Wednesday, February 29, 2012

Euro Banks Flock To Cheap LTRO Money

The market was higher in early trading, but unlike most recent sessions we have seen the early gains reversed and as of this post the major indexes are trading in the red. If the day plays out like many before, the market should regain its footing into the close. If not, it would mark a rare change of character for this market.

The big news out of Europe was the latest round of cheap money offered to banks over there via the ECB's LTRO program. This time around more than 800 banks lined up to participate with the ECB lending a total of 530 billion euros. This figure was slightly above estimates and slightly above the first round of LTRO when 489 billion euros were lent.

Hopefully the large liquidity injection will be put to productive use and help the banks shore up their balance sheets. As for the sovereing debt issues in Europe, you can't really solve debt problems with more debt but I do view this as a type of kicking the can down the road scenario. In that sense, it gives the markets more time to price in the fiscal realities and gives the banks more time to reposition their books. So purely as an investor I like the program.

In economic news in the U.S., Q4 GDP was revised higher to +3.0% from a previous estimate of 2.8%. Also, the Chicago PMI came in better than expected at 64.0 vs. 60.2 last month. This continues the streak we have seen of strong readings in the manufacturing sector.

Stocks up on earnings: AH, ITT, COST, FE, CPRT, VRSK

Stocks lower on earnings: SODA, LIZ, JOY, SPLS, FSLR, PANL

Despite the LTRO, the euro is lower this morning and that is weighing on commodities. Gold has staged a big downside reversal so far and its trading down to $1730. Oil prices are also lower near $105.75.

The 10-year yield is getting a bounce near the 2.00% level. And the VIX is only up 2% so far to 18.30.

Trading comment: Today has the makings of a down day for once, but with dip buyers at the ready another positive close wouldn't surprise me either. Materials stocks are down the most today, while defensive consumer staples are bucking the weakness so far. Lots of stocks look extended on their charts, so a pullback or at least some consolidation would be constructive to allow these stocks time to trade sideways and build another base. It's hard to see the current pace of advance in the market continuing without a breather.

KAM Advisors was long FE, SODA


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