Back in the raging bull markets of the 1990's and mid-2000's the term "Merger Monday" was born.  What would happen is that businesses would spend the weekend working out plans to hook up to become bigger or more efficient and it would be announced on Monday morning.  This would usually give the market a boost as the mergers showed confidence from CEOs that the economy or their industry was strong.  (The mergers would involve the issuance of new shares of stock and/or more debt, which CEOs wouldn't do unless they were confident about the future.)

Watching the patterns this summer, I think we should start calling days like today "Make Believe Mondays".

The news this morning out of Europe is thus far being taken quite positively both there and in the U.S. based on the reaction in the futures market.  The BBC is reporting that the IMF, EU, and Greece are working on a plan that would give Greece a little breathing room all while putting a "fire break" around the country to prevent the problems from spreading across Europe.  The rumored plan calls for a 50% write-down of Greece's debt, with private investors being forced to accept this reduction.  The plan also calls for a quadrupling of the European Financial Stability Facility (EFSF) to 2 billion euros.  This bailout fund would be able to lend to struggling governments. 

It is also to be rumored that 10s of billions of euros would be infused into the struggling banks to help with liquidity.

Never mind that a 50% reduction in the debt would be a technical default and could trigger a payout from all of the institutions that issued CDS (insurance) against such an event (including Wall Street banks.)  Never mind that increasing the EFSF would likely cause S&P to lower the credit ratings for France and/or Germany from AAA (since the member countries would be taking on debts from the other member countries.)  Never mind the fact that this is just an idea that would require many difficult decisions from many different working parts in order to have any chance of success.  Finally, never mind the fact that most analysts say it would take an 80% write down of Greece's debt in order for them to have a chance of surviving.

While everyone is excited about this rumored proposal, keep in mind what I said on Friday:

We're likely to see yet another weekend where "solutions" will be offered to solve Europe's ongoing debt problems.  So on Monday morning when we hear about the next "solution" remember how well all of these other "solutions" have worked.  (We also discussed this on the radio last Friday.)

The Grand Experiment is failing.  You cannot take a balance sheet problem (too much debt) and fix it by adding more debt.  Knowing this, it makes sense to continue to use rallies to allocate out of portfolios that are carrying too much risk and into portfolios that have a plan to handle both the upside and the downside.

Our Volatility System still has Enhanced Growth (EGA) 20% exposed to equities.  Based on the signals we are getting from our well tested trading systems, last weeks sell-off was a TRADING opportunity, not an INVESTING opportunity.  It may be fun to play make believe on Mondays where it looks like the problems in Europe will magically disappear, but unfortunately, unless you are an actor, you can't make a living playing make believe.  We suggest you treat the rally accordingly.

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