ECB Put
Research for Online Investors

01/12/12

Italy and Spain sold debt this morning at lower than expected interest rates.  Spain planned on selling $6.35 billion dollars in bonds, but doubled the issue because of demand.  Italy only had to pay 2.735% on twelve month bonds, down sharply from the almost 6% yield at their last auction in mid-December.  Italy will offer another $6 billion tomorrow with longer terms.

Have these PIIGS countries regained the market’s confidence or is there so much money floating around the eurozone it has to find a home?  Probably the later, but enjoy it while it lasts.  It may last some time as banks are depositing record amounts overnight with the ECB.  Eurozone banks are looking for places to invest the $637 billion dollars that was loaned in December on three-year 1% loans.

Yesterday we learned the ECB is planning another “liquidity” offering in February.  Think about it…the U.S. Federal Reserve pushed $1.8 trillion dollars into the money supply over two years in quantitative easing.  The ECB did $637 billion in one day and they are going to do more!

Greece is negotiating with bondholders on the amount and terms of the “haircut” they will take on older Greek debt.  Evidence suggests banks are using some of the ECB money to buy “high yield” eurozone debt.  What is not to like?

China cut bank reserve requirements for the first time in three years.  Inflation came in a little higher than expected at 4.1%.  The market had hoped for a reading of 4.0% or lower.  The Chinese government had tightened bank lending requirements to manage a “soft landing” of the Chinese real estate market.

Inflation was pushing the prices of homes and food up too fast.  In December, food costs in China continued higher at a 9.1% rate.  The Chinese market was disappointed as this may keep the government from further easing.

The argument for continued easing of monetary policy is Chinese export growth has been slowing since August.  Imports of raw materials in December dropped precipitously in December.

Chinese premier Wen Jiabao promised more lending to entrepreneurs on Sunday.  When push comes to shove, the economy must grow to feed the population and provide jobs…even at the cost of higher food prices.

We ask again…What is not to like?  We have an “ECB Put” on eurozone sovereign debt and loosening Chinese monetary policy.

Buy long, we believe the market is going to move higher…absent bad headlines.  This isn’t a long term call.  We are not saying the market has seen the lows of the year, but there is room for the market to move higher short term.

Quote:
The best argument against democracy is a five minute conversation with the average voter.---Winston Churchill

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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