Thursday, October 27, 2011

Do You Believe The European Solution Will Work?

The markets are flying this morning on the news that the EU leaders have agreed to a plan to deal with the debt crisis in the region. Although this deal was for the most part well telegraphed by the market, I think there was still some skepticism that the various parties would agree on all of the various pieces.

As it has been announced, the negotiations on the Greek debt agreed on a 50% haircut, the EFSF stability fund is planned to be able to leverage up to $1.4 trillion, and the banks in Europe will be recapitalized. Of course, there is a lot of skepticism as to how the whole thing will actually be implemented and if it will work long-term, but those aren't today's issues.

Financials here in the U.S. are leading the early action, with the sector fully 4% higher, as the concerns about exposure to European banks dissipates. Corporate earnings have continued to come in better than expected, and investment managers seem to be scrambling to cover short positions and add long exposure as performance anxiety sets in.

Additionally, Q3 GDP came in above expectations at +2.5%. That is both well above last quarter's figure and also makes the debate about recession more of a 2012 issue as opposed to the imminent economic collapse some where predicting.

Asian markets were up sharply overnight, and Europe is nicely higher this morning. It is also a good sign to see CDS prices dropping in Europe. The euro is also higher vs. the dollar, which is boosting commodities. Oil prices are all the way up near $93, gold is up a bit to $1727, and silver and copper are rallying nicely as well.

The 10-year yield has broken above its recent trading range and is at 2.29%; as for the VIX, it fell all the way down to the 25 level, and is currently -13% lower on the day to 25.92.

Trading comment: I admit it hurts not having more long exposure during this record rally we have seen since the Oct. 4th lows. I am glad we didn't press our shorts or add to hedges as we felt a bounce was certainly in order after investor sentiment had reached bearish extremes. The question is what to do now? With earnings holding up, the economy slow but steady, and Europe less bad now that plans are in place, I think everyone will be in dip buying mode. I want to look for stocks that reported good earnings and can play catch-up with the averages, as well as looking for new leadership. The SPX is at resistance at its overhead 200-day average near 1275, so I do expect some consolidation in the markets first, but probably not all that much.


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