Rumors were flying Thursday as equity markets plunged roughly 9% before
rebounding, eventually closing down 3.5%. One being that a trader from Citi made
an erroneous trade in E-Mini S&P futures by entering incorrect order size by typing a
B for billion rather than M for million. This doesn’t make sense for a number of
reasons. In addition, it doesn’t explain the various equity issues that showed prints
of zero or a penny to others that showed prints of 100,000. Rather spending time
dissecting why it doesn’t make sense, I will just note that NADAQ, NYSE and the
ECN’s announced they would be busting trades that meet a certain criteria and CME
Group released a statementsay in g,

“Upon review of yesterday's trading activity in CME Group markets, we
have concluded that we did not experience technology or systems issues
associated with trading activity between 1:00 and 2:00 p.m. CST.
Additionally, it does not appear that CME Group clearing firms or customers
experienced any significant technological failures or trading errors during
this timeframe.

Finally, CME Clearing participants have not experienced any difficulties as a result of market events yesterday and all clearing members remain in good standing having met all financial obligations to the CME Clearing House.”

As of Sunday, origins of anomalies in P&G are being traced to a broker in
Chicago. A chart of USD/JPY and P&G is on page 8 showing that selloff in USD/JPY
was almost over before selling in P&G started. While a case to be made that high
frequency trading systems exacerbated yesterday’s market plunge, looking to
computer glitches, etc. is obscuring what is in plain sight.

The most notable moves on Thursday, in my mind were in Eurodollars and
USD/JPY (Charts on next page). It is unlikely that a computer glitch in U.S. equity
markets caused FX markets to move like they did. Thanks to Ed Bradford for
bringing swap spreads to my attention and Professor Pinch forh ig h ligh tin gLIB OR -
EURIBOR spreads.

The first, most obvious source of concern is the Euro Zone/Greece debt
crisis. Thursday was the European Central Bank’s first meeting since the EU and IMF
extended a €110bil emergency loan to Greece. In addition, the ECB suspended its
minimum credit rating threshold in collateral eligibility requirements to allow (now
downgraded) Greek Government bonds to be posted as collateral for ECB funding.

I was particularly struck by ECB President Jean-Claude Trichet’s apparent lack of concern for the problem faced by the Euro
Zone during Thursday’s ECB press conference, only reiterating that “Greece will not default”. The terms of the EU/IMF require
Greece to narrow its budget shortfall from 13.6% of GDP to 7.6% in 2011, to 2.6% in 2014. This approaches extremely optimistic
given the fact that Government Expenditure was 50.4% and revenue was 36.9% of Greece’s GDP as of 2009 (Source – Eurostat).

A “Flash Crash”? Probably not.
EU & IMF agree on €750bil bailout
ECB will intervene in public and private debt

Major Central Banks
BoJ intervenes Friday morning in Asia.
Q1 GDP increased by 3.2%
Unemployment rate up to 9.9% from 9.7% in

To narrow its deficit to 7.6% in
2011, Greece would have to reduce total
expenditure by 11% from 2009 levels
assuming revenue is unchanged, which in
itself is unlikely (2010 total expenditure is
presumable higher, but most recent
Eurostat GFS data is only to 2009). As I am
writing this, the EU has agreed on a loan
package worth €750bil, €440 of which will
be backed by EU governments and €250bil
will come from the IMF as well as an
additional €60bil expansion of the balance
of payments facility that was used to aid
Latvia and other non-EU countries in 2008.
The ECB also said it would intervene in
public and private secondary debt markets.

On our side of the Atlantic, the Fed
opened swap lines with the ECB, Swiss
National Bank, and Banks of England,
Canada, and Japan. The Fed press release
cited re-emergence of strains in short term
U.S. Dollar funding. Immediate market
reaction should be USD selloff.

The BoJ also intervened Thursday
evening (Friday morning in Asia), offering
emergency funding of ¥2trillion. The BoJ
has made it clear it will defend the ¥87.00-
88.00 level in USD/JPY. We have been
positive on USD/JPY from 89.00 in January
based on medium term expectation of
higher U.S. interest rates. While 88.00 is
significant support, the sharp rebound and
generally high FX volatility has us stepping
back after Thursday’s move while USD/JPY
is between 90.00-93.00 because we cannot
rule out a move lower in the near term.

The focus, at least from U.S. based investors was on
U.S. equities. After a 77% rally from March 2009 lows to April
2010 highs in the S&P 500, equities were due for a correction.
With a combination of fundamental and technical factors
supporting our thesis, we think equities are oversold in the
immediate term, but have lower to go as we move into
summer.The rally from March 2009 to March 2010 saw

traded in SPY and 10 million contracts in E-Mini S&P 500
futures. In addition, sell volume was relatively higher than
buy volume. Last week’s volume was roughly a third higher
than average volume over last year’s rally.

1200 in the S&P 500 was support pre-Lehman/AIG.
We expect this to be relatively strong resistance going
forward.