Once Europe is "solved" (i.e. Germany and France allow 'quantitative easing'), it's going nowhere but up*.
I believe the markets are looking for / hoping for
shock and awe (massive printing of electronic Euros by ECB to buy up all the bad debt in Europe
immediately), but Merkel may be trying to wear everyone down with
Chinese water torture (drip, drip, drip of slow controlled printing of money, just like they are already doing to control bond yields, but still maintain enough of a sense of crisis / urgency for voting population of all these countries so they acquiesce to the fiscal checks Germany needs before they take on the brunt of this debt load.
We could have quite a powerful Santa Claus rally* into year end / January, but that is not a green light that happy days are here again, because Italy has $400 billion Euro of total debt to refinance next year and Spain $200 billion Euro, plus new Greek elections in February. Plus first quarter gdp forecasts for U. S. were near 0, because of things like fiscal drag from non-extension of payroll tax holiday, unemployment benefits, etc.
The immediate crisis (freezing up of
wholesale funding of European banking system) and underlying
sovereign debt crisis are definitely related, but not exactly the same (e. g. sovereign debt used to be treated as equivalent to cash and used as collateral at these banks, which were apparently levered 40:1, and somewhere I read that 10% reduction in face value of these bonds makes these same banks insolvent). Commentator on CNBC Asia last night said Italy and Spain are not insolvent, yet, if they can ge their funding costs under control...
If you still choose to gamble, talking heads say money managers lagging markets and desperate to catch up by year end will be chasing high beta names, Zach Caravel specifically citing technology, and someone yesterday saying Santa Claus rally would need to be led by financials and tech...
* My impression from talking heads on tv is that current trading range is 1100 - 1250, and if we can definitively blast through 1250 - 1280, it might open up a run at 1350. ( Rational bear commentary I have seen says we need to go back and retest 950 - 1025 ish, before a sustained upturn can occur, but obviously we would have to break 1100 definitively for that scenario to come into play)
There are a lot of ifs between here and there, so perhaps at least take heed Gary Kaultbaum's comments from earlier in November:
"For two months, starting with the lows in August, I took pains to tell everyone the market was unplayable as we saw ridiculous moves both up and down in a matter of days. Markets were experiencing gaps every day to the upside or downside. Good news, bad news...you name it. It was tough. It was tough because when markets moved up quick, people wanted to be in. When markets moved down quick, they wanted to be short. All the markets provided during that time was nausea.
October 4th provided a high volume washout day where I stated that typically, you are going to rally off of. The rally was stunning in time and price. Instead of the market slowly working through resistance, within 5 days and a couple of gaps, the markets were back at resistance. They then sat around for a few days...a wild few days with gaps and reversals. We saw things like housing and financials actually put in what looked like good bottoms and then we had E day...on October 27th in which Europe supposedly solved their problems. Technically, it was a strong volume gap above resistance. Fast forward to yesterday. What happens? A rogue Corzine makes leveraged bets...just like the numbskulls did in 08 and kills the company he took over just over a year ago...leading others to ponder whether others are in the same position. We hear again that all may not be well in the big E. Markets give back a ton on Monday and we now walk back into a huge gap to the downside today.
I would love to tell you there is a template or a manual for all this...but there isn't. The fast money bails on the first sign of a problem...and jumps back on the first sign of relief. If you put a crayon in the hand of your 2 year old and told him to draw a picture, that scribble would look like a lot of charts I am looking at as I watch the action today. European markets are moving up and down in one day enough for a normal year's gains or losses.
Bottom line: I have been saying for months that this market is going to remain tough to play...but even I am stunned. The emotion of fear and greed usually last a while but right now, it lasts days, sometimes only hours. I wish I could use my favorite line and tell you I will know more when a few more cards come out of the deck. I am just not sure what cards are in the deck. Personally, I have played this on the light side...and as of this second, thrilled to have not played this too heavily. More to come. Don't blink!"
http://www.tradingmarkets.com/stocks/commentary/the-cuckoo-s-nest-1578737.html
* Another AT member provided some really great insights on another thread:
"QE needs to come quickly to stabilize bond prices. Anything less than Euro1T will probably be seen as a failure to the market. Shock and Awe is how QE works (look at how long it took the Japanese when they started small).
For the stress tests to be believable capital raise has to be north of E500B. Anything less and they will keep going back to the same non-believable status. Dexia passed 6 months ago, lol. Even the 100B or so from the last round of stress tests is not seen as believable. The amount needs to be north of 300B to even gain confidence, 500B in new capital would imo fix a lot however. European banks would rather continue to delever and sell assets which isn't going to work in the mark to market era. The European stress tests from the start haven't been seen as even the least bit believable and to salvage them, they are going to have to push them to the max a scenario people can't imagine. When they factor push the banks this hard the amount of capital that needs to be raised is going to be huge. Just have a quick play around here (
http://graphics.thomsonreuters.com/1...ST0711_VF.html) that doesn't even include what is going to happen on the bank loan side, the capital markets side and retail banking side. The numbers get gigantic in a hurry.
2-5 years is too long. They won't have a banking system by then. 18 months maybe. QE + 500B in equity would do a lot to calm the markets. Make no mistake on paper debt ratios in Europe look fine but including bank debt that is going to end up being nationalized Europe is extremely over leveraged. Whereas the US is becoming over leveraged on the national government debt, Europe is over leveraged on the bank debt side. Conservatively if things go badly in France and Germany because of the European debt crisis, national sovereign debt loads will go up 10-12% of GDP bringing in the needed capital (putting the DE/FR close to comparable to the US for debt/gdp). France will get hit worse than Germany. Remember a 700B TARP was for 8T in big bank assets (which turned into a bit more because little banks were allowed in). Europe has more bank assets than the 8T and GDP that is similar. As the majority of European countries are locked out of the capital markets if equity needs to be raised by GermAAAny/FrAAAnce/AustriAAA/NetherlAAAnds all of them will become GermAny/FrAnce/AustriA/NetherlAnds or worse. To make a comparable TARP EU1T needs to be raised and that is how Goldman came up with the number in their now famous report.
On that note I will leave you guys to yourself. I should have stayed out, I do have an economics degree!"
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