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October 2011

Bianco Research, L.L.C.
An Arbor Research & Trading, Inc. Affiliated Company
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Newsclips/Daily Commentary
October 27th, 2011

Jim 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 click here. 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 attached clip. 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.

" . the credit markets have bounced back in a big way. however. it looks like stocks are "right.Bianco Research.L. Page 2 of 12 October 2011 <Click on chart for larger image> Comment Additionally. it has often been the credit market that was "right." This time around. L. but they are closing the gap by rallying to stocks rather than stocks falling to bonds. They are still lagging the stock market. We have noted that over the last few years whenever a divergence between stocks and credit has opened up.C.

L.C. Page 3 of 12 October 2011 <Click on chart for larger image> . L.Bianco Research.

That alone will come as a relief to markets given how low expectations had fallen. Page 4 of 12 October 2011 <Click on chart for larger image> A Deal Is Struck The Wall Street Journal .Europe's Not-So-Grand Plan Well.L. L. He also said they had agreed to expand the firepower of the euro zone's bailout vehicle. when you remember the consequences of the failure of Lehman Brothers.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.4 trillion. and it's done." he said. by four. Mr.or five-fold—suggesting it could provide guarantees for around €1 trillion. it's a plan. Sarkozy expressed satisfaction that the Greek debt agreement wouldn't be forced on holders of Greek bonds. "France wanted to avoid the drama of a Greek default.C. But it falls far short of the "comprehensive plan" that eurozone leaders had promised and investors had been demanding. 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 billion—though they didn't say where the money would come from. German Chancellor Angela Merkel said she was "very satisfied" with the outcome. The Wall Street Journal . known as the European Financial Stability Facility. On all three main measures—restoring Greek debt sustainability. increasing the size of the bailout plan and recapitalizing the banks—key details . of bonds issued by countries such as Spain and Italy. or about $1.Bianco Research. 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.

000bny. They secured a “voluntary” deal with the banks. the best hope is that this deal buys a little more time. Bankers want to use spare cash to placate restive investors. Page 5 of 12 October 2011 remain to be worked out. Morgan decided against submitting a formal application following the Fed's discouraging feedback. There exists an implicit insurance of unlimited liability. The conflicts point to rising tensions between the biggest banks and their overseers regarding how much capital is necessary at a time of economic weakness. I doubt that global investors will rush into the tranches of the special purpose vehicle through which the eurozone wants to leverage the EFSF.S. tumultuous markets. There is no guarantee that this can be done.. The Federal Reserve Wants More Capital At U. I struggle to see how this structure can lead to a significant and sustained fall in bond spreads.P.S. said this week that its request to raise its dividend for the first time in four years had been rejected by the Federal Reserve. But it isn't the only big.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. Banks can only use leverage because central banks and governments act as ultimate guarantors of the financial system.Fed Ties Purse Strings of Banks J. made a revealing comment after the meeting when he said that banks have been doing this forever. The Financial Times . J. L.. In the case of the European financial stability facility the very opposite is the case: there is an explicit insurance of limited liability. If Greece Is Bailed Out. and they agreed the outer perimeters of a system to leverage the European financial stability facility up to about €1.000 billion to be raised It is notable that the summit has not really raised any new money. Why should governments not do so as well? The reason is simple. according to people familiar with the situation. Germany wants its exposure capped to a maximum of €210bn. All of the remaining “new” money. What policymakers agreed at 4am Brussels time on Thursday came close to what they set out to do. But none of this is going to end the crisis. But there is no new money on the table. Ireland Wants To Renegotiate Its Own Bailout Terms .L.C.The euro zone is gambling the market will judge the sum of the parts to be greater than the whole. has yet to be raised from the private sector. but this was not the day.000bn can actually be raised. many are being urged to shelve their buyback and dividend-increase requests until another Fed-supervised stress test of the biggest U. MetLife Inc. including €106bn to recapitalise the banks and over €800bn to be added to the firepower of the EFSF through leverage. regulators about potentially buying back more of its shares but the giant bank was told it might not get the answer it wanted. Banks The Wall Street Journal . whose holding company operates under a banking charter. Herman van Rompuy. apart from an increase in the private sector’s write-down of Greek debt by some €80bn. Previous Grand Plans unraveled within days under the glare of market scrutiny. That will inevitably fuel concerns that the Greek debt saga still isn't over.. thereby avoiding triggering credit-default swaps.Bianco Research. But in the spirit of caution. while the crucial issue of who will bear the losses of the debt crisis has still not fully been answered. healthy bank clashing with regulators over how it may spend its money. banks that will begin in January. The Financial Times . But the deal will still leave Greece with debt equivalent to 120% of GDP by 2020—far above what many would consider sustainable. the president of the European Council. Morgan Chase & Co. 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.P. new regulations and investor flight from bank stocks. recently approached U.EMU summit leaves €1. and conceivably from the ECB. The eventual out-turn of this summit will depend on whether this missing €1.S. from sovereign lenders outside the eurozone.

French and Italian banks need around €50 billion in fresh capital under a European Union-wide agreement forged late Wednesday that analysts said was largely in line with market expectations and is part of broader efforts to restore the region's financial health.Ireland was the second euro member to need a bailout and Prime Minister Enda Kenny is ruling out reneging on its bonds. Page 6 of 12 October 2011 Bloomberg.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. EU Banks Must Raise Capital The Wall Street Journal .. get rewarded. the top boys in the class. who are seen to be behaving badly. the government might pursue other relief given to Greece. including cheaper interest payments on aid and longer to repay it. .Ireland May Seek Ancillary Rewards from Greece’s Debt Failure Greece’s difficulty paying its debts may turn out to be Ireland’s opportunity. and to generally bolster capital held against their assets.EU banks supervisor the European Banking Authority said around 70 banks in the 27-country bloc must add roughly €106. a bond analyst at Collins Stewart Plc in Dublin.L.4 billion to their capital reserves to reflect price declines in the Greek and other sovereign debt they hold. However. according to a person familiar with the matter who declined to be identified as no final decision has been taken. whereas the Irish. 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. Greece’s 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.com .” said Gavin Blessing..”.C... “The Greeks. he said this week he’s pushing his European partners for alternative ways of reducing Ireland’s “crushing” debt. several large banks from the countries early Thursday said they won't have to turn to shareholders for the money. get nothing. “There’s a political problem for the government. L.Bianco Research. While Ireland won’t seek debt discounts. and analysts affirmed that many banks should be able to accrue capital by retaining earnings and disposing of assets. Yet. Spanish.

L. Page 7 of 12 October 2011 <Click on chart for larger image> Fund Investors Not Buying Into The Stock Rally .Bianco Research.C. L.

Page 8 of 12 October 2011 <Click on chart for larger image> MarketBeat (WSJ Blog) .Bianco Research.L. If anything. Even As Stocks Rally This month’s stockmarket rebound isn’t getting investors to put fresh cash into the market.Investors Still Dumping Stock Funds.C. The latest data from ICI says domestic long-term mutual funds had net estimated . L. they’ve been doing some profit-taking.

we do not expect the public to come rushing back into the stock market until it exceeds its October 2007 high of 1550. just hours after the deal. The public started paring back their purchases in 2004. and the head of the euro zone's bailout fund was heading to . despite the market’s runaway rally. French President Nicolas Sarkozy was set to call his Chinese counterpart.C. L. That is not happening anytime soon. There are a number of "2 and 20 managers" that would like to have this kind of timing. That signals the market’s October strength doesn’t exactly have the firepower of the investor class behind it. but an outflow nonetheless.47B for the week ended Oct. However. the public probably does not feel they are missing anything.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 collapse—but it won't be an easy sell. they did not get the 2007 high wrong. It is true the public is often a poor market timer. Comment Now before we snicker at the public for missing the rally of the last three weeks. They began selling at the market high in 2007 and have not come close to returning. Page 9 of 12 October 2011 outflows of $3. That’s the smallest weekly outflow in a month.Bianco Research. Hu Jintao. Considering the current low level of consumer confidence and high degree of skepticism. So. as a group. lets look at their longer-term flows in the monthly chart below. 19.L. Their timing has been so good the last eight years that they are still better off because of when they sold the market. <Click on chart for larger image> Asia To The Rescue? The Wall Street Journal .

"Stealing is our biggest problem at the moment.. China has other interests to pursue with Brussels. who make up 18% of the IMF. Page 10 of 12 October 2011 China and Japan. Beyond bricks and mortar. But both Asian powerhouses have made clear that while they are willing to help Europe..com . That process is already under way. as China has indicated to International Monetary Fund officials that Beijing would contribute only through the IMF and in conjunction with Brazil.” said Shen Jianguang.. The visit by Klaus Regling. In July 2010. "I had my Mac stolen—that was like $5.S. which is totally fine. and hints from European officials who have every interest in talking up buying activity. they will invest on their own terms. cap in hand. It doesn’t want to be seen spending money on a plan that even Europeans don’t want to support. amid a crowd demanding the redistribution of wealth. Imagine that. but maybe that's not all bad. Comment Reading between the lines. Spain and Italy in their hour of need.Remedial Economics The Occupy Wall Street protests have drawn huge numbers of confused and directionless young people." the 18-year-old protester told the New York Post. promising support for Greece. the other major emerging economies that together with China make up the socalled BRIC nations.500. 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.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’s efforts to resolve the region’s debt crisis. the Chinese want the U. Perverse incentives were at work at Occupy Boston. where "sanitation committee" member Lauren Digioia told the Daily News: "There's a lot of takers here and they feel entitled. of the European Financial Stability Facility. Some of them at least seem to be getting a remedial course in economics. Sarkozy might want to consider a call to Obama as well. Bloomberg. where 36-year-old Andrew Warner told the Boston Herald: "It's turning into us against them." The same is true in New York." 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. Designation as a market economy under World Trade Organization rules could be top of the list—this would limit Europe's capacity to take actions against the Chinese on trade matters." Why? Because she left it in a public place. “What worries China is that there is so much disagreement among European policy makers. Chinese state-owned shipping giant Cosco signed a 35-year lease on a Greek port for $4.” The Wall Street Journal . a Hong Kong-based economist for Mizuho Securities Asia Ltd. But beyond a few inconclusive data points. The State Administration of Foreign Exchange—the manager of China's foreign-exchange reserves—is focused on safety rather than returns. it is going to have to put some real assets. A dash into debt issued by distressed European countries appears unlikely. If Europe wants serious infusions of cash from China. Nan Terrie learned an expensive lesson last week about the importance of property rights. or EFSF.Bianco Research. or policy concessions. For a major trading nation. you can't get much more strategic than a port.L. Mr. but they don't bring anything to the table at all. it isn't clear that China's purchases of European debt have increased. India and Russia.Europe's High Price for China's Friendship Premier Wen Jiabao and other Chinese leaders have toured the continent. Occupy Wall Street & Wealth Redistribution The Wall Street Journal . on the table.2 billion. to bear some of the burden of the European bailout. probably won't bear fruit immediately.C.“China will need time to evaluate this plan very carefully. L." Cartoons .

L.C. L. Page 11 of 12 Merkel's Timeline of What Is Needed To Save The Euro October 2011 .Bianco Research.

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