Its All About the EU Plan
As we’ve discussed over the last week, I’m of the mind that despite the fact that earnings season is now running at full tilt and the economic data continues to come in on both sides of the fence, “the plan” is really all that matters right now. And yes, given that this market is stricken with a severe case of ADHD, there is a decent chance that traders will move on to something else within moments after EU leaders release the details of the Greek writedowns, the bank recapitalizations, and the makeup of the new and improved EFSF. But for now, it’s all about the plan.
Support and resistance zones? Forget about it. Moving averages and trend lines? Don’t bother even looking. And even for the high falutin’ Fibonacci followers, my advice is to find something else to do. You see, until we find out whether the Eurozone leaders have built a bazooka or a pea shooter, the rest of it can be tossed out the window.
In case you aren’t quite up to speed on your EU Plan primer, there are three key areas to the plan. First, there is what to do with Greece’s debt. For eighteen months now, officials have tried to build a wall around Greece so that the contagion wouldn’t spread. And so far at least, these attempts have failed miserably. So much so that the only thing left to do is to default. Well, except the EU leaders won’t be using such a nasty legal term. No, instead of a “default” the powers-that-be will be talking about a “voluntary debt exchange” with “haircuts” to net present value of 50% – 60%. Ouch.
Next up is the issue of the European banks. Due to the fact that there is sure to be more of these de facto defaults (oops, I mean voluntary debt exchanges) from sovereign nations, the banking regulators have decided that they might want to actually include sovereign debt in their so-called stress tests this time around. Remember it’s not a test if everybody passes! And this time, more than 60 banks are likely to fail the exam; meaning that they will have to go out and round up some fresh capital for their balance sheets.
And finally, there is the question of the day… Will they bring the bazooka or the pea shooter to the contagion fight? While the consensus expectations are for the EFSF bailout fund to be supercharged by marrying the concepts of first-loss insurance on new bonds with a public/private partnership fund designed to attract private sector capital and lever the thing up, the key question is how big will the EFSF become? Although it has been made clear to the folks in France and Germany that they need to go big or stay home here, the worry is that the leaders will once again try to put out the fire that is threatening to burn down the global economy with a garden hose.
So, while the market has been acting fairly well lately (basically on the hope that this time the leaders in Europe won’t blow it), the key to the next move more than likely lies with the plan. I think I speak for everyone holding any kind of long positions when I say, here’s hoping they bring out the bazooka later today.
Turning to this morning… Word that China may get involved with the EFSF’s public/private partnership fund has lifted spirits heading into the open.
On the Economic front… The Commerce Department reported that Durable Goods orders declined by -0.8% during the month, which was better than the consensus expectations for -1.0%. When you strip out the volatile orders for transportation, orders rose by +1.7%, which was above the consensus for +0.3%. The August reading was revised to -0.4% from -0.4%. The positive in the report was the proxy for capital spending rose by +2.4%.
We’ll also get the report on New Home Sales at 10:00 am.
David Moenning
Editor: The Daily Decision
