Stocks rallied for the 6th time in 7 session and have now rallied over 12% off last weeks lows. The presumed reason for the furious rally? A simple kicking of the proverbial can down the road in Europe and a technical reversal that has left bears catching their breaths. How much longer can the markets keep smoking the hopium that seems to be coming out of Europe daily? Your guess is as good as ours, but with the S&P500 getting rejected at 1,220 today and closing off the highs, a pullback seems inevitable.
As for the developments out of Europe, which seem to be getting applauded by the markets and pundits lately, we’re very concerned. This fund that the EU has set up, the European Financial Stability Facility (ESFS), is really not a fund at all. What it really consists of, is financial guarantees from each of the 17 EU nations, save Greece. The money that each country has guaranteed to contribute to the fund hasn’t yet been set aside for the fund which seems rather silly to us. Think about when you retire, or saving for your childs college education, you don’t just hope to have the money when you’ll need it. No, you start saving now and set the money aside so you don’t need to worry about having it when you do need it.
This simple principle seems to be missing from the structure of the ESFS. I mean lets think about this, we have countries like Italy, France, Ireland, Spain, & Belgium all on the hook for financial guarantees to this fund. This assumes that all of those countries will actually have the money to contribute to the fund when it is needed. But what would happen if what happened in Greece happens in one of these countries?
Presumably the same fund they have guaranteed to contribute to would be the very one they would then be drawing from. It is not hard to see the potential problems here. If you don’t think this is going to be an issue at some point in time then you must believe what happened/what’s happening in Greece is an anomaly and not likely to occur elsewhere in Europe. And if that’s what you think, well, then you’re really just not that bright (sorry).
This does not seem to concern the market at the moment as the can has been kicked down the road long enough to warrant a strong oversold rally, like the one we have witnessed in the last week. Tread carefully, we do still recommending buying dips that hold the 1,140-1,150 range on SPX but we also recommend selling into rallies like these due to issues like the one we raised in this commentary.
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