Are German naked short and CDS bans really that awful?

In response to the German bans on some naked short-selling and naked credit default swap (CDS) purchases Zero hedge declares:

If this pans out as expected, look for Bunds to collapse tomorrow, and wipe out a few billion from Pimco's NAV. We warned in February that the flight to safety in Bunds was both shortsighted, and too good to last.

I disagree.  Banning naked short selling and unmatched CDS purchases are fairly mundane regulatory changes.  Shorting is still allowed as long as the bonds or shares can be borrowed and default swaps are still available but only for hedging purposes.  Coming so soon after the bailout announcement, this is being linked to the "wolf pack" behavior mentioned by officials last week but these policies are in line with reform recommendations from before the Greek crisis made it to the front burner.

This may be the sort of news that can set off a panic given the view by many that the Europeans are flailing about but I expect the real money will take note of the limited scope and difficult enforcement of today's bans.  While I agree that Europe has not yet come to terms with Greece as a solvency problem rather than a liquidity problem, the current approach is still printing Euros to pay bond holders, so the downward pressure should stay focused firmly on the Euro.

With the lopsided view and large short positions in the Euro currently, I am not even sure the one way trip down there can continue through tomorrow.

Stock market stunned by its own fragility

The price action this week in equities was a change of pace.

I included the chart above to show just how low the short term volatility of SPY had fallen before the recent pull back.  As much as much as the Greek debacle may be the proximate cause of the stock drop, the steady grind higher over the last two months had left the market ripe for a pull back. The price drop is severe enough that momentum traders will be throwing out positions while value investors will still be on the sidelines for a few hundred more S&P points.  

US stocks continued lower on Friday, but the long bond and the Euro changed direction.  The long bond has been on a strong two week run up that was goosed higher by yesterday's late afternoon panic, while the Euro had been weakening in response to Europe's sovereign debt woes. Both trends are stretched but seem well supported by the current fundamentals.  The reversals in these markets, though mild, makes me think equities will not start next week in free fall.

The Greek saga (which began in early December 2009) dominated the headlines with European policy as of last weekend looking to keep the monetary union intact at the cost of a steadily weakening Euro.   There is still a lot of skepticism whether the current bailout for Greece is enough and whether the same thing can be done for the other PIIGS but it seems to me that where there's a will there's a way.   This is the train of thought that is driving the weakening Euro.  It may still happen that Greece abandons the Euro (likely leading to a sharp recovery in the currency) but I think the policy response of last weekend postpones it by a year while the powers that be wait to see if the austerity package works its magic.

A Greek debt restructuring will also relieve some pressure on the Euro and provide a far better template for the other PIIGS (should their situations worsen) to follow.  For all the weekly on again off again bailout announcements regarding Greece it is still not clear the authorities have done their homework and come up with a plan for the Euro and European debt markets that won't need to be reevaluated in the near future.  This lack of credible long term goals is the key uncertainty spooking the markets.  This thought from 2004 still reflects my view on why attempts to use the bailout package to discipline the Greek government is misguided.  

Most of the economic news out of the US has been positive, though ignored.  It was capped off today by  the best jobs report in years.  The positive recent news is being ignored due to fears of slowing growth in the second half of the year. As the US fiscal package winds down there is no obvious candidate to replace it.