Eurocrats Whisper Sweet Nothings – EFSF Will Help Euro Banks. Relief Rally Will Last A Few Days

June 29, 2012
Author: Peter Stolcers, Founder of OneOption
Author
Pete

I hate to say I told you so, but I told you so. This morning Eurocrats “whispered sweet nothings into the market’s ear”. The EFSF will directly support struggling European banks. Traders loved the news and the S&P 500 is up 25 points before the open.

Before we get too excited, realize that this is another Band-Aid. A centralized European banking system would be the first step in the right direction, but that will take many months to implement (if Europeans can reach an agreement). Structural debt is the real issue and money printing/bailouts are not the answer.

Eurocrats can pat each other on the back and disappear on vacation. Credit concerns will fester in coming weeks and no one will be home to “mind the shop”. Not one long-term solution has been drafted in the last two years and time is running out. Spain is five times the size of Greece and interest rates have reached the point of no return.

These light volume summer rallies can be a real beaach. That is why I covered my short positions two days ago. I sold a few put spreads yesterday, but I did not want to over extend myself. I planned on selling more today, but I won’t get the chance.

The relief rally today should last into next week. It will be tempered by weak PMI’s out of China and Europe on Monday.

European credit concerns are the biggest issue and if the market feels that danger has passed, it will grind higher into the Fourth of July. Shorts are going to get squeezed during the next few days.

The jobs reports and the ISM’s will weigh on the market next Thursday and Friday. Once we get through that wave of selling, stocks should be able to rally into the first two weeks of earnings. The season will kick off on July 10th.

Worst-case scenarios are priced in and stocks are attractively valued at a forward P/E of 13. The strongest companies announced early in the earnings cycle and optimism builds quickly. Once this rally stalls, we will be set up for a nasty decline.

Pre-announcement warnings are much greater in Q2 than they were in Q1. Today, Nike announced that sales in China are down substantially and the stock is getting nailed. As earnings season unwinds, cautious guidance will take its toll and investors will get nervous.

Credit concerns in Europe will continue to grow. Interest rates in Spain and Italy are at dangerous levels and Greece will be asking for another handout. The EU is divided and the strong are tired of bailing out the weak.

Economic conditions around the globe continue to deteriorate and it feels like a “double dip” is right around the corner.

US interest rates are at historic lows and Asset Managers will bargain hunt on pullbacks. However, they won’t chase. No one feels as if they will miss the next big rally.

The ECB and the BOE will meet next week. We can expect LTRO3 and a $50B round of QE in England. That news will help to offset weak economic data.

I sold my puts this week and I’m grateful that I banked profits. I also sold a few put spreads yesterday and I will have to be satisfied with those positions.

I believe this rally will continue for a few days. Look for US companies that have European exposure and sell out of the money put spreads below support. Don’t get too aggressive.
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