Lots of News

Yesterday the markets opened down hard and then reversed during the course the day. They ended mostly flat, after the Dow traded down almost 300 near the open. They shook off a litany of bad news.

Volume was heavy, coming in over 40% higher than yesterday.

There were several news items yesterday which are new and could have forced some money back in to cover shorts –

ECB Rumor
There was a rumor this morning that the ECB would cut their version of the Fed Funds Rate by 0.50%
That rumor came out early in trading and at the very least did not hurt things. So far it has proven to be unfounded.

The rumor has now morphed into the Fed lowering the swap rate it charges for Europeans borrowing from the Fed from 1% to 0.5%.

Geithner In Europe
Tim Geithner is supposedly telling Europe that they need to run a “Stress Test” to get confidence back into the markets. The goal of the stress test was to drive institutional investors back into banks. The TARP was used to finance the purchases of bank shares. Now that Europe has this $1 trillion facility set up, the money is there to start the next round of capital raises for European banks.

Remember, German has the least capitalized banking system in Europe. It is becoming clear that they made shorting illegal to protect their banks from extinction. Spain was not so smart and has seen a lot of turmoil in their banks this week, as about 9% of their banking system has merged in the last few days.

Now we are being told that Spanish bank Banco Bilbao (BBVA) was unable to renew $1 billion in commercial paper in the US. That probably explains a lot of the plunge in European Financial stocks this month. BBVA is down over 35% in recent weeks, but is only down -2.5% today. So maybe a lot of news is already baked into BBVA.

It is clear that a major capital raise must come soon for European Banks. If you have lamented the fact that you did not buy US Banks on the cheap last year, then you may get another chance with cheap European banks – or they may just all implode…

Barney Frank
If you don’t think some of the recent selling is the result of attempts to regulate US Banks, then look at how the market bottomed yesterday when Barney Frank said that banks and their customers should be able to use Derivatives to trade and hedge positions.

Larry Summers (senior economic advisor to Obama)
Larry started to talk about a Second Stimulus today. He specifically talked about aiding States, so that they would not have to lay off Union workers. I’ll be watching Muni Bonds closely to see if they start pricing in another free gift from US Taxpayers.

Most of the stuff listed above is new and all has the capability to turn the markets higher. Will they? Are we currently in the “slope of hope”? Or have we put in a real bottom?

VIX
The VIX measures the Volatility reading that is used for the pricing of Options. The higher the VIX reading, the more you have to pay to protect your portfolio with Options. The VIX is now near levels that rival LTCM, 9/11, Worldcom and the beginning of the Iraq War 2.0. There is a lot of fear right now.



Currently only 10.25% of the stock on The NYSE are above their 50-day. That is an extreme reading, and tells you how oversold things are right now. Oversold can become more oversold, so this is a secondary indicator. But it is one of the first readings to tell you when a possible turn is occurring, so it is worth watching.

The Euro Standard
Europe has to run structural Deficits to keep its economies from imploding. But the Euro Agreement mandates that countries can only run a 3% deficit. With The Euro in place, countries cannot turn on the printing presses to inflate away their debt and devalue their currency (like the US, UK and Japan can). So the weak countries are potentially trapped in Deflation as the strong countries have low inflation.

Something has to give. The PIIGS were spending well above this 3% deficit bogie and had turned their Financial Sectors into de facto money printing presses. Now the game is up. The banks can’t print anymore and European countries have to reduce their deficits.

How bad is the problem?
The average European country is running a 6% structural deficit for FY 2011. So if they all follow the Euro mandate, then they have to cut spending in Europe by 3% across the board.

To give you an idea, the US is running an -8.2% structural deficit! This allows the politicians to claim that GDP is growing by 4% this year. Our Debt to GDP ratio will hit 100% in 2011.



I am not writing about the merits of Deficit Spending. I think it makes future Taxpayers have to pay for current consumption and think it is unfair. But what is is, and with Geithner in Europe, you know that he is telling them they need to do what we are doing – print money and use taxation to transfer wealth from the strong to the weak to maintain civil order.

I am waiting for a Follow Through Day to tell me that this will happen sooner, rather than later. So far, the European politician have been very disappointing in their actions…