shares outstanding? Or now does an individual shorter have to hold in the limit as many long shares as short shares?
ns
Posted by: nspolar | Wednesday, May 19, 2010 at 10:45 AM
Greece's loaded bazooka? Default and screw the banks. KD points out what is the indecision in the markets at this moment in time.
http://market-ticker.denninger.net/archives/2334-To-Greece-Nut-Up-Or-Shut-Up.html
Posted by: Roger D. | Wednesday, May 19, 2010 at 11:05 AM
IN MEMORIAM
DG, MY GAY SON, PASSED AWAY A FEW DAYS AGO IN HIS TRADING ACTIVITIES.
HE WAS LONG THE EURO AT 1.30 AND HE LOST ALL HIS MC DONALD'S CHECKS FOR THE NEXT 18 MONTHS.
THE FUNERAL WILL BE HELD AT THE NEO GARBAGE INSTITUTE HEADQUARTERS...
THE ONLY SPEAKER WILL BE HIS FORMER LOVER GLENNY NEELY.
PLEASE DO NOT SEND FLOWERS, PLEASE SEND MONEY TO PAY FOR THE GAMBLING DEBTS OF MY BASTARD SON DG.
THANKS.
GLENN LOSER NEELY
Posted by: Glenn Loser Neely | Wednesday, May 19, 2010 at 11:22 AM
marketman ... should have read "They can not have more short shares than what they have long."
If you or anyone knows all the rules I would like to know.
Been a lot of arguments on boards about all this over the years, me not included. I admit I am sure I have fully understood all of this.
ns
Posted by: nspolar | Wednesday, May 19, 2010 at 11:35 AM
Gartman on Gold.
http://seekingalpha.com/article/67017-dennis-gartman-on-gold
or
http://www.reuters.com/article/idUSN1837861720100518
Are Denny boy and I early?
ns
Posted by: nspolar | Wednesday, May 19, 2010 at 12:11 PM
It's pretty simple... If you are unable to LOCATE the stock from your broker, you are not allowed to sell a stock short, otherwise it is considered NAKED and ILLEGAL. Period.
And as far as the CDS market is concerned... the majority of it trades in LONDON, and not Germany. Think about that for a moment.
Posted by: marketman | Wednesday, May 19, 2010 at 12:27 PM
nspolar, look at it this way: the entire world is completely upside down, because of trillions, even hundreds of trillions, of dollars wagered where the speculator holding the wagers has no interest in the underlying asset. If it weren't for all these naked positions, most of the worlds problems would be under control.
Posted by: Mamma Boom Boom | Wednesday, May 19, 2010 at 12:43 PM
"And as far as the CDS market is concerned... the majority of it trades in LONDON, and not Germany. Think about that for a moment."
Ah, now it makes a little more sense.
thanks.
ns
Posted by: nspolar | Wednesday, May 19, 2010 at 12:45 PM
"If it weren't for all these naked positions, most of the worlds problems would be under control." - Mamma
Wrong.
Naked short positions have NOTHING to do with the fact that countries have racked up so much debt. To claim that "the world's problems would be under control" if there wasn't naked short selling ... is to be quite NAIVE and foolish.
I'm sorry, but you have no idea what you are talking about.
Posted by: Michael | Wednesday, May 19, 2010 at 01:35 PM
Mamma, marketman, Michael , ns - reads my next post on this thread about naked shorts and what's up in Europe (after the AUD discussion)
Posted by: yelnick | Wednesday, May 19, 2010 at 02:07 PM
Michael, your such a numbskull. Put a dunce cap on and sit in the corner.
Posted by: Mamma Boom Boom | Wednesday, May 19, 2010 at 02:08 PM
Wave - great point. Merkel is right that the US leadership have been captured by the big banks. The Dodd bill is a joke. And yet Merkel was like John Belushi in animal House yesterday - she ran out of the building saying "who is with me?" and no one followed.
Posted by: yelnick | Wednesday, May 19, 2010 at 02:14 PM
Hock, I think the part of Denninger's rant that says "stop the lying" is correct and long overdue. At a high level the leadership in this country across almost all sectors and both parties has engaged in a giant pretense to feather their own pockets. Bear markets happen because investors realize they are being lied to. The scale and scope of the lies this time are so pervasive and so enormous that a big bad bear is due, the purpose of which is to wring the rottenness out of the system at all levels. Right now the bond vigilantes and shorts are the ONLY forces trying to put honest back into government policy, with perhaps the Tea Party movement becoming a second force (at least they got one guy nominated yesterday).
The fundamental disappointment with Obama is he portrayed himself as the great reformer than turned out to be on the take with the rest of them, or just clueless. That pretend Obama would be a great national hero right now. The real Obama continues to fade as a political force - witness yesterday.
The big tell for me is how Merkel's move yesterday is already a bust, and the Euro-TARP likely a bust (too early to be certain). This means that we have gone one bailout too far, and bailouts will no longer work to fool the masses and continue to benefit the classes.
As to Denninger's specific policies, some make sense and some seem impractical.
Posted by: yelnick | Wednesday, May 19, 2010 at 02:23 PM
A, my post today on the AUD is meant to answer your request
Posted by: yelnick | Wednesday, May 19, 2010 at 02:24 PM
"Michael, your such a numbskull. Put a dunce cap on and sit in the corner." - Mamma
Posted by: So Says The Fool That Believes That The Worlds Problems Revolve Around Naked Short Selling | Wednesday, May 19, 2010 at 02:44 PM
A, my post today on the AUD is meant to answer your request
Many thanks!
Posted by: A | Wednesday, May 19, 2010 at 04:24 PM
Y:
Bear markets happen because investors realize they are being lied to. The scale and scope of the lies this time are so pervasive and so enormous that a big bad bear is due, the purpose of which is to wring the rottenness out of the system at all levels.
Nicely said. Couldn't agree more.
Right now the bond vigilantes and shorts are the ONLY forces trying to put honest back into government policy, with perhaps the Tea Party movement becoming a second force (at least they got one guy nominated yesterday).
I have trouble here with the bond vigilantes, as in where the fluck were they during the 2000's in the US. Why did they buy Greek bonds in the first place? Would you have bought Greek debt 2 years ago??????
The fundamental disappointment with Obama is he portrayed himself as the great reformer than turned out to be on the take with the rest of them, or just clueless. That pretend Obama would be a great national hero right now. The real Obama continues to fade as a political force - witness yesterday.
Sad but true I think.
Hock
Posted by: Hockthefarm | Wednesday, May 19, 2010 at 04:44 PM
Chinese Government has no clue on what fiscal stimulus will do to a over heating economy, now they realize all the stimulus went to properties, commodities and stock speculation, they just want the tap to turn off, period.
Thats how they manage their planned economy. There is no in between. For those who anticipate there is a rebound of SSEC, be careful as the communist doesn't understand or care about stock investors, in early 2000-2005, their economy is going strong, but the market is not doing anything because the government decided not to support any stock investment.
Posted by: Zendo | Wednesday, May 19, 2010 at 06:16 PM
sp 500 forming a bullish pennant pattern
http://niftychartsandpatterns.blogspot.com/2010/06/sp-500-pennant-in-5-minutes-chart.html
Posted by: Account Deleted | Thursday, June 03, 2010 at 11:38 AM