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Daily State of the Markets Good morning. The leaders of the Eurozone (meaning France’s Nicolas Sarkozy and Germany’s Angela Merkel) have spent a great deal of time recently talking about the idea of restoring confidence in the banks of the region, the Euro as a currency, and the powers-that-be of the EU. In my humble opinion, this is exactly what the announcement over the weekend by “Team Merkozy” was intended to do – restore confidence. And so far at least, the markets are buying it. However, it is important to remember that we’ve heard this song before. There were no details given on exactly how Team Merkozy is planning on solving the now 18-month old crisis. There were no details offered on how France and Germany have suddenly fixed their well known differences of opinion on the key issues. And to be sure, we don’t know where the money is going to come from. In fact, all we know is Merkel and Sarkozy are going to let us in on the “grand plan” in three weeks or so. Thus, while I can certainly be accused of being more than a little cynical here, it looks to me as if Europe’s dynamic duo is really simply trying to buy some time – again. The general thinking in the markets is that the leaders of the EU and the ECB have been “behind the curve” on this crisis since the beginning. And while it is a positive that those in charge across the pond have finally figured out that its all about the banks, I am not entirely sure they are going to suddenly get ahead of the game here. Remember, the EFSF (assuming Slovakia ever votes the thing in) only has €440 billion available. And given that a fair-sized chunk of that has already been allocated to Greece, Portugal, and Ireland, there are only so many euros available to recapitalize the banks. And since, according to the estimates I’ve seen, it will take “a couple trillion” to recapitalize the banks, my math suggests there is a modest hole that somehow needs to be filled. Keep in mind that the plan here is to recapitalize the banks so that they can withstand the impact of the now-expected default in Greece. And since (a) just about everybody involved is against the idea of new debt, (b) Germany has made it very clear that it is absolutely, positively against “leveraging” the EFSF via either a “public/private partnership” akin to the TARP/TALF plan or via the “insurance model” in which the debt to back the banks would be guaranteed, and (c) any “backing of the banks” by sovereigns such as France or Germany would put their debt rating at risk, I’m not quite clear on how this plan is supposed to work. So, from where I sit, it looks like Team Merkozy is simply trying to buy some more time to figure out how to get ‘er done. It looks like the leaders of the EU want some more time to noodle on things before the EU Summit starts on October 23rd and/or before the G-20 meeting in France on November 3/4. And it would appear that we are supposed to assume that in a matter of a few short weeks, this entire thing is going to get solved. Yet, to my surprise, traders are swallowing this hook, line, and sinker. Or are they? The second biggest question investors need to ask (after, of course, the all important “Where’s the money going to come from?”) is “Where’s the volume?” To be sure, the recent blast from the moment the “great save” began last Tuesday has been impressive and I will admit that the current move up from the bottom looks good on the charts. However, there is one teeny tiny problem; the volume relationship stinks. Remember, a true “game changer” is going to be accompanied by a huge increase in demand as players suddenly recognize that the problems the market has worried about are overdone. As I’ve written before, go back and look at what happened to the volume relationships in March 2009. In short, volume surged after Jamie Dimon reminded us that the banks were making money. But right now, believe it or not, volume has been declining each and every day of the current rally. Therefore, unless the volume picks up or Team Merkozy can actually deliver on their grand plan, I, for one, am going to remain cautious for a while longer. Turning to this morning… The question of whether or not Slovakia is going to vote for the expansion of the EFSF seems to be holding the markets back for a change. Stock futures in the U.S. are pointing to a modest pullback at the open. On the Economic front… The NFIB Small Business Optimism index rose in September to a reading of 88.9 from 88.1 in August. However, the reading remains below the average of 90.2 seen during economic recoveries. Finally, Alcoa (AA) officially kicks off the earnings parade today after the cloes. Thought for the day… Are you feeling inspired today? Shouldn’t you be? Pre-Game Indicators Here are the Pre-Market indicators we review each morning before the opening bell…
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