EU Plan and Markets

Looking through this European plan it would seem to me that if it is actually implemented it is pretty rock solid in the short term. Two keys in that sentence. If actually implemented and in the short term. What that means for asset markets also means two things. Whether the markets will test the implementation and force it to happen (or fail) and how long the market will ignore the short term.

First you have legal issues. Legal challenges are already being shaped in Germany. Courts refused to create an injunction but are reviewing the case. Second, my understanding is the ECB is planning on offsetting the QE measures. What that exactly means and how they plan on doing it I still haven't quite figured out. What does seem apparent is the ECB is legally prohibited from monetizing EU debt at auction so they can only do it in the secondary market. Now how private participants will participate is up in the air. Entirely possible you will see busted auctions because investors will know these are short term fixes. For Greece you are looking at 18 months of time bought. What happens if your issuing a 5 year bond?

Anyway, I don't have a strong conviction on the markets as of the end of close today. In many ways I am clueless. We bounced right up to the area I thought you should look to short but we did it so quickly it made me nervous. I finally talked myself into putting back on at the close today about 10% of the short exposure I took profits on at the close on Friday. There are enough problems with Asia (i.e. China) that I don't really feel like I am betting on just a Europe story but a story of the entire world economy slowing down again. Time will tell. In general I would not be surprised to see the markets climb some more or sell off. Two similar TARP type announcements in the U.S. caused the markets to bounce one and the other time two days. It may be the same or different I don't know. If we are up another 10 to 20 points I will be probably short a little more tomorrow.

Like I said yesterday this whole things seems EURO negative and asset markets positive but if the EURO starts sliding hard again the asset markets could start selling off hard.

The big danger is that the unity in Europe for the bailout starts breaking up with different quips in different newspaper reports or there was already to much damage done to capital markets that this really doesn't repair things.