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Europe Once Again

It is still all about Europe and the obvious. Mario Draghi is quickly becoming the key pot stirrer as he has the keys to the European printing press. The thing is that everything I've seen attributed to him today was plain common sense or plainly obvious. Here's the problem-the ECB is going to print money but take the longer more convoluted route. To protect the treaties, the ECB will give banks in Europe 1% loans to be repaid in three years; in the meantime those banks can buy all the crappy paper they want. The question is if trying to save face will allow too much water to go under the bridge.

Then there is the Federal Reserve making U.S. banks operate under banking rules crafted out of Europe. Those Basel III rules mean a lot less money in the system to be lent to would-be business owners or home buyers. I don't get this. Why are we putting our interests behind those of European central planners? So the news out of Europe took down that flimsy rally attempt, and now we just have to brace for waves of frustration and apathy to take over from here.

ECB Spooks Market
By Carlos Guillen
Equity markets have take a turn for the worse during this morning's trading session after Mario Draghi commented that substantial risks to the economy remain. His comments have spooked investors who had been much more hopeful that a resolution would soon be reached. According to Mario Draghi, losing the ECB's credibility wouldn't help market confidence. His comments have pulled the stock markets lower, with the Dow Jones Industrial Average trading down over a quarter of a percent after being mildly in the Green at the open.

Draghi's comments added to the eurozone's negative data flow this morning, as Spanish banks reported that in October there were more bad loans and lower lending and deposits as a result of the fallout of the nation's property crash and the European sovereign debt crisis. According to the Bank of Spain in Madrid, the ratio of bad loans as a proportion of total lending climbed to 7.42 percent, the highest level since 1994, up from 7.16 percent in September and up from 5.68 percent a year earlier as the value of borrowings in default rose to 131.9 billion euros ($171.9 billion). Lending fell 2.5 percent from a year ago, following a record 2.6 percent drop in September, and deposits slid 2.2 percent to their lowest level since 2008. Clearly the rising defaults and declining loans and deposits are demonstrating that Spanish banks are in bad shape as a result of the nation's property downturn.

Here at home, the U.S. House of Representatives will vote tonight and is expected to reject a Senate-backed bill that would extend a payroll tax cut for workers for two months. Failure to extend the payroll tax cut will result in a 2% increase in social security taxes for individuals on the first $110,100 of wages in January. Moreover, if Congress fails to act, emergency unemployment benefits will also expire at the end of the year, and physicians that are reimbursed through Medicare would receive lower payments.

Adding fuel to the fire is the uncertainty that is emerging as a result of the death of North Korean leader Kim Jong Il. The 70 year old leader passed away over the weekend, and it has been reported that his 27-year old son Kim Jong Un will take the leadership position. This clearly is making many nervous as it is rumored that the 27-year old may actually be more unstable than his father, putting the region and the world at greater risk.

Basel Blues, Kim Jong Ills
By David Urani

As a reminder, Fed Chief Bernanke probably has more power than he should, and now he's ready to sign on to new global rules for the financial system set out by regulators in Basel. The Basel guidelines call for another increase to required capital reserves for large banks on top of the 7% already mandated. The additional reserves are likely to be in the range of one or two percent for most big banks in the US, with J.P. Morgan in particular potentially being required to hold 2.5% extra.

Naturally, the big banks are angry about this, citing the fact that they are less likely to lend with the new rules which may in turn result in a slower economic recovery. Then again from Basel's point of view, it's less money for banks to leverage and pour into risky assets; and maybe there's a little retribution in there as well.

Whatever the case, the Financials aren't taking it so well. The move of the day has to go to Bank of America (NYSE:BAC), which dropped by more than 3%, cracked the $5 mark on the downside, through support, and to its lowest price since March 2009.


My next move of the day comes from the South Korean KOSPI index, which tumbled by 3.4% for the day. Obviously the news of the day was North Korea's Dear Leader Kim Jong Il's departure. In a year when both Bin Laden and Qaddafi were disposed of, one may be tempted to think this is yet another tyrant that the world could be better off without. That may be true, yet the Asian markets aren't taking it kindly and that's because nobody knows hardly anything about his successor, Kim Jong Un. But, as the son of Kim Jong Il, nobody's necessarily expecting him to be any more peaceful.

Perhaps the main worry is simply that North Korea has one of the world's largest militaries, nuclear firepower, and dictatorship; and its stability will now come even more into question.