From: Justin X Gratz czi To: Undisclosed recipients:; Subject: Eye on the Market, April 7, 2010 Date: Mon, 10 May 2010 10:40:00 +0000 Attachments: 5-07-10_-_EOTM_-_The_Maginot_Line.pdf Inline-Images: image017.png; image018.png; image019.png; image020.png; image021.png; image022.png; image023.png; image024.png Eye on the Market, April 7, 2010 (the attached PDF of this email is much easier to read) Topics: European contagion spreads There's a correction underway and I want to make sure to communicate our take on this, and how it's affecting portfolios. Let's start in Europe. From the onset, many policymakers, investors and analysts have been way too optimistic and not cognizant enough of the realities. "Greece is not Argentina", they said; they're right, but only because Greece is actually worse (a). Some are critical of the ECB; not sure that's fair, since their options are all pretty terrible. The Sovereign Default Time Capsule we published in March remains the lens through which we see this crisis, and explains the short Euro, underweight European equity/bond positions we've held all year long, and that our portfolios are not in typical post- recession growth mode. First, what has the European Central Bank (ECB) done so far to help? As shown, the ECB is now lending more to its financial system than other Central Banks [as an aside, the Fed/BoE were proven correct, in that repayment of their credit facilities demonstrates that part of the crisis was a liquidity squeeze]. But unlike the Fed and Bank of England, the ECB has done almost no "quantitative easing" (QE), which refers to the printing of money to buy government bonds. That is exactly what the ECB is being pushed to do by market participants: buy government bonds, and give peripheral European countries a chance to enact fiscal adjustments without having to access debt markets at the same time. Lending facilities to financial institutions as % of GDP Direct asset purchases (QE) as % of