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Monday, September 12, 2011

Market Thought... endless rumors

What a freaking day.  Sometimes, all you can do is just laugh. We were negative throughout the day. (Although there were hints of bullishness, that I pointed out, but those kind of subtitles have been useless in this tap.)  Then around 2:30pm we got rumors of China helping Italy causing the market to spike, and facilitating a late day rally.

At the moment, there are so many rumors running around, if you don't catch your imagination, it can run wild with speculation.

In the morning we heard from the WSJ that the IMF/EU/ECB will give Greece the Sept bailout funds.  Allowing to a few month to prevent default. (All this despite the electricity union in Greece defying the tax hike.)

Over the weekend we got bank chatter (Germany prepping its banks) and actions (resignation of the German ECB member) that may suggest some sort of action can be coming sooner-rather-than-later.

Greece may get the next round of bailout funds, but the CDS market is still pricing in a default.  And rightfully so, as a part of the bail out funds is to organize 90% of Greek bond holders to restructure the debt. Restructuring is a default.  Everyone, and their mother, is waiting for this to happen, and appropriately, the market has priced it in.

Now, if we combine all this chatter, we have a situation where Greece restructures, banks are gonna be back stopped (to prevent credit freeze) and further sovereign issues my be stemmed by a large buyer with plenty of liquidity (ie China) while the ECB takes care of the periphery (Ireland, Portugal, Spain and Greece).

That is a bull's wet dream.  (Although I bought light protection into the end-of-day-rally, I would love to the above pan out. After all, I am what the data tells me to be, and the data is telling me to be bullish. At least toward the secular growth trends that I follow.)

But now lets be realistic. In order for the above to take place, there needs to be the funds and a plan to back stop any EU bank that would need it.  The funds will be available with the amended EFSF, and there is no mechanism to force mergers within EU banks. (Although the recent Greek bank merger may have acted as a test-run to the forced mergers that will take place.)

How the EU starts implementing their fix will lead to market action.  If things are done in a piece-meal format, the market will start pricing in the activity as steps are taken. However, for maximum effectiveness, they should do this in one shot.  Maybe right after the amended EFSF is voted on and passed, and then announce to the world the above 'wet-dream'.

Regardless of what happens here, I will be actively shorting the FXE (basically short the Euro) via put options with a December expiry. I am doing this for two reasons:

1.  To hedge my long positions.  Right now, the movement within the FXE and SP500 are very much correlated. The closer we get toward the end of September, the amended EFSF will be approved and market correlations will diverge as the market losses the credit freeze discount and fundamentals get priced into individual stocks.  So over the next few weeks, I will close out of my SPY put protection.  But the Euro will still have downward pressure...

2. The Euro will be depreciated within the next 6 months to allow for the EU mess to be fixed.

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