Market Overview

Super Mario Increased His Fire Power, But It Isn't Enough

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Super Mario is able to do it again, at least for a little while.

ECB President Mario Draghi and the rest of the European Central Bank have now been given the approval to purchase $27 billion worth of sovereign debt every week, as Europe tries to stave off a debt crisis of epic proportions. According to Bloomberg, there is some growing opposition within the ECB council on raising the amount to $27 billion, particularly from the Germans.

Bundesbank President Jens Weidmann, Executive Board member Juergen Stark and Yves Mersch, governor of Luxembourg's central bank have all expressed their skepticism against increasing the amount of bond buying.

Until the ECB can directly lend to countries (something that is currently forbidden by law), the weekly bond buys are doing nothing but treading water for the time being. German Chancellor Angela Merkel is vehemently opposed to a Eurobond, although French President Nicolas Sarkozy has not ruled that option out. However, that option is down the road, and not likely to come any time soon.

Italy is too big to fail and too big to save, with a debt market that is the third largest in the world. Yields on Italian 10 year debt are just under 7%, and the yields on Spanish debt are rising as well. We have already seen one casualty of large exposure to European debt (MF Global, how you doing?) and the rumors continue to pop up about Jefferies (NYSE: JEF). A couple of weeks ago, it looked as if Jefferies was able to stave off the worries and the rumors about the company, but they have crept back up in recent days.

Draghi's hands are tied until the ECB is either allowed to lend directly to sovereign nations or a Eurobond is instituted. There have been increased rumors about the ECB lending to the IMF, which has the capability to lend directly to countries, but these are just rumors at this point, and may not happen.

Greek debt holders took a 50% haircut a few weeks ago, and now there are banters about them wanting less, which could lead to a hard Greek default as soon as next month. The European Financial Stability Facility (EFSF) was a joke from the start, and no one actually expected it to get levered up to over $1 trillion because they never had a clear plan to do so from the beginning.

The increased bond buying from Draghi is like putting a Band-Aid on a gaping wound. It might stop it from getting worse for a little while, but it will not fix the problem and be a cure that is so desperately needed.

When you have 17 heads of states trying to come up with 17 different plans, and the only thing that can be done to try to stave off a debt crisis is a slight increase in bond buying, this is not going to end well.

Europe is a lost cause at this point, unless Super Mario can figure out a way to increase his fire power. He's going to need a lot of mushrooms, fire plants, and blinking stars to help him get there though.

ACTION ITEMS:

Bullish:
Traders who believe that Europe will fix its problems might want to consider the following trades:

  • Consider going long the Euro ETF, CurrencyShares Euro Trust (NYSE: FXE), as the Euro could rally back to the $1.40 level.
  • Also consider going long European banks, such as Deutsche Bank (NYSE: DB) and BNP Paribas, which may rally on some kind of recapitalization plans.

Bearish:
Traders who believe that Draghi can do no more and Europe will see a severe recession may consider other trades:

  • Consider shorting the S&P 500 ETF (NYSE: SPY), as it does not look like Merkel and Sarkozy have a legitimate plan. This fiasco will go on until the market forces action.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

 

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