Floating Trial Balloons

The markets around the world seem to be waiting on further steps by European officials to stop the banking crisis gripping the area.  Many” trial balloons “ have been floated by the media over the last week ranging from a E.U. banking unification, IMF bailout of Spanish banks, use of the ESM, another LTRO round by the European Central Bank, direct Spanish aid to their banks by issuing bonds, and the potential of Euro bonds being issued.  Pick your favorite story and investors will jump back on the potential solution(s) as a reason for a short-term rally.  I look for the market to continue to decline as the S&P 500 has broken below the 200 day moving average late Friday.  While a bounce back above the 200 day is possible, the relief rally should be used to sell as I still expect the S&P 500 to continue to decline to around the 1213 level. I made a rough calculation using an equal point total decline to the last wave down.  I look for a bounce after the level is reached.     

Euro Crisis II

The markets around the world are selling off on the news from Greece as the new leadership is attacking the “barbarous austerity”.  As the financial dominos start to drop in Europe, Spain’s ten year yield is back over 6% this morning.  One of my concerns has been the amount of U.S. money market fund investment positions outside the United States in search of yield.  An estimated 35% of assets of U.S. money market funds are in European holdings.  I was very concerned about this last fall, until the U.S. Federal Reserve extended swap agreements to help with the last liquidity crisis.  The European bank liquidity issue has been propped up with over $1 trillion Euros borrowed from the ECB called the LTRO.  The LTRO is a three year lending operation to European banks.  Usually a “lender of last resort” does not need to extend credit to banks for such a long period of time.  When European banks unwilling to lend to each other due to increased counterparty risk, the short term spike funds parked at the ECB’s Central Bank Deposit facility is another warning sign and concern for liquidity in the region.