When Germany and France announced in early October that they planned on having a plan in place to once and for all deal with the European financial crisis, the market took off and barely looked back.  At the time they announced a summit on October 23 where they would map out the plan.  Last week as the EU finance ministers couldn't come to an agreement, a second summit was announced.  That summit is being held today.

-Early in the day the EU Finance Ministers announced they would not be meeting during the summit, which essentially means that there will not be a significant solution announced.  Without the people controlling the purse strings agreeing on how much will be spent and where they will find the money, any announcement will be subject to major revisions as the details are ironed out.

-Italy was given a deadline of today to approve spending cuts to cut their out of control deficit.  If you recall, a few months back they approved some dramatic spending cuts in order to get the European Central Bank (ECB -- their version of the Fed) to buy their bonds.  After widespread protests, the government backed away from those cuts.  Italy's debt load is bigger than all of the other PIIGS countries combined and they are thought to be the next country in need of a bailout.

-In order to survive, Greece has to have a large portion of its debt written down.  Estimates vary from 40-80%.  Germany is pushing to have private investors take the losses on those write downs.  The number is somewhere between 50-60%.  Barclays was out yesterday saying that this size of a haircut would be a CDS trigger (CDS = Credit Default Swap, essentially an insurance policy that pays when a bond goes into default).  What defines a default is highly subjective & could likely be fiercely debated in court, but nobody knows for sure what banks (including Wall Street banks) have issued CDS on Greek debt.

-Germany is also pushing to stop ECB purchases if the European Financial Stability Fund (EFSF) is stabilized.  Many people thought the ECB would continue to be able to purchase bonds alongside the EFSF, but Germany said they will not agree to allow both.  Since the ECB is operating on behalf of all EU countries, any liabilities it takes on are the responsibility of ALL EU countries.  That means if somebody defaults on a debt owned by the ECB, whoever has the most money (Germany) ends up taking the loss.

-The legality of EU leaders to approve the expansion of the EFSF (another vehicle that puts each member country on the hook for any losses) without either parliamentary or voter approval has come up several times, again making it unlikely that a true solution will be announced today.

One article that I don't think received enough attention yesterday was posted mid-day by Reuters.  They are reporting that the International Monetary Fund (IMF) is considering taking part in the EU bailout.  Basically the EFSF would create a Special Purpose Investment Vehicle (SPIV) to raise money for the bailout fund.  The IMF would then purchase the SPIV.  This is HUGE as it would mean that US taxpayers would be participating in the EU bailouts.  With a social uprising already taking place across America, this could just be more kindling to add to the fire.

The US contribution to the IMF is around 18%, more than the next 3 countries combined contribution (Japan, Germany, and the U.K.).  What I find interesting about this plan is the Ponzi nature of it.  The U.S. is already printing money and borrowing from other countries at an exponential rate, so they will be asked to take that money and invest it in a fund that will bailout countries that are so indebted that they cannot pay their bills.  Further adding to the Ponzi nature of this plan is the fact that the 17 EU countries contribute about 32% to the fund (an average of 1.9% per country), so they will be taking their own money to bailout themselves.

There are also reports that the head of the EFSF is traveling to China and other emerging markets to raise money for the SPIV.  The EU is desperate to continue the Ponzi Plan their economy has been based on for the past 10+ years.  They've been unable to stop spending other people's money, so they are asking other indebted countries to help them out.  Whatever plan is announced, it will be just another shot of pain killers to a terminal financial system.  The EU needs antibiotics in the form of real spending cuts -- not more loans from other countries. 

Despite the big losses yesterday, there wasn't any technical damage.  The pullback was a pretty normal reversal down to the breakout point.  Even the steep uptrend line remains intact.

I continue to believe that we could be seeing a repeat of the "debt ceiling compromise" where the market analyzes what is actually being accomplished (or in this case not accomplished) and we see a sell-off as everyone realizes that it is just another attempt to kick the debt can down the road.

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.