US Stocks Reasonably Well Behaved So Far…

Posted by on Dec 8, 2011 in Uncategorized | No Comments

But credit markets and banking stocks are not so happy.  SNR bank CDS is Europe is 25 wider, SOVX is 25 wider. Italian 5-year bond yields are 53 bps higher, back to 6.68%.  GLE.FP (SocGen) traded at 20.42 earlier today and is at 18.70 now.

HYG is down a little bit, but that looks like a sell for a trade.  It is trading above NAV and the HY bond market is heavy.  I would expect some arb activity in HYG and JNK as people try to take advantage of the relative strength on the ETF’s versus the underlying.

I think Europe will be very heavy into the close as this price action is not showing a sign of slowing down, and the move in Italian bond yields is attracting attention.

France in general, and Sarkozy in particular, will be interesting to watch over the next few days.  There is a growing sense that he is bluffing, and that France is far weaker than anyone realizes, and is desperate to get a deal done, because otherwise their problems may be exposed.  I’m not sure I agree totally with that, but on the other hand, just how much money have they committed to providing? What percentage of their GDP are they on the hook for that people haven’t yet focused on?  There was a reason they were on watch for a double notch downgrade.  I find it hard to believe that they escape at least a single notch downgrade regardless of the treaty negotiations.

The EBA (whoever they are) says banks need EUR 115 billion. Take that number, add 50 billion, and double it, and you probably have a more realistic assessment.  But conveniently, 115 billion fits better with what EFSF has allocated out of its guarantees (not yet turned into money).  I expect that the 3-year unlimited funding is going to come at a cost.  It won’t be just dilution, it will involve more government interference.  Merkel wants banks “to serve the people”.

Too many people are waiting for some reversal.  They can’t believe that Europe doesn’t get it.  Maybe it really is just way too much debt and it cannot be handled easily.