False Bravado?

France and Germany in yet another meeting

We have had one heck of an uptick in the market this last week.  The market gapped up on both Monday and Wednesday and again this morning (Monday).  I had mentioned last week that we may expect a bounce after all the selling that went on the two prior weeks, but expected nothing to THIS magnitude.

I'm sure most of you have heard that the major central banks of the world got together and provided "Easy Dollars" for cash strapped Europe.  Why would OUR Fed help bailout Europe you may ask?  Well, MarketWatch financial reporter Jon Markman reported last week "There were persistent rumors that a major French bank was on the verge of going bankrupt and that common financial transactions were on the verge of a total halt."

Remember back in 2008 when Bear Stearns and Lehman went out of business while at the same time Freddie and Fannie were taken over by the Gov't (and just a few weeks ago MF Global went BK)?  All these banks / financial firms (as well as others who were bailed out) were leveraged 45+ to 1.  What does that mean?  Basically that for each dollar they had as an asset - such as a savings account, checking account, loan, etc, - they had borrowed $45 to make other investments.  When you owe $45 for every $1 you have on the books, if ANYTHING goes wrong with the $45 investment, it sends your $1 into turmoil.  This is the current scenario with the major banks in Europe.  They invested a lot of their $45 into loans to countries like Greece, Italy, Spain and Portugal.  And anyone who can read knows those investments aren't going so well.

Anyone know what mark to market means?  You might say who cares, but it is huge.  If you bought a stock for $45 per share and it is only worth $20 per share today, would you want to know about it?  There are a lot of people who stopped opening their 401k statements in the last recession who might say NO, but savvy investors  want to know.  Mark to market means to report the current value of an investment on a daily basis.  The loans for these European countries are still on the books for the full $45 even though they might only be worth half.  Since they don't have to mark to market - report today's true value - they can run around with their head in the sand until someone forces their hand.  These easy dollar loans allow them to keep their head in the sand for another day or two -  like giving a junkie a fix instead of sending him to rehab.

Europe can't get institutional investors to lend them money, so they are trying to get it from our Federal Banks.  The institutional investors remember 2008 and how even money market funds were frozen.  They want to avoid living that again.  The European Cental Bank won't print money because of Germany, but that won't stop ours from printing.

Gaps:  Gaps can occur when something unusual happens in the market.  The gaps I'm referring to occur over night.  If the market closes at $1,000 and opens the next morning at $1,100, there is a $100 gap.  You can't buy in the morning at $1,000 or $1,025 or $1,050.  If you want to buy it must be at the gapped up price of $1,100.  There is a saying in technical analysis that gaps are always filled back in.  When a gap occurs to the upside, if you are patient and hold on, the price will come back to pre-gap levels.  

This last week, we had such artificial steroids added to the markets, they did nothing but go straight up without allowing any low risk entries.  The first gap hit its head on resistance and the second gap went through the ceiling and to unsustainable highs for the short term.  The big question?  Will these market steroids build a foundation to a sustainable recovery or will they wear off quickly and find ourselves filling the gaps on the way back to the lows of a week ago?  Time will tell, but headlines this afternoon said that the S&P has put the major european countries on watch that they could be downgraded based upon results of meetings this week.  France could lose two notches which would be a disaster.

Europe is still moving our market tremendously giving our markets volatility beyond belief.  Visit the briefing room to see how we are viewing the current market movements and what we are doing about it.

Those of you who are lucky enough to watch Badger and Packer football heard during both games how they were similar to heavy weight bouts.  Maybe this is a new Fox sports term, but one I would quickly add to watching the bulls and the bears.  This is one heavy weight  bout that is exciting to watch.  One of these days, the bull or bear will win and it will become much easier to make money.