Trader Talk

No US Bottom Without Europe Resolution

Are we at a bottom? Not without a better resolution to Europe.

With that said, the selloff this morning as Europe was closing had the feel of a mini-panic. Volume was intense; some very big stocks on my screen were down 8 or 9 percent.

We will close today with well north of 6 billion shares changing hands among NYSE stocks. That is the highest volume level of the year.

That's good news, believe it or not; a panic blowoff. It's a rare day when the S&P 500 is down 3.5 percent, but it's even rarer when it occurs after the S&P has dropped over 6 percent in the prior 7 days.

As for the technicals, a number of observors have come on our air to note that a 10 percent correction in the S&P 500is to be expected after the Fed withdrew QE2, which blew a lot of liquidity into stocks and bonds.

That is correct, but the velocity of the decline has made what could be called a healthy correction seem like a panic. A year's worth of correction in 7 days?

What's Next?

1) All through this morning, I kept hearing the phrase "Brady bonds" from traders as a way of saying that some kind of longer term solution to the rolling European crisis needs to be found. Recall Brady Bonds, created in 1989, converted defaulting Latin American bonds into new bonds (after a healthy haircut) with guarantees. Lenders had a choice of taking the new bonds or getting out and reducing debt exposure. They were successful. In a way, the European Financial Stability Fund will be functioning as a quasi-Brady Bond solution: investors in Greek debt will be taking a haircut, and new bonds will be issued. What's not clear is whether the EFSF in its current form will be comprehensive enough.

2) no one likes the words "stimulus" or "QE2," but very few traders I have spoken to believe Trichet and Bernanke will sit and watch us go off a cliff.

One thing's for sure: neither the Germans nor the French are interested in seeing the euro dissolved. Right now Germany is perfectly happy to have a weak currency brought about by weak partners in the euro. The Germans are the beneficiaries, since they are exporting a storm. If they broke up the euro the Deutschemark would go through the roof and annihilate exports.

Look at what is happening in Switzerland...they are spending a fortune trying to quash the strength in the Swiss franc, to little avail.

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