Game Changer Or Euro-Style Band-Aid?

Daily State of the Markets 
Friday Morning – September 16, 2011

Good morning. By now, you surely know that just before the open on Thursday, the Federal Reserve, ECB, Bank of England, Bank of Japan, and Swiss National Bank joined together in providing U.S. dollar loans to Europe’s commercial banks. In response, the euro rose, the dollar sank, and stocks soared for a fourth straight session. And with stocks now up +6.4% since their lows of Monday morning, the key question that has to be asked is if this is the type of game changer that the markets have been looking for or just another Euro-style band-aid?

If you will recall, the Credit Crisis Bear Market ended in the U.S. on March 10, 2009 when JPMorgan Chase CEO Jamie Dimon said at a press conference, in an almost off handed remark, that U.S. banks were making money during the quarter. As we stated immediately following Dimon’s pronouncement, this was a game changer. Remember, at the time, the markets were crashing down on the fear/assumption that the entire U.S. banking system was at risk of insolvency. Lest we forget, there was a great deal of talk about the idea of our banks being nationalized at the time. So, the fact that the banks were actually making money was a clear statement to the markets that the fears as well as the downside movement in stocks, had finally been overdone.

If the situation seen in Europe today sounds familiar, it should since there is growing talk about (a) European banks needing large amounts of capital in order to stay open and (b) the idea that the banks will ultimately need to be nationalized. And given that many traders/investors missed the move in both directions in the U.S., it seems that the players in the game are anxious not to miss the “game changer” that most expect out of Europe.

However, I am sorry to say that yesterday’s move by the five central banks of the world wasn’t it. From my perch, the move simply confirmed how bad the situation with the European banks has gotten. You see, the reason the gaggle of central banks set up the new facility to lend U.S. greenbacks to the Eurozone banks is because nobody else would. Yep, that’s right, the problem is that U.S. banks and money market funds, who traditionally have lent dollars to banks across the pond, have grown concerned about the idea of getting repaid by their European neighbours and have simply stopped lending out dollars to their Euro counterparts.

Exhibit B in my argument that the new dollar-lending facility set up by the central banks is not the game changer that the bulls so desperately seek is the volume seen in the market itself. Yes, I understand that in this day and age of high-frequency trading, volume and breadth stats are easily skewed. As such, I personally have put less credence on some of the old-standby signals. However, the basic concepts of supply and demand haven’t changed.

In short, if the investing public felt that the move by the banks yesterday was indeed a game changer, then they would have voted with their feet so to speak, and volume would have soared. But instead, the volume seen on the venerable DJIA was lower than the day prior and actually the lightest of the current 4-day joyride to the upside (during which time volume has been trending lower). Compare this to March 10, 2009 when volume spiked higher and was almost double that of the day before. Now THAT is evidence of a game changer.

Our heroes in horns will counter with the idea that European leaders are next going to be taking a page out of the U.S. playbook by implementing a TALF-like strategy with their current bailout fund. If you are anything like me, you may recognise the acronym for the Term Asset-Backed Securities Loan Facility but may be a little foggy on the concept. After all, there were quite a few of the FLA’s (four letter acronyms) bandied about in 2008/09. The key idea here is instead of using your bailout money to buy up bonds or to prop up bank balance sheets, you use the cash at your disposal to guarantee loans at say $0.10 on the dollar. This allows a country to stretch (or leverage) its available crisis-fighting funds.

Based on the fact that U.S. Treasury Secretary Timothy Geithner is sitting in an emergency meeting of European leaders in Poland, explaining how the TALF program works as I type, suggests that implementing something like the TALF, which could leverage the amount of money the EFSF has, may be the next move the Eurozone is likely to make. Thus, the question that begs to be asked is if this will be the game changer the bulls need to truly turn things around.

While a European-style TALF may indeed restore some confidence in the banks across the pond, I’m not convinced that THIS will change much. In my humble opinion, this appears to be the latest band-aid designed to buy the Eurozone time to deal with the actual crisis – too much debt and not enough income. Remember, in the U.S., the crisis was all about the banks’ balance sheets. Thus, once you fixed the banks, you had fixed the problem.

However, the current crisis in Europe is about debt and the question of what will happen if Greece, Portugal, Ireland, Italy, and/or Spain start to default on their sovereign debt. Most analysts agree that based on the current interest rates being asked of Greece these days, the country WILL default – it’s just a question of when.

This brings us back to yesterday’s theme, which was the idea of buying time. In short, the European leaders are basically attempting to buy enough time in order to find a way to actually solve the problems. So, while yesterday’s move wasn’t a game changer, this and other band-aids to come may buy enough time to sort this mess out. But for now, unless and until the market produces a break to the upside on impressive volume, we’ll remain cautious and continue to keep our eyes open for something that actually changes the game.

Turning to this morning… With European leaders meeting in Poland and apparently cooking up the next big thing, the sentiment in Europe continues to be upbeat as CDS rates have pulled back a bit and the fears of an imminent default have receded. However, the dollar is higher in early trade and U.S. futures are thus far not following the European markets higher.

On the Economic front… We’ll get the report on University of Michigan Sentiment at 9:55 am eastern.

Thought for the day… Best of luck on this Friday and be sure to enjoy the weekend!

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell…

  • Major Foreign Markets: Australia: +1.85% Shanghai: +0.13% Hong Kong: +1.43% Japan: +2.25% France: +0.66% Germany: +1.15% Italy: +1.31% Spain: +0.55% London: +0.41%
  • Australia: +1.85%
  • Shanghai: +0.13%
  • Hong Kong: +1.43%
  • Japan: +2.25%
  • France: +0.66%
  • Germany: +1.15%
  • Italy: +1.31%
  • Spain: +0.55%
  • London: +0.41%
  • Crude Oil Futures: -$0.65 to $88.75
  • Gold: +$7.80 to $1789.20
  • Dollar: higher against the Yen, Euro and Pound
  • 10-Year Bond Yield: Currently trading at 2.081%
  • Stock Futures Ahead of Open in U.S. (relative to fair value): S&P 500: -4.71 Dow Jones Industrial Average: -32 NASDAQ Composite: -5.26
  • S&P 500: -4.71
  • Dow Jones Industrial Average: -32
  • NASDAQ Composite: -5.26

Wall Street Research Summary


  • Revlon (REV) – BMO Capital
  • TD Ameritrade (AMTD) – Citi
  • Gilead Siecnses (GILD) – Goldman Sachs
  • Yamana Gold (AUY) – HSBC
  • Harmony Gold (HMY) – HSBC
  • Flowserve (FLS) – UBS
  • eBay (EBAY) – Wedbush


  • Veeco Instruments (VECO) – BofA/Merrill, Lazard
  • Royal Gold (RGLC) – HSBC
  • Adobe Systems (ADBE) – JMP Securities
  • Research In Motion (RIMM) – Pacific Crest
  • MasterCard (MA) – RW Baird
  • Watsco (WSO) – UBS

Long positions in stocks mentioned: none

For more of Mr. Moenning’s thoughts and research, visit


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