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Bianco Research, L.L.C.An Arbor Research & Trading, Inc. Affiliated Company

Independent - Objective - Original

Newsclips/Daily Commentary

October 27th, 2011Jim Bianco On Yahoo Finance

Comment

Jim Bianco was on Yahoo Finance yesterday discussing Europe, market correlation, the U.S. downgrade and

China. To view the interview click on the image above. To view any of our recent interviews clickhere.

Yahoo Finance - Stocks, Sentiment Seesaw as EU Summit Doubts Arise Stocks have given back early

gains, only to reverse course yet again as sentiment flip-flops over hopes that European leaders will emerge

from the summit underway in Brussels with a coherent plan to resolve their debt crisis. "There's a lot riding

on Europe giving us some kind of a deal," says Jim Bianco, President of Bianco Research in the attachedclip. Bianco, like most of us, says he has been repeatedly disappointed by Europe's process to find a

resolution. The journey continues to be filled with delays, disagreement, and unforeseen detours. Whatever

your expectations for today's policy unveiling, the execution will 1) take time, and 2) allow investors to

refocus on a world full of underlying economic ugliness. "We've gone from awful to poor," says Bianco, in

reference to the global economy. And stocks could easily retrace October gains if we see a few more

clunkers like the latest consumer confidence reading, or another credit rating downgrade as has been

discussed this week. Bianco believes that if the U.S. indeed loses another AAA rating by Moody's or Fitch,

it will have wider implications than the first cut by Standard & Poor's back in August.

Comment

It looks like the stock market is finally resolving the three month trading range to the upside. This is a bullish

development.

Bianco Research, L.L.C. Page 1 of 12 October 20
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Comment

Additionally, the credit markets have bounced back in a big way. They are still lagging the stock market, but they

are closing the gap by rallying to stocks rather than stocks falling to bonds. We have noted that over the last few

years whenever a divergence between stocks and credit has opened up, it has often been the credit market that

was "right." This time around, however, it looks like stocks are "right."

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A Deal Is Struck

The Wall Street Journal - EU Forges Greek Bond Deal European leaders said they secured a deal to reduce

Greece's debt after they labored overnight and into Thursday morning to find agreement on what they had

billed as a blockbuster package to stem the Continent's debt crisis. French President Nicolas Sarkozy said

after the marathon negotiating session that the leaders had reached agreement with private banks on a

"voluntary" 50% reduction of Greece's debt in the hands of private investors. He also said they had agreed

to expand the firepower of the euro zone's bailout vehicle, known as the European Financial Stability

Facility, by four- or five-foldsuggesting it could provide guarantees for around 1 trillion, or about $1.4

trillion, of bonds issued by countries such as Spain and Italy. Mr. Sarkozy expressed satisfaction that the

Greek debt agreement wouldn't be forced on holders of Greek bonds. "France wanted to avoid the drama ofa Greek default, when you remember the consequences of the failure of Lehman Brothers, and it's done," h

said. German Chancellor Angela Merkel said she was "very satisfied" with the outcome. The leaders also

agreed on a plan that would boost the capital buffers of the stragglers among the Continent's 70 biggest

banks by 106 billionthough they didn't say where the money would come from.

The Wall Street Journal - Europe's Not-So-Grand Plan Well, it's a plan. That alone will come as a relief to

markets given how low expectations had fallen. But it falls far short of the "comprehensive plan" that euro-

zone leaders had promised and investors had been demanding. On all three main measuresrestoring

Greek debt sustainability, increasing the size of the bailout plan and recapitalizing the bankskey details

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remain to be worked out. Previous Grand Plans unraveled within days under the glare of market scrutiny;

the best hope is that this deal buys a little more time. The only significant new element to emerge from

Wednesday's euro-zone summit was the decision to ask Greek private-sector bondholders to accept a 50%

haircut on their exposures. The euro zone believes this can be achieved on a voluntary basis, thereby

avoiding triggering credit-default swaps. But the deal will still leave Greece with debt equivalent to 120%

of GDP by 2020far above what many would consider sustainable. That will inevitably fuel concerns that

the Greek debt saga still isn't over...The euro zone is gambling the market will judge the sum of the parts tobe greater than the whole. But there is no new money on the table, while the crucial issue of who will bear

the losses of the debt crisis has still not fully been answered.

The Financial Times - Half measures and wishful thinking do not a solution make The day may yet come

when the eurozone finally agrees a comprehensive package to end the crisis, but this was not the day. What

policymakers agreed at 4am Brussels time on Thursday came close to what they set out to do. They secured

a voluntary deal with the banks, and they agreed the outer perimeters of a system to leverage the

European financial stability facility up to about 1,000bny. But none of this is going to end the crisis.

Herman van Rompuy, the president of the European Council, made a revealing comment after the meeting

when he said that banks have been doing this forever. Why should governments not do so as well? The

reason is simple. Banks can only use leverage because central banks and governments act as ultimate

guarantors of the financial system. There exists an implicit insurance of unlimited liability. In the case ofthe European financial stability facility the very opposite is the case: there is an explicit insurance of

limited liability. Germany wants its exposure capped to a maximum of 210bn. I doubt that global investor

will rush into the tranches of the special purpose vehicle through which the eurozone wants to leverage the

EFSF. I struggle to see how this structure can lead to a significant and sustained fall in bond spreads.

The Financial Times - EMU summit leaves 1,000 billion to be raised It is notable that the summit has not

really raised any new money, apart from an increase in the private sectors write-down of Greek debt by

some 80bn. All of the remaining new money, including 106bn to recapitalise the banks and over

800bn to be added to the firepower of the EFSF through leverage, has yet to be raised from the private

sector, from sovereign lenders outside the eurozone, and conceivably from the ECB. There is no guarantee

that this can be done. The eventual out-turn of this summit will depend on whether this missing 1,000bn

can actually be raised.

The Federal Reserve Wants More Capital At U.S. Banks

The Wall Street Journal - Fed Ties Purse Strings of Banks J.P. Morgan Chase & Co. recently approached

U.S. regulators about potentially buying back more of its shares but the giant bank was told it might not get

the answer it wanted, according to people familiar with the situation. J.P. Morgan decided against

submitting a formal application following the Fed's discouraging feedback. But it isn't the only big, healthy

bank clashing with regulators over how it may spend its money. MetLife Inc., whose holding company

operates under a banking charter, said this week that its request to raise its dividend for the first time in fou

years had been rejected by the Federal Reserve. The conflicts point to rising tensions between the biggestbanks and their overseers regarding how much capital is necessary at a time of economic weakness,

tumultuous markets, new regulations and investor flight from bank stocks. Bankers want to use spare cash

to placate restive investors. But in the spirit of caution, many are being urged to shelve their buyback and

dividend-increase requests until another Fed-supervised stress test of the biggest U.S. banks that will begin

in January.

If Greece Is Bailed Out, Ireland Wants To Renegotiate Its Own Bailout Terms

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Bloomberg.com - Ireland May Seek Ancillary Rewards from Greeces Debt Failure Greeces difficulty

paying its debts may turn out to be Irelands opportunity. Greeces failure to cut spending and boost

revenue by enough to meet targets set by the European Union and International Monetary Fund prompted

bondholders to accept a 50 percent loss on its debt. While Ireland wont seek debt discounts, the

government might pursue other relief given to Greece, including cheaper interest payments on aid and

longer to repay it, according to a person familiar with the matter who declined to be identified as no final

decision has been taken. Theres a political problem for the government, said Gavin Blessing, a bondanalyst at Collins Stewart Plc in Dublin. The Greeks, who are seen to be behaving badly, get rewarded,

whereas the Irish, the top boys in the class, get nothing....Ireland was the second euro member to need a

bailout and Prime Minister Enda Kenny is ruling out reneging on its bonds. Yet, he said this week hes

pushing his European partners for alternative ways of reducing Irelands crushing debt.

EU Banks Must Raise Capital

The Wall Street Journal - European Banks Look to Reassure on Capital Needs Europe's banks sought to

reassure investors Thursday that they won't tap them for fresh capital needed under a 106 billion

recapitalization plan designed to make the sector more resilient to sovereign shocks. Spanish, French and

Italian banks need around 50 billion in fresh capital under a European Union-wide agreement forged lateWednesday that analysts said was largely in line with market expectations and is part of broader efforts to

restore the region's financial health. However, several large banks from the countries early Thursday said

they won't have to turn to shareholders for the money, and analysts affirmed that many banks should be

able to accrue capital by retaining earnings and disposing of assets...EU banks supervisor the European

Banking Authority said around 70 banks in the 27-country bloc must add roughly 106.4 billion to their

capital reserves to reflect price declines in the Greek and other sovereign debt they hold, and to generally

bolster capital held against their assets. Final shortfall estimates will be released next month and banks will

have until the end of the year to tell domestic regulators how they plan to come up with the money.

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Fund Investors Not Buying Into The Stock Rally

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MarketBeat (WSJ Blog) - Investors Still Dumping Stock Funds, Even As Stocks Rally This months stock-

market rebound isnt getting investors to put fresh cash into the market. If anything, theyve been doing

some profit-taking. The latest data from ICI says domestic long-term mutual funds had net estimated

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outflows of $3.47B for the week ended Oct. 19. Thats the smallest weekly outflow in a month, but an

outflow nonetheless, despite the markets runaway rally. That signals the markets October strength doesn

exactly have the firepower of the investor class behind it.

Comment

Now before we snicker at the public for missing the rally of the last three weeks, lets look at their longer-term

flows in the monthly chart below. The public started paring back their purchases in 2004. They began selling at

the market high in 2007 and have not come close to returning. There are a number of "2 and 20 managers" that

would like to have this kind of timing. It is true the public is often a poor market timer. However, they did not ge

the 2007 high wrong. Their timing has been so good the last eight years that they are still better off because of

when they sold the market. So, as a group, the public probably does not feel they are missing anything.

Considering the current low level of consumer confidence and high degree of skepticism, we do not expect the

public to come rushing back into the stock market until it exceeds its October 2007 high of 1550. That is not

happening anytime soon.

Asia To The Rescue?

The Wall Street Journal - Europe Turns to Asia for Help With Bailout European officials have quickly

turned to Asia to help bankroll their plan to ease Greece's debt obligations and prevent its fiscal

collapsebut it won't be an easy sell. French President Nicolas Sarkozy was set to call his Chinese

counterpart, Hu Jintao, just hours after the deal, and the head of the euro zone's bailout fund was heading to

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China and Japan, cap in hand. But both Asian powerhouses have made clear that while they are willing to

help Europe, they will invest on their own terms. The visit by Klaus Regling, of the European Financial

Stability Facility, or EFSF, probably won't bear fruit immediately, as China has indicated to International

Monetary Fund officials that Beijing would contribute only through the IMF and in conjunction with

Brazil, India and Russia, the other major emerging economies that together with China make up the so-

called BRIC nations.

Comment

Reading between the lines, the Chinese want the U.S., who make up 18% of the IMF, to bear some of the burden

of the European bailout. Sarkozy might want to consider a call to Obama as well.

Bloomberg.com - Sarkozy to Seek China Aid as EU Expands Rescue Fund French President Nicolas

Sarkozy said he plans to call Chinese counterpart Hu Jintao today to discuss China contributing to Europe

efforts to resolve the regions debt crisis...China will need time to evaluate this plan very carefully, said

Shen Jianguang, a Hong Kong-based economist for Mizuho Securities Asia Ltd. What worries China is

that there is so much disagreement among European policy makers. It doesnt want to be seen spending

money on a plan that even Europeans dont want to support.The Wall Street Journal - Europe's High Price for China's Friendship Premier Wen Jiabao and other

Chinese leaders have toured the continent, promising support for Greece, Spain and Italy in their hour of

need. But beyond a few inconclusive data points, and hints from European officials who have every interes

in talking up buying activity, it isn't clear that China's purchases of European debt have increased. The Stat

Administration of Foreign Exchangethe manager of China's foreign-exchange reservesis focused on

safety rather than returns. A dash into debt issued by distressed European countries appears unlikely. If

Europe wants serious infusions of cash from China, it is going to have to put some real assets, or policy

concessions, on the table. That process is already under way. In July 2010, Chinese state-owned shipping

giant Cosco signed a 35-year lease on a Greek port for $4.2 billion. For a major trading nation, you can't ge

much more strategic than a port. Beyond bricks and mortar, China has other interests to pursue with

Brussels. Designation as a market economy under World Trade Organization rules could be top of thelistthis would limit Europe's capacity to take actions against the Chinese on trade matters. Mr. Wen has

already dropped a broad hint that China's support for a debt-ridden Europe would be tied to a change of

heart by the EU on this key question.

Occupy Wall Street & Wealth Redistribution

The Wall Street Journal - Remedial Economics The Occupy Wall Street protests have drawn huge numbers

of confused and directionless young people, but maybe that's not all bad. Some of them at least seem to be

getting a remedial course in economics. Nan Terrie learned an expensive lesson last week about the

importance of property rights. "Stealing is our biggest problem at the moment," the 18-year-old protester

told the New York Post. "I had my Mac stolenthat was like $5,500." Why? Because she left it in a publicplace, amid a crowd demanding the redistribution of wealth. Imagine that. Perverse incentives were at work

at Occupy Boston, where 36-year-old Andrew Warner told the Boston Herald: "It's turning into us against

them." By "them" he didn't mean rich bankers but street vagrants: "They come in here and they're looking

at it as a way of getting a free meal and a place to crash, which is totally fine, but they don't bring anything

to the table at all." The same is true in New York, where "sanitation committee" member Lauren Digioia

told the Daily News: "There's a lot of takers here and they feel entitled."

Cartoons

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Merkel's Timeline of What Is Needed To Save The Euro


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