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Friday, November 25, 2011

Market Thought... they didn't listen

The EU leaders did not 'listen to the thunder'.  European banks were at the precipice in August.  The silent bank run was happening, and the only thing keeping it silent was the heavy reserves.

The EU leaders teased us with an amended EFSF, but have yet to give any details on the plan. No plan, no demand. With no re-capitalization mechanism for the banks, the banks can not, and will not, support the sovereign debt, so rates are rising.  The only play the EU banks have right now is to sell assets to raise capital. But they can not sell quick enough. 

Now, the yields in Germany are rising.  German PMI was also crappy. One of many crappy PMI figures earlier this week. Rising rates with a contracting PMI is not a good thing.  Spreading that scenario across Europe is even worse.  The data is pointing to a harsher slowdown coming for the EU economies.

The only chatter of hope, at this stage of the game, is to have 1. Euro Bonds or 2. the ECB entering as a lender of last resort.  But I fail to see how these are going to alleviate the EU bank runs.

First, a cross-boarder EU bond cannot even be initiated without a cross-boarder tax collecting system.  With out the revenue system the "Euro Bond" will be nothing more than a EFSF bond. The market is already pissing on the EFSF bonds, so why would a Euro Bond without a revenue stream not get pissed on?

Second, the ECB 'prints money' and buys all the sovereign debt until it does not have to anymore.  The market will initially like this, and it should keep rates depressed for a period of time.  But what happens when there is another Dexia? Will the ECB back-stop banks as well? Or will the bank(s) get nationalized and the ECB keeps buying debt?  Is the ECB willing to increase their current balance sheet by 1-2Trillion Euro?

Regardless of what the 'EU hope' would be, the global PMI data is pointing to a slower global GDP growth. The technicals are confirming the slow down, and depending on how Europe handles it, is how harsh the markets will be.

The global GDP will still see growth, but it will be lower. Probably around 1-3%. But the severity of the EU contraction will guide the growth.  The price of oil does not suggest a global GDP recession. (WTI is holding up well, and should not go below 75-80. But Brent looks interesting here. It could see 90, and if it goes below 90, I will view it as a red flag.)

The weekly suggests support around 1135.

 The daily is in a tail-spin.

The one short-term catalyst is that a lot of stocks that I see are oversold, a lot.  The markets will be due for an oversold pop shortly.  But that assumes the EU is quiet enough for such a move to take place.

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