Tuesday, December 20, 2011


Look at bond yields today (rising) and stock market prices (also rising).

I am fully aware of the structural problems of a debt-laden European economy (who isn't?) and the disparate interests of the 17 members of the EU that is a headwind to a cohesive policy aimed at stabilization of the crisis. But the underlying problem in the eurozone is well-known by now, and quite frankly should have been a cautionary sign to market strategists a year ago and six and three months ago, as they would have avoided many of the stock market's problems in 2011.

The eurozone Cassandras are out in droves now, supported by an ailing stock market, Draghi's hard line and Lagarde's ominous rhetoric. But so were the U.S. Cassandras out in droves during our domestic bank, debt and financial crisis of 2008-2009, yet much of those threats were overcome with aggressive policy -- and aggressive policy is inevitable in Europe, as the tension is kept on the weaker members of the EU until they respond responsibly in a fiscal sense.

And, already, as measured by lower sovereign debt yields, policy is having a positive impact.

The perma-bears missed the March 2009 generational low (666 in the S&P 500). Throughout the market's ramp over the past two and a half years, observers such as Nouriel Roubini have been in denial, wearing blinders that block out the recovery in stocks, and they have been very wrong in expecting a U.S. double-dip.

Despite the anxiety in the markets and the downside risk to the world's economic growth entwined in the European debt crisis, I remain of the view that a credible plan to stem the debt crisis in Europe has just begun and that European and global leaders and central bankers will all come to their senses and intervene in a massive way.

To me, the chances are awfully good. After all, the alternative is unimaginable for the eurozone's economic health and political stability.

In markets, politics, society and sports, change always come out of extreme conditions.

Peter Boockvar's brief communiqué:

Peanuts, beer, three-year loans here!

Today, European banks tell the ECB how much borrowing they want to do at 1% for three years. Tomorrow we'll hear how much they took and forecasts are about 300 billion euros. While some are still speculating that banks are buying short-term sovereign debt after selling it for the past few months, yields in Spain, Italy, Belgium and others are down again.

Also, another good Spanish sale of short-term bills is helping sentiment. Spain sold three-month debt at a yield of 1.74%, well below the 5.11% paid last month, and they paid 2.44% for six-month bills vs. 5.23% in November. The Spanish two-year yield is falling to a 17-week low, and the 10-year is at a 10-week low. There is confidence in the new Rajoy government's will and ability to get through tough reforms, as it will certainly be easier than for the previous socialist government. Italy's two-year yield is at a seven-week low. Germany's December IFO business confidence number unexpectedly rose to 107.2 from 106.6, led by the expectations component.

Also in Europe, the euro basis swap is narrowing to a two-week low, and Sweden cut interest rates by 25 basis points as expected. The ECB did fully sterilize its 211 billion euros of purchases.

In Asia, the Shanghai and Sensex indices continue to trade poorly, but the Kospi bounced after yesterday's Kim Jong Il-induced selloff.

Change is coming in Europe, and in the fullness of time, the aggressive policy employed in the U.S. three years ago will land on its shores.

In the meantime, unusual value in stocks has developed, and I am exploiting that opportunity even as the stock market's tone is terrible and as most classes of investors run for the hills and de-risk.

Is it painful to watch stocks reverse lower every day over the last week of trading? Of course it is. But no one ever said investing should be easy.

Remember: Bull markets are borne out of poor economic news, uncertainty and dour investor sentiment.

A dispassionate accumulation of stocks is what I believe to be in order now.

Overnight, Spain had a very successful auction of short-term paper, as the country raised its maximum target of 5.6 billion euros. Bid-to-cover was strong and helped to move the 10-year Spanish note yield down by 8 basis points, to 5%. Lateral sovereign debt in Italy dropped; its 10-year yields declined by 16 basis points, to 6.5%.