It is very unusual that the markets are lower everyday on higher volume. Although volume is higher it is not out of tolerance and therefore not indicating any extraordinary stress on the markets at this time….also have started to see put assignments, but only on a deep ITM WM37 within expiry tolerance.

WE NEED TO ESTABLISH A FLOOR…Expect weakness into the start of next week and then a rally to month end….THE SHORTS WILL COVER ON ANTICIPATION OF A RELIEF RALLY

News of the Greek economy has not been good for a long time and austerity measures imposed by the Eurozone in exchange for loans has made the matter much worse.

Interest rates are the highest of the developing world, unemployment is over 25%, Gdp is contracting at over 4%!! THIS IS NOT SUSTAINABLE

WHAT HAPPENS IF GREECE REJECTS THE EURO ON ITS TERMS?

People will start to get concerned about Euro deposits in Greek banks. This will put pressure on deposits and liquidity in the Greek economy will GO DOWN!!

Foreign money will not want to go into Greece investment.

With the banking system dry and investment fleeing the country, the prospect looks terrible!

What needs to happen?

The Governments has to encourage foreign investment and the only way is to lower capital taxes.

Real estate values and the economy is so depressed that a small reduction could impact in a big way. BUT LOWERING TAXES IS NOT ENOUGH, THEY ALSO NEED A STABLE CURRENCY..THE EURO

The Government has to allow its citizens to be in a unrepressed society. IT HAS TO BE LESS INVOLVED. It has to turn over community functions to the community. This could include security, schooling, healthcare, infrastructure maintenance. IN A SOCIATY WHERE THERE IS CORUPTION AND LACK OF TAX PARTICIPATION, THE CITIZENS HAVE TO CONTRIBUTE THEIR TIME IN LIEU OF TAX.

The Government has to become smaller. It has to balance its books, and since it cannot raise revenues, OR BORROW MONEY AT A RESONABLE PRICE.. IT MUST LOWER SPENDING.

THE EUROZONE UNITED

We need to see European leaders providing more certainty as to the future of the currency. There has to be containment of the current debts established and protection of all of the banks assured without any doubt.

There needs to be a plan in place which provided an environment for economic prosperity, and the only way to do this is to have a plan of relief of current debt, bring taxes down to a established level of acceptability, balance the budget by making government smaller, and transferring its responsibilities to a smaller community consortium. This will have the outcome of increasing GDP and then they will be able to pay off or maintain its current debt.

The Greek people are hurting under the proposed austerity programs because the government has raised taxes. The Greek people should turn their attention to controlling government spending without raising taxes. Smaller government is the only way to lighten the tax burden.

Under the current proposal, Greece has the added benefit of having other countries help with their budget problems. The two most obvious advantages are: Payments to meet cash flow requirements, lower interest rates on new debt due to EU17 guarantees. Greece is better off under the EFSF because a default would create an environment where the government would be unable to fund its obligations to foreigners, Greece would have leave the Euro currency and to start to print its own money. The Euro currency has been a valuable instrument in increasing standard of living. Therefore this event would lower the standard of living for Greek citizens.

Why would there be a need for a referendum?

There are several possible scenarios I can think of, the most interesting are: 1) The people of Greece would not be able to complain about the necessary austerity measures if they have a say. 2)The CDS instruments written on Greek debt are currently not exercisable under the EFSF. The people of benefit of a default might be applying influence. 3)It will scare the financial markets and maybe improve the terms for Greece.

The end scenario

As long as the country of Greece is getting funds from the other countries, and as long as they can spend more under the agreement because they are receiving funds at a lower cost, it is in their best interest to agree to the EFSF.

What will be the real problem if Greece defaults

The real problem lies in the financial sector, in not only Greece but also other countries where banks are exposed to Greek sovereign debts. According to a list of banks’ exposure to Greek debt earlier this year, only Greek banks and a Cyprus bank have heavy exposure as percentage of asset to Greek sovereign debt. All other banks only have 1% of assets or less exposed to Greece default risks. If that remains the case today, the direct effect of Greece default on the financial sector outside of Greece will not be large, regardless of whether the haircut will be 20% or 50%.

The real problem is that Greece is not alone, the GDP of Greece only accounts for 3% of the entire Euro 17 countries, Ireland and Portugal accounts for 2% each. The real problem will be the relatively larger countries, who are also in trouble, namely Spain, Italy and even France, who accounts for 12%, 17% and 20% respectively of eurozone GDP.

How much sovereign debt do the troubled European countries have outstanding in total?

According to eurostat, by the end 0f 2010, the government debt outstanding is as the follows:

Spain, Italy and France together has more than 4 trillion of outstanding debt by the end of 2010. If any of these governments cannot meet their obligations, the current 1 trillion EFSF in discussion is insufficient to help. (Note the fact that part of the EFSF itself is backed up by the troubled countries).

How long can the ECB buy sovereign debt of troubled countries?

The European Central Bank (ECB) has been purchasing government bonds of the troubled countries from banks and private sector, and will keep doing so to help stabilizing the market, according to the new president Draghi.

The latest ECB consolidated balance sheet shows a total for September of €27,065b, an increase of  €1,253.8b from the end of 2010. If the ECB is willing to expand its balance sheet, then purchases can go on for a long time. This will result in inflation causing higher nominal GDP and lower debt to GDP ratio. Also debt will be easier to repay.

But the ECB has said that they will not finance governments. Furthermore, there is a “no-bail-out clause” (Article 125) of the Treaty on the Functioning of the European Union.

On October 27, 2011, a voluntary 50% reduction of Greek sovereign debt by the private holders was agreed to. Now projections of debt to GDP have reduced to 120%. Greece will do everything it can to get funds from outside of the country to sustain its spending. When the day comes that they cannot get the money, they will default.

What is Occupy Wall Street about?

There are several reasons so far for these waves of protest. First, it started with a blog post by a Vancouver, BC based website, expressed an idea of occupying Wall street by setting up tents, kitchens and live in a park for some time. Owners of the blog post did not claim responsibility or leadership for this protest, and many joined basically because they liked the idea that they heard through social networking websites. The original protest were fostered by the frustration of tax payer money being used to bail out the banks and Wall Street.

Why is there limited effect from the protests?

So far there has been waves of demonstrations on the streets, press reports, but no real effect has been made. We believe the reason for this is that there is no clear aim of the protests. Furthermore, protestors are not sending any unified message about what they want to change. Many protestors do not fully understand the government stimulus and bailout programs, and thus cannot articulate their message. The slogan that seems to stick is “I am the 99%”.

Should there be a protest, what message need it deliver?

The US government and the Federal Reserve has taken action by increasing the deficit and printing money. The reason the leaders always give to justify their actions was to help the unemployed. But reviews of the last few years tend to indicate that banks and large corporations (through various bailouts, quantitative easing and stimulus programs) have been the largest benefactors of the programs. For example, The TARP program that helped companies such as AIG, General Motors and many small banks all of them poorly managed. There have been reports that the government has made a profit on their actions but this profit is so far fictional as it is held in equity on the books of the government. As of today, US Treasury still has 77% stake in AIG, 32% stake in General Motors, 74% stake in Ally Financial Inc, and equity in many other smaller financial institutions. That means every US tax payer has to bear the credit risks in these companies. The Federal Reserve created Maiden Lane II, LLC to help AIG. By purchasing unwarranted toxic assets from AIG , they secured the couterparty risk of the big financial institutions, like Goldman Sachs, which now could be paid 100 cents of AIG obligations to them instead of taking a large loss. The Fed has not been transparent as to the cash flows of the debt, and so far have not been paid back. AIG recently offered to buy back the debt.

The unemployment rate in the US has increased to nearly 9% in Feb 2009, and remained in the 8.7%-10.6% range ever since, and inflation has increased to over 3% including gasoline at almost 4 dollars a gallon. The stock market has rallied, high end home prices are setting records, and conspicuous spending by the affluent is very apparent, and executive earnings have been increasing at double digits.

Therefore, the message that needs to be delivered should really be that the government need to spend money on job creation.

• This means the fed should not print any more money, interest are artificially low enough, and only the traders will profit. Also there is a danger of more inflation and more bubbles if the economy is not allowed to stand on its own legs.
• The Federal government should balance its books and control its spending. They should be promoting infrastructure programs and energy refurbishing programs which can be sold to the private sector.

The beginning of the EFSF: MAY 2010 to help Ireland

Some quick notes about the characteristics of the facility:

The issuance of Euro bonds will be done by the German DMO (Bundesrepublik Deutschland – Finanzagentur GmbH), but the EFSF is the issuer.

EFSF is not a preferred creditor for the distressed bonds that it purchses , that means it has the same priority as any other creditor who purchases the sovereign bonds. Finnland was not comfortable with this arangement and demanded collateral. A complicated deal involving a bond swap was created and added as a feature to the EFSF for all participants. But it isn’t cheap so no one except finland is expected to use the feature.

Default – If a member country default on its sovereign debt that EFSF invested in, the  payments is made from what is called a cash buffer. If a member country cannot meet its obligations as a guarantor, other countries are required to cover the portion.

Historical activities on the fund:

• November 28 2010: ireland recieves 22.5b euros
• January 252011: first 5b  bonds issued
• April 7 2011: portugal recieves up to 78b
• July 21 2011: eurozone leaders agree to enlarge the efsf to 780b:
  This increase expanded the lending capacity to 440billion. This is because of a mechanism, backed by each country participating, was increased from 120% to 165%.

The amount each country now agreed to overgarantee is raised to 165%. This was to preserve the AAA rating of the eurobonds issued to fund the EFSF. As of today only 6 countries have aaa ratings : Germany, the Netherlands, Finland, Austria, Luxenburg and France which is 62.4% of the fund.  France was just put on negative watch. If France which is 20.32% was to lose its AAA rating then only 42.08% of the fund or 327b.

The idea is to spread the risk over all members using the euro: 

The countries that will require the funding the most are contributing : Greece 2.80%. Portugal 2.58%, Belgum 3.46%, Spain 11.86%, Ireland 1.58%, Italy 17.86%, and France 20.32%= 60.46% to the fund.
Refer to Wikipedia page for the contribution from each country.

This is a reward for poor fiscal spending habits. The richest countries, especially germany have the most to lose. With the poorest countries having the most to gain.

In October all of the participating members were voting on the new EFSF?

Each member state has been voting on the enhanced powers of EFSF.  This will allow the stability fund to buy sovereign debts of stressed euro-area nations, help troubled eurozone banks, and offer
lines of credit to governments. The fund was expanded to 780B and there is an increase in the overganatee from 120% to 165% to maintain a AAA rating.

Expansion of the EFSF to 2 Trillion

Rumors spread that French and German officials are ready to enter a 2 trillion rescue fund.

A quick review of the proposal: 4 points that raise serious doubts about the success of this plan

1. the plan is supposed to include a systemic bank recapitalization to a 9% capital ratio. The list of banks could be as high as 60! Most banks work on a tagible capital ratio of less than 4%. So the amount of money required would be enormous. Furthermorethis should be takin with a grain of salt because the capital ratio they are talking about is probably risk adjusted. Daxia had a tier 1 capital raio over 13% but had to be nationalized two weeks ago because it couldn’t meet its short term financing obligations.
2. the fund doesn’t have 2 trillion dollars of which aprox 60% is being backed by the weak economies that the fund is being created for.  These obligations are off
   the books,which means that they are not recorded in their reported fiscal
   deficit figures.
3. the fund will require  fiscal responsibility. This will be painful. If the goals are to be meet then the countries will have to record fiscal balanced budgets and even small surpluses. Recent history does not revel a promising outcome. Countries have a spending adiction and will increase taxes before they cut government expenditures. If spending isn’t rained in and fiscal budgets aren’t balanced then the situation will not be solved.
4. in the past countries have been able to inflate their way out of similar situations by printing money, but because these countries are all tied to the euro currency and do not have control of the printing press, they have to look to other means. Austerity will result in contraction making it more difficult to afford their debt obligations. Defaults will probably be the only sollution.

Alcoa, who is the first to release Q3 earnings, reported disappointed numbers. The EPS of $0.15 missed the target by 7 cents. Alcoa is important because its main product aluminum is widely used as one of the major raw materials in many industries. Although they are supplying a record amount of aluminum, they are at a slower pace for the quarter. The expansion in demand for this year is estimated to be 12%. The CEO forecast the need for aluminum to be doubled in 10 years.

Alcoa (AA) is down 4.17% after market now.

The market is again on light volume today, stayed from yesterday’s close level. The uncertainties in the short term are evident in Alcoa’s earnings and might be indicative of this earnings season.

How to interpret the consumer credit outstanding numbers?

Consumer Credit Outstanding data for August showed a decrease of 4.5% annualized. But the difference on the monthly basis is only -0.389%. Furthermore, 4.5% of the current 2.44t is equal to $100b. The last time, the yearly credit change by $100b was 2008-2009.

When we analyzed the very detailed table reported by the Fed, we see that year over year total credit is actually higher. Further investigation shows that the federal government non-revolving debt is responsible for $75b increase. Private sector credit is falling, but being replaced by the federal government. The not seasonally adjusted numbers are actually higher in all categories except pools of securitized assets, which suffered major corrections during the 2008 financial crisis.

The numbers have to be watched, but the latest report does not seem negative.

Is this week’s market optimism going to hold?

The employment numbers came out today, and there was an initial mild positive reaction by the markets. The Canadian dollar spiked on the news but ended the day neutral. The financial sectors sold off heavily.

This concludes a traders week of testing support and resistance levels. It is important to notice that on Tuesday we tested the 1080 level on the S&P500 and rallied to re-test the 1165 level. Today the market met resistance at 1170. We believe that 1080 is a very strong support level and we reiterate the 1170 level that was last seen on the FOMC meeting day.

Next weeks everyone is focused on the earnings releases, starting with Alcoa.

Private funding is now available for small businesses in Ontario

A great alternative to traditional funding options for small businesses is available. Many private investors are now offering financial opportunities to small businesses with great potential. Funding of such is often referred as venture capital. The transaction is straight forward, venture capitalists basically purchase part of the company based on a strong goodwill forecast, and the company seek fast growth opportunities with the extra capital invested.

The benefits of private equity vs traditional ways of funding are:

• amount is large enough to fund the business with the desired expansion
• no collateral is required
• no complicated approval process such as bank loan applications
• investors are usually experienced business professionals where the company could get valuable advice from

There are companies and individuals where small business owners can turn to for private funding opportunities. For business owners in Ontario, check out pitchyourbusiness.ca for opportunities to meet a group of venture capitalists in Toronto.