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To Be Or Not To Be?

Daily State of the Markets 
Wednesday Morning - November 30, 2011

Good morning. I will admit that the title of this morning's missive may be a little clichéd and perhaps a bit over the top. But then again, with the very future of the Eurozone on the line, maybe "To be or not to be?" is an appropriate question after all - well, for the ECB anyway. You see, with all the talk about whether or not the Euro will implode in the coming weeks (there were reports in the market yesterday that banking regulators are currently running tests to see if their systems can handle a rash of new - er, old - currencies), it appears that the situation has come down to whether or not the European Central bank wants to be (or not to be) the lender of last resort.

If the phrase "lender of last resort" rings a bell, give yourself a gold star. You will recall that the phrase was made popular during the Credit Crisis here in the United States. During the dark days of the crisis, the Federal Reserve Board was forced to step up their game and create all kinds of new ways to provide liquidity to a banking system that was about one brokerage bankruptcy from total ruin. And as expected, Ben Bernanke came to the rescue by pledging to provide the banks with all of the money they needed to keep the system functioning.

Recall that it was Ben Bernanke's creativity that kept the money flowing and ultimately restored confidence in the U.S. banks. And based on what is currently happening across the pond, many believe it is now the ECB's turn to step up to the plate and do something similar for Europe's floundering PIGIS - before the European sovereign debt crisis drags the entire global economy back into the abyss.

The argument for the ECB "to be" the lender of last resort goes something like this. With unlimited funding capabilities, the ECB could simply lend money to any and all European countries that can't borrow money anymore in the bond market (i.e. Greece, Portugal, Ireland and perhaps Italy and Spain). Doing so would eliminate the fear of default and buy the Eurozone countries time to "grow their way" out of this mess. Problem solved, right?


Unfortunately there seems to a not-so minor hitch in the plan. As it turns out, the European version of the U.S. Federal Reserve isn't allowed to bail out member countries. Doh!

Given that one of the basic assumptions of government and politics is that rules were meant to be enthusiastically bent if not broken, the thinking man's solution to this little detail is for the ECB to lend the money to the IMF (for some strange reason this seems to be allowed), which would, in turn, lend the money to the PIGI'S. Assuming it is possible; this again would appear to solve the problem, no?

As you have probably guessed by now, the ECB isn't wild about the plan and the Germans have decided to repeatedly just say "nein" to this idea. Why not save the day here, you ask? The reason is simple: moral hazard.

Although there does appear to be a way for the ECB to ride in on their white stallions, the bottom line is the ECB and the Germans have no guarantee that the countries that have basically thumbed their noses at the EU's debt rules won't do so again (and again, and again). After all, if the ECB is there to bail you out, why bother implementing all those nasty budgetary reforms that everyone is talking about these days? Why not just take the money from the ECB and hope to grow your way out of the problem?

Welcome to Angela Merkel's world. While the ECB does seem to have the ability to bail out just about any country in the Eurozone, they are not going to do so until there is some way to hold the budget cheaters accountable. And this is where the "Stability Union" concept comes in. Should Team Merkozy be able to draft Mario Monti to play along, they just might be able to create some sort of "fiscal union" that would be able to veto any country's budget that breaks the rules and even enforce penalties on the cheaters.

Although nothing is certain given that there are handfuls of countries and many more political agendas involved, it does appear that under this scenario, the ECB might be willing to say "ja" to "be"ing the lender of last resort.

And if we could fast-forward to getting this deal done, the bulls just might be able "to be" in business as well.

Turning to this morning... Reports that (a) China took the first steps to begin easing monetary policy, (b) the major central banks of the world announced coordinated actions to enhance liquidity support to the global financial system, and (c) the ADP report (see below) was surprisingly strong has stock futures roaring higher. Thus stocks will enjoy another massive spike higher at the open.

On the Economic Front... ADP reported that the private sector job market expanded by 206K jobs during the month, which was well above the consensus expectations for a gain of about 124K.

In addition, we'll get the report on Chicago PMI at 9:45 am eastern and Pending Home Sales at 10:00 am.

Thought for the day... Don’t forget, ego is the real enemy in this game...

Pre-Game Indicators

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


  • Major Foreign Markets:
    • Australia: +0.42%
    • Shanghai: -3.26%
    • Hong Kong: -1.46%
    • Japan: -0.51%
    • France: +3.47%
    • Germany: +4.15%
    • Italy: +3.44%
    • Spain: +3.26%
    • London: +3.27%

  • Crude Oil Futures: +$1.52 to $101.31
  • Gold: +$26.80 to $1745.90
  • Dollar: lower against the Yen, higher vs. Euro and Pound
  • 10-Year Bond Yield: Currently trading at 2.087%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +38.76
    • Dow Jones Industrial Average: +302
    • NASDAQ Composite: +60.56


Long positions in stocks mentioned: None

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


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