Where's The Bazooka?

Hank Paulson asked for, and ultimately received his bazooka. For now, it looks like Jean-Claude Trichet is coming out with a squirt gun, when he really needs a RPG launcher at this time. Last night, the European Central Bank announced it would be buying Spanish and Italian bonds, as quantitative easing shifts from the United States to Europe. According to the

the European Central Bank was in the market buying Italian debt at €50 million increments, while purchasing Spanish debt at smaller sizes. Considering Italy has over $2 trillion in debt and is the third largest debtor nation in the world, buying Italian debt in €50 million increments is like dropping a glass of water into a pond. It's not going to make much of a difference anytime soon. Italy is getting

and even though bonds are rallying on the back of this news, it does not look like the rally will last long on the back of €50 million increments. Italian two year debt have closed the spread over German bund yields, at 1.05% tighter than where they were before the announcement last night. Despite this, this is still a high yield for 2 year debt in the current environment, and we could see a sell off as people use the rally to exit the trade. "People who had bad long positions may use the recovery today as an opportunity to get out of those trades," one trader said to the Journal. "In terms of positioning, the market had been short in Italy and Spain, which is why we're seeing such wild moves." Additionally, Spanish two-year yields were 1.09% tighter to German bunds, yielding 3.15%. The ECB needs to do something major, and according to

the purchases of Italian and Spanish debt may ultimately reach $1.2 trillion. That is more like a bazooka, and could help stave off the fear and problems going on right now. The ECB can not continue to make small purchases at this time, it needs to send a message to the markets that it is going to cut off the head of the snake and kill it. There is tremendous amounts of political pressure for purchases the size of $1.2 trillion, but the EU governments have to realize they need to something major. Small purchases like this are not going to stave off the problems. “This huge-risk pooling exercise will not come easily and the risk of political fallout will be large,” wrote Jacques Cailloux, chief European economist at RBS. “This might be the necessary and painful step required to pave the way for the creation of a common debt instrument, the quid pro quo for this might be the loss of fiscal sovereignty.” You do not bring a knife to a gun fight, and you do not bring a water pistol when you need a bazooka. Just ask Hank Paulson on how to get it.

Traders who believe that the ECB will get to the trillion dollar level sooner rather than later might want to consider the following trades:

Traders who believe that the ECB will not get what it needs in a timely fashion may consider alternate positions: