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Is There An Actual Plan?

Daily State of the Markets
Wednesday, June 27, 2012

Good morning. In stepping away from the blinking screens for a moment and thinking about what is actually going on here, I find it truly amazing that once again we are waiting, hoping, and wondering what the next Eurozone Summit meeting will bring. Seriously, how many of these things have there been over the past two years? And yet the cycle continues as stock and bond markets first freak out about this country or that country needing a bailout. Next, the fear of contagion begins to percolate, threatening the very existence of the Eurozone in the process. And then once things get really heated, the leaders gather at a luxurious hotel and try to put a band-aid on the gushing wound.

So, what did stocks do on Tuesday after being shellacked on Monday over renewed worries about Europe? Oh that's right, they rallied on, wait for it... the "building blocks" to a more closely integrated EU, word that the ESM might not subordinate existing bondholders, and more talk about a "redemption fund" that isn't exactly new (although the concept of a "redemption fund" was actually Germany's idea back in November, Merkel simply said "Nein!" at the time). Ughh.

So, here we go again. In case you are not familiar with the "building blocks" reference, one of the focal points of this week's EU Summit is the President of the European Council's ideas for deeper Eurozone integration through four essential building blocks: An Integrated Financial Framework (a single banking supervisor and a deposit insurance plan), an Integrated Budgetary Framework (i.e. a budget czar), an Integrated Economic Policy Framework, and Legitimacy and Accountability of Decision Making. In short, this proposal is supposed to set the stage for the "United States of Europe" (well, kinda, sorta).

Next, IF (note the use of capital letters) the ESM doesn't butt in line ahead of existing bondholders, the thinking is that the bailout fund would be able to buy up bonds of Italy and Spain on the open market. This would drive rates down and - boom - the problem would be solved (insert eye-roll here, of course). However, there are a couple of pesky little details to be dealt with here as the ESM doesn't exist yet, it hasn't been approved by all EU countries, and is has no money. But I guess these are rather minor details in this day and age as it's "the grand plan" that seems to matter.

And then IF (again, I've chosen all caps) the so-called "redemption fund" (which will purportedly be backed by the gold stockpiles of the member nations) can get approved, it would take over the debt of all countries that break the EU's debt-to-GDP limits. The debt cheaters would then be subjected to strict economic oversight of their budgets. And since this fund is supposed to be backed by the gold reserves, analysts project that the fund could handle €2.3 trillion. I guess the catch is that the gold won't actually be used, it will simply "back" the borrowings of the fund. Thus, once again, EU leaders are attempting to fix a debt problem with... drum roll please... more debt.

The big problem appears to be that you aren't going to get seventeen countries to share in each other's debt mess anytime soon. And given that Germany's debt rating was downgraded by Egan Jones yesterday, it is clear that even Germany can't back all the EU's debt. Oh and then there's the small matter of German citizens not being terribly excited about backing the debt of the socialists. As such, it would appear that a real plan to deal with the debt ought to be forthcoming at some point.

But politicians being what they are, they don't appear to be too keen on actually coming up with a plan to reduce the amount of debt that has been built up (apparently such a plan not a good career move). So, while several "grand plans" have come and gone over the past two years, the crux of the problem remains - there is simply too much debt.

What about "the bazooka" (a globally coordinated plan for the major countries of the world to join forces to put an end to this mess) you ask? Although there has been a lot of talk about firing the bazooka, most of the G-20 nations have their own debt problems to deal with. And since the nations of Europe don't want to buck up, why should anybody else?

But with window dressing season underway, traders may continue to buy into any and all new "schemes" (as they're called across the pond) that could conceivably stop the incessant negative feedback loop. However, unless there is actually a plan developed at some point to deal with the debt, we may be stuck waiting, wondering and hoping that the next EU Summit will be the one to make everything all better again.

Turning to this morning... Despite Angela Merkel's warning that Eurobonds are off the table, higher rates at Italy's T-Bill auction, and Spain saying it count not finance itself for long at current rates, the sentiment in Europe continues to improve this morning. Correspondingly U.S. futures are pointing to another green open at this time.

On the Economic front... Orders for Durable Goods rose +1.1% in May, above expectations for +0.5%. Ex-Transportation, orders were up +0.4%, which was below expectations for +0.5%.

We'll also get Pending Home Sales at 10:00 am.

Thought for the day... "The democracy will cease to exist when you take away from those who are willing to work and give to those who would not." -- Thomas Jefferson

Pre-Game Indicators

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

  • Major Foreign Markets:
    • Australia: +0.68%
    • Shanghai: -0.23%
    • Hong Kong: +1.03%
    • Japan: +0.77%
    • France: +0.44%
    • Germany: +0.26%
    • Italy: +1.04%
    • Spain: +0.81%
    • London: +0.54%
  • Crude Oil Futures: +$0.14 to $79.50
  • Gold: -$4.00 to $1570.90
  • Dollar: lower against the yen and euro, higher vs. pound
  • 10-Year Bond Yield: Currently trading at 1.645%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +4.32
    • Dow Jones Industrial Average: +33
    • NASDAQ Composite: +7.76

Positions in stocks mentioned: none

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


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