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The second quarter ended this week on a high note in the markets.The Dow Jones Industrial Average surged 277 points on Friday after European Union leaders announced a new plan to aid the regions troubled banking sector.
Meanwhile, homebuilders announced strong quarterly earnings and the housing data suggested the market may be turning up.
Some of the best minds on Wall Street stepped up and told us what we should and shouldn’t believe.
'The Germans say, 'you lost your virginity. Now you sign a contract; you say, 'I'm a born again virgin.' Be abstinent for the next two years. Show me your soul and two years from now, we're going to get married. But today, I commit to marriage today? Forget it.' The Germans don't believe and they don't trust the periphery.'
'If you were Greece, all you had to do was sign up for the euro, and you got German interest rates. That, to me, is the Ponzi scheme that is emblematic of this great and glorious pan-regional integration. They didn't do anything to deserve those rates, but they got them.'
KEN GRIFFIN: This Is Not Just About The Eurozone, What's Really Important Now Is Saving The Entire European Union
'While most observers, including German policy makers, believe Germany will do what is necessary to save the euro, it is more important to save the European Union, which is older, larger and more significant than the euro zone. Continuing on the current trajectory will most likely entail more bailouts, more guarantees and ultimately dramatic sovereign defaults or enormous fiscal transfers. That would mean a continued loss of human capital and dignity for southern Europe and a nightmare of an open-ended commitment of trillions of euros on the part of Germany.'
'I estimate that there is between two and three million excess housing units on the market for sale when you count in all the shadow inventory, so you're talking about at least another two or three years to clear the inventory and put a definitive floor under home prices. There is no question that the decline in home prices is decelerating. Some people are claiming victory, that we've actually put a floor under home prices permanently. I'm not so sure about that.'
GREED IS GOOD: Andrew Lo Believes An Exotic Financial Instrument Could Help Cure Cancer Within 20 Years
'But if you created one large pool of 150-such asset ventures, your odds of a decent return on investment increase. So how do you raise $30 billion? Similar to CDOs, Lo proposes creating 'research based obligations' or RBO bonds, that would be divided into tranches with different risk premia (with AAA-rated bonds yielding a lower coupon; riskier bonds, higher).'
'The relentless fall in German yields from the 1990-91 peak of nearly 9 per cent following unification may be largely over. But the fleeting increases in the 2009-2010 global economic recovery, and in 2010-11 as bailout packages for Greece, Ireland and Portugal were agreed, were not sustainable. The JGB lesson is generational lows in German bond yields are structural, not a valuation freak.'
'The current premium for a view that the euro will be 15% cheaper in six months is about 7.4% (we use Bloomberg mid-pricing so these should be viewed as approximate). But the price for a bet that the euro will be 15% more expensive in six months is 4% so beyond the normal volatility there is maybe a 3% excess probability priced in for a really big euro move. By comparison the premium on USDCAD moving up by 15% or more over six months is 8%, and the cost of an AUDUSD 1.14 6m digital is 4%. Pricing for a similar USDJPY upside digital is 6.3%.'
'According to a new note to clients, Deutsche Bank Chief U.S. Economist Joe LaVorgna fully expects tomorrow's Case-Shiller number to give an inaccurate read on U.S. home prices.
'Additionally, the improvement in the year-over-year growth rates is corroborated by both the median existing and new home price data, where the gains are +7.9% and +5.6%, respectively. Hence, we have four different home price metrics that are showing much more substantial home prices improvement than Case-Shiller, leading us to downplay the significance of the latter.''
'1. The absence of an external balance of payments deficit that seems to be a hallmark of financial crises; 2. The euro area fiscal and debt position is better than other developed countries; 3. Only six countries would originally have qualified for the euro in 1999, so it's surprising it took this long for major issues to arise; 4. The problem with European banks is that they aren't in control of their currency, which makes markets look at their bond purchases as foreign currency liabilities of their government...'
'In particular, the EFA could establish a Debt Reduction Fund -- a modified form of the European Debt Redemption Pact that was proposed by Merkel's Council of Economic Advisers and endorsed by Germany's Social Democrats and Greens. In exchange for specified structural reforms in Italy and Spain, the Fund would acquire and hold a significant portion of their outstanding stock of debt. It would finance the purchases by issuing European Treasury bills -- joint and several obligations of the member countries -- and pass on the benefit of cheap financing to the countries concerned.'
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