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TIS MIR 05.11.10

TIS MIR 05.11.10

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Published by: Broyhill Asset Management on May 12, 2010
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05/28/2010

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EU May 11, 2010
 
 
R$¥$pyб¥$
 
The Institutional Strategist
100
 
V
ILLAGE
C
ENTER
D
RIVE
 
S
UITE
260
 
 
N
ORTH
O
AKS
,
 
M
INNESOTA
 
55127-3024
 
 
USAP
HONE
:
 
651.379.5070;
 
T
OLL
F
REE
:
 
866.527.8698
 
F
AX
:
 
651.379.5080
 
 
E-M
AIL
TIS@TISG
ROUP
.N
ET
 
This report has been prepared by
TIS
Group on behalf of itself and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy secu-rities. While all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it shouldnot be relied upon as such. The market, currency, economic, political, business, technological and other factors upon which our analysis are based may change without warning. Accordingly, all opinions expressed herein aresubject to change without notice. From time to time,
TIS
Group and any officers or employees of 
TIS
Group may, to the extent permitted by law, have a position or otherwise be interested in any transaction, in any invest-ments (including derivatives) directly or indirectly which are the subject of this report. This report is provided solely for the information of clients of 
TIS
Group who are expected to make their own investment decisionswithout reliance on this report. Neither
TIS
Group nor any officer or employee of 
TIS
Group accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents.
This report may NOT be reproduced, distributed or published by any recipient for any purpose without the prior express consent of 
TIS
Group, Inc.
 
M
 ARKET 
I
 NTELLIGENCE
EPORT 
 
 What Did Not Happen in the EU Bail-out
 —I find what did not happen in the EUbailout almost as important as what did occur. This was a credit easing, not QE, so I do notexpect to see a sustained rally in equities or incredit as the ECB bought a few bonds, butnothing like the Fed's QE program, which justended. If I were the European authorities andI saw the Euro/Dollar behave the way it didthe day after a bailout, I would be very worriedindeed. The Euro should have strengthened, I would think by a lot, but ended the day virtu-ally flat. If I were sitting in Beijing watching this and I was responsible for allocating China's $2 trillion, the price action in the FX markets on Monday would be enough to con- vince me not to be a buyer of Euros. What else did not happen? Since the bailoutsof the credit bubble era began in 1997, every single one has been accompanied by a cut ininterest rates, sometimes co-coordinated on aglobal scale. There was no cut this time be-cause there is no room in Europe to reducerates.In fact, in the U.S., the Fed is preparing totighten monetary policy at the wrong momentI think, but if the Fed begins to reduce the sizeof its balance sheet, that may amount to a de-facto tightening which is Dollar bullish versusthe Euro. The ECB has no chance to cut ratesnow. That there was no reduction in interestrates is very telling about the global investmentlandscape. We have reached the point whereusing the blunt tool of interest rates is nolonger available to most of the Westerneconomies. Instead, it appears piling new debton top of old debt is the next phase in thecredit bubble. My question is from where isall of this money going to come? Third, I note that the UK is not participating in the bailout. To some extent that may bebecause the government is in limbo, butfrankly I don't think the UK can afford to par-ticipate anyway. This is astonishing that one
German Government Bond 2-Year Yield
Courtesy of Bloomberg LP
Greece 10 & 5 Year CDS
Courtesy of Bloomberg LP
 
EU May 11, 2010
 
 
R$¥$pyб¥$
 
The Institutional Strategist
100
 
V
ILLAGE
C
ENTER
D
RIVE
 
S
UITE
260
 
 
N
ORTH
O
AKS
,
 
M
INNESOTA
 
55127-3024
 
 
USAP
HONE
:
 
651.379.5070;
 
T
OLL
F
REE
:
 
866.527.8698
 
F
AX
:
 
651.379.5080
 
 
E-M
AIL
TIS@TISG
ROUP
.N
ET
 
I
F YOUR FIRM UTILIZES A VOTING SYSTEM TO PAY FOR RESEARCH
,
PLEASE VOTE FOR US
.
 
(TIS
 
G
ROUP IS AN
 
INDEPENDENT RESEARCH BOUTIQUE
.
 
W
E DEPEND ON YOUR SUPPORT
.)
 
M
 ARKET 
I
 NTELLIGENCE
EPORT 
 
of the three largest economies in Europe isnot to be included in the largest EU financialrescue in its history and by itself is anotherimportant signal. Very rough times lie aheadfor the UK economy and I am very bearish onnot only the economy but on Sterling/Dollar.Formation of a government may give Ster-ling/Dollar a bounce to the mid 1.50's, but I would be a seller there with my target in the1.23-1.27 range.Fourth and perhaps most important, thisnearly $1 trillion loan package is dependent onstructural reforms and major fiscal adjust-ments being made across Continental Europe. That translates into higher taxes, lower gov-ernment spending, higher unemployment, andan extension/deepening of the EU's recession.Can the EU move fast enough to convince themarkets that the groundwork is being laid forgrowth in the private sector rather than thepublic sector? The track record is not good with regard to the EU moving quickly or inimplementing structural reforms. In addition,the political situation in Europe is becoming  very difficult and not at all amenable to fiscalretrenchment. The UK has a hung Parlia-ment, Mrs. Merkel's CDU party lost a key elec-tion last week which weakens her grip onpower, and the Greek political situation looksuntenable to me. When the terms under which Athens took IMF money begin to movethrough the Greek economy, there will be ad-ditional strikes, strikes have already been vio-lent and calls for a new government willappear. I expect the same scenario to strike inSpain, where the problem is not governmentdebt but bank balance sheets and overlever-aged real estate market. Will the ECB bailoutSpanish banks which have a U.S. style real es-tate crisis on their books?Finally, I have not seen this in the commen-tary today in the television media, but themedicine which Europe is adopting runs a realrisk of developing into another recession of some significant magnitude. Greece hassigned up for a near depression, which will goon for 2-3 years. This will spill over into
S&P 500—Probably Trapped in a Trading RangeNow—1,180-1,200 BecomesResistance
Courtesy of Bloomberg LP
Euro Stoxx 50—This Chart Looks Much MoreDifficult Than the S&P 500
Courtesy of Bloomberg LP

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