Is it just me or have we been here before?  The market is rallying during the final week of the quarter on rumors that Greece will get more bailout money.  When has this happened before?

There are so many rumors floating around from "sources familiar with the situation" that some of them must be true.  The consensus of all the rumors is that the European Financial Stability Facility (EFSF) will quadruple to around 2 billion euros.  At the end of last quarter was when the facility was rumored to be expanded to 500 billion euros.  The EU Finance ministers finally agreed in July to make it 440 billion euros.  Following that each EU country's parliament has to ratify the new EFSF size.  Those votes are happening this week.

So we've now learned in the past 3 months that the 440 billion euros is not even close to sufficient enough to handle all of the bad debt.  So how will the EFSF get its 2 billion euros if the member countries are only now voting to approve 440 billion euros?  Simple, really.......they go to the European Central Bank (ECB) and borrow the remaining amount, using as leverage the collateral that they have, which consists of bonds from the very countries they are trying to help.  This is somehow different than the 143 billion euros the ECB has bought directly from the struggling governments and banks.

Of course none of this has been voted on by the EU Finance Ministers, so we don't know all of the details.  It will then be months before each country approves it.  As we said at the end of last quarter, when the first EFSF expansion was being considered, the other countries have chosen to go down with the ship.  Rather than forcing countries and banks that made bad choices to suffer the consequences, they have chosen to force those that didn't make the bad choices to pay for those bad choices. 

They are so far removed from reality over there that it is not even funny.  This chart, posted on ZeroHedge explaining the latest bailout is funny.  (Click on the chart for a larger image.)

Of course it won't be funny when the Ponzi Scheme blows up in their faces, taking down Wall Street banks with them, but for now the market is happy with this latest "plan".

For now the market is celebrating.  As Peter McClellan put it, "2 for 1 drinks!  Come aboard!  It's happy hour!"

For some reason, I picture this occurring at the EU Finance Ministers' meeting:

The market has used this news out of Europe to fill the "gap" created between Wednesday's close and Thursday's open.  This is a normal occurrence following a large drop in the market.  The next level to watch will be the point the market was at when the Fed announced "Operation Twist".

Looking at the bigger picture, you can see how the market will also be bumping up against the uptrend line that it broke last week.  You can also see the end of quarter rally the market had at the end of June and how the market reacted once the rumored EFSF expansion became reality. 

We'll keep you posted on whether or not the rally causes any changes in our "Bearish" position.  If the market is able to hold the opening levels, we are likely to SELL our remaining equity exposure that was put in place on Thursday's ugly close as the oversold condition has now been alleviated. 

When the market is rallying on "rumors" for some reason the participants begin to believe that all of the problems have been solved.  It is important at times like that to step back so you can see the forest through the trees as we realize problems do not magically disappear.

The comments and posts published in the SEM Trader's Blog ARE NOT investment recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.

Investing in the stock or bond markets involves risk and may not be suitable for all investors.  Before making any investment decisions you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with your investments and seek advice from an independent financial advisor if you have any doubts.  All investments involve risk including those managed by Strategic Equity Management.

Opinions expressed at www.stratequity.com are those of the individual authors and do not necessarily represent the opinion of Strategic Equity Management or its management.  Any opinions, news, research, analysis, prices or other information contained on this website, by Strategic Equity Management, its employees, partners or contributors, is provided as general market commentary and does not constitute investment advice. Strategic Equity Management will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

The use of this website constitutes acceptance of our user agreement.  Past performance is NOT indicative of future results.