LTRO liquidity tsunami floods back to the ECB with little effect

The so-called Draghi put, more formally named "Long Term Refinancing Operation", through which the European Central Bank is offering almost unlimited liquidity with 3 years maturity at 1% yield, has proven unsuccessful at supporting the sovereign bond market. The big plan was that, by offering massive amounts of low cost financing to banks and financial institutions, they will park some of this excess cash into European debt instruments. Instead of this, it turns out that banks have chosen to deposit the funds back at the ECB and conduct small carry trades at the short end of the yield curves.

France downgraded to AA+ and what it means for the rest of EU

In a move that only confirms what the rest of the world already knew, financial ratings agency Standard and Poor`s downgraded Friday 9 of the Eurozone countries: Cyprus, Italy, Spain and Portugal by two notches and Austria, France, Malta, the Slovak Republic and Slovenia by one notch. By far the biggest implications are for the downgrade of France from its triple A status to AA+ because it will consequently mean that its EFSF guarantees will not be as high rated as before and threaten to bring down the AAA status of this special investment vehicle.

Hedge funds prepare to show their middle finger to the European Union and IMF

Besides the risky bet on further quantitative easing, another hedge fund favorite has become purchasing Greek sovereign debt. Some of the hedge funds amassed such large positions of Greek debt, that they may have quite some bargaining power in the upcoming debt restructuring. Because the EU and IMF are going to ask for voluntary write-offs, in order to avoid a formal "bankruptcy", which would trigger the massive CDS market, the idea behind this speculation is to reject any kind of haircuts on their share of debt, and therefore pocket the "defaulted amount".

PIMCO is taking a massive bet on QE3

Bill Gross, the co-chairman of one of the largest bond funds, PIMCO's Total Return fund which closed 2011 at a whopping $244 billion dollars, has added to its leveraged Mortgage Backed Securities position during December 2011, in a bet on further Quantitative Easing and further "Operation Twist".  According to Zerohedge, the Total Return fund had in December a $60 billion cash margin account used to purchase $103 billion in MBS, TIPS and long duration US treasuries. Turns out that in December, Bill borrowed an additional $78 billion to purchase more MBS and treasuries.

S&P and precious metals outlook

Last year ended in a rather odd way: it seems that the bounce-back effect of the stock market faded away and, as a result, the S&P500 and the DOW ended almost flat for the year, albeit on the negative side. The precious metals plunged in December below the 200 daily moving average, which has been a support level since 2008, a rather bearish move, and since unsuccessfully tested the 200 EMA once. The picture is still blurry, but this Friday closing prices should provide a better image.

Everybody join in the Too-big-to-fail bandwagon!

According to a recent article published by Bloomberg, global regulators (whoever they may be) from the Financial Stability Board met in Basel, Switzerland to decide on a "framework for domestically systemically important banks" which should be up and going by next year. This would expand the list of financial institutions which, in case of failure, would pose risks to the stability of the domestic system, and therefore should be regulated. After we saw insurers (AIG) and  governmental mortgage associations (Fannie Mae, Freddie Mac) being bailed out in 2008, it is time to also regulate the so called shadow banks.