24th November 2011: The Eurozone Endgame is Nigh: “Treaty Change” – At Last A Substantive Debate

 

Light At The End of the Euro-Tunnel ?

Quote of the Day:

With (Chancellor Angela) Merkel, we will soon make proposals on modifying the treaties to prevent countries from diverging in the budgetary, economic and fiscal areas,

 

Nicholas Sarkozy – French President

 

Macro Overview

“Treaty Change” is on the Table in Europe – hate to say I told you so… but I told you so

• 12 weeks is a long time in this market. But 12 weeks ago I remember explicitly stating that the way to solve this Eurozone crisis was to change the very fabric of the glue holding it together… namely CHANGE THE TREATIES that were agreed long ago (Maastricht Treaty, Stability and Growth Pact, EU Treaty)… I’ve since referred to this many times in my comments. Here is a quote:

They’re missing the most obvious solution in my opinion which is what Donovan calls the confederation of Europe. I’ll go one stage further and say I think the best solution would be to reform the Maastricht Treaty and Stability and Growth Pact. Let’s call it “The Eurozone Consolidation Treaty”.

• Then I set aside specific actions which would change the treaties should be changed – namely to STRUCTURALLY enforce more fiscal discipline and economic management of the region (not leaving it to vague “guidelines”) where automatic punitive measures come into play for countries which do not adhere to the limits.

• Listen, it’s all here http://theinternationalperspective.wordpress.com/2011/09/08/ read it for yourself…
• At the time this was regarded as politically impossible, outlandish, perhaps even fool-hardy, insane, idiotic… right?
• OK… I now forward you the headline in Reuters just hitting the tape…

 

French President Nicholas Sarkozy has embraced a German campaign for treaty change that could give European authorities intrusive powers to intervene in the national budgets of countries sharing the euro currency.

France and Germany will soon propose amendments to the European Union treaty in response to the bloc’s sovereign debt crisis, Sarkozy said on Tuesday.

“With (Chancellor Angela) Merkel, we will soon make proposals on modifying the treaties to prevent countries from diverging in the budgetary, economic and fiscal areas,” he told an Asian forum inParis.

“We will do everything not just to defend Europe but also to consolidate it.”

• You know where you heard it first, dear reader, and I believe we may have entered the end game here. It’s been a long time coming but I actually see light at the end of the euro-tunnel – especially if Germany and France revamp the EFSF with something tangible.
• The Dollar has rallied hard since I called an end to my bearish stance which was great, but it may be time to resume the Dollar short again and perhaps even buy Euros again (!?). Let’s see how all this pans out – it’s only a headline so far and much more needs to happen. But, in my opinion, EU leaders may have just cleared the path for a relevant debate and perhaps even some action towards a sensible solution.

 

Market Overview

Thanksgiving – Give Thanks You’re Not a Fixed Income Broker

• Markets quiet due to US Thanksgiving but I was just just talking to a friend of mine who told me fixed income volumes were down 75% according to some independent data providers. Ouch! Nobody wants to put money to work it would seem – no bottom fishing this month. It seems everyone is mesmerized by European CDS prices and Angela Merkel’s lips.
• But as is so often the case the media, obsessed with money-printing as a solution to all things (not, coaxed by the banking sector, who don’t want any more write-downs – honest!) ignored the most important and fundamental change that Merkel and Sarkozy had finally agreed upon: Treaty Change. For those who think this is not substantive enough – bear in mind that’s all the Euro is… one big Treaty. This is a plee to find a fundamental solution to what is a fundamental problem.

Thanksgiving – Give Thanks You’re Not Shareholder of: GRPN, AIG or RIM

• What can I say, Groupon lost almost 40% of its value in 3 days and now trades well below IPO price. I can’t say I’m particularly sympathetic with shareholders, but it does point to the nature of the IPO market and just how poor sentiment is out there – and, given the amount of front-loaded “investment” Groupon management put into the company, this was definitely a sentiment driven stock. Chart of the Day: Groupon share price.

• We shouldn’t be so hard on Groupon – afterall it’s only been trading a few days, but AIG and RIM – now that’s a different story. These two behemoths are pretty much the only big non-bank names which have lost over 60% of their value this year. Fighting it out for the supreme prize of worst performing stock of 2011 – still one month to go but it looks like RIM is gonna “win” though. Chart of the Day: AIG and RIM YTD charts.

 

Chart of the Day

Groupon's Fall from Grace (Source: Bloomberg)

 

AIG YTD (Source: Bloomberg)

RIM YTD (Source: Bloomberg)

 

Events

Macro Events:

Update:

• German GDP in line at +0.5% QoQ (+2.5% YoY)
• UK GDP in line at +0.5% QoQ (+0.5% YoY)

Alerts:

• Mexican Inflation Numbers

 

Corporate Events:

Results:

• Genting [GENTMK],

Dividends:

• Johnson & Johnson [JNJ], Loews [L], Marriott [MAR]

 

Reading, Links:

Nothing Significant