Did the Fed and/or ECB advise certain banks on the brink of solvency to purchase e-mini S&P (and other exchange) futures before yesterday’s central bank induced rally? My theory is that the joint effort by central banks was a quiet way to help prop up a number of large US & European investment banks on the brink of solvency given the large write down in government bonds that is coming. By causing the rally yesterday they provide these banks with a large mark to market gain in equities and futures, plus a slight gain in European bonds- if they sold them yesterday or in the coming days.
A number of French and Italian banks are poised to take large hits on the value of French and Italian bonds which have taken a beating in the last few weeks. Unlike derivatives where the value can be obscured, government bonds that trade regularly on public markets are extremely easy to value. These banks had no choice but to take this gift from the central bankers or possibly their equity would have been called into question.
One investment bank that should have benefited greatly is Jefferies. Jefferies fiscal year ends November 30th. That rally probably padded their balance sheet a bunch and might even help customer defections given the recent rumors of trouble with European bond trades.
Think of this rally as an early Christmas gift the central bankers are giving to the weak money center banks as an effort for them to raise equity instead debt like the TARP funds were. The issue is solvency not liquidity.
Full Disclosure
I do not trade or own any futures or government bonds mentioned in this blog posting. I do have a negative hedge on my own portfolio that was affected by yesterday’s rally. I am maintaining this hedge because I feel there will be a point when the artificial stimuli wears out and the real market can shine.
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