Friday, June 15, 2012

Coordinated Central Bank Action

Yesterday's news reminded me of Y2K.  There was all this fear about possible catastrophe over some computer glitch going from 1999 to 2000 and the Fed pumped a ton of liquidity ahead of it.  Greece elections is like Y2K.  It is fundamentally meaningless, but it stirs up intense fear among the investor community.  Somehow Greece exiting will cause contagion.  I think it would do the opposite.  It would strengthen the remaining members because there is no longer precious capital going down a gaping hole.  I think the market rallies on that news.  If Greece stays, there is always the possibility and uncertainty of exit.  If they leave, they are forgotten forever and the market can move on to more relevant things. 

Market is addicted to free money.  Whenever they get signs of possible coordinated central bank activity, they love it.  Where is the pain point which leads to ECB/European/Fed bailouts?  Do we measure it with the Eurostoxx index, Spanish bond yields, or the S&P?  That is something to think about.  I definitely don't see any action at these price levels.

It seems like Spanish/Italian bond yields will be the measuring stick.  If the Spain bond yields go towards 8-9%, then we probably will get action.  The equity market won't/isn't panicking over 7%.  So we'll have to go to higher yields before we get action.  Remember, only when the market starts to panic do the central bank bazookas come out.  The Spain bailout was just a rifle shot.

Expecting selling in the first half of the day, but not that much conviction.

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