Stocks Slip on Report of Euro Zone Debt Dispute

Stocks off their highs, led by banks. Stocks have held up all day, but came off their highs going into the final hour. Some note an FT article claiming there is a debate among Euro zone members that private creditors should take a bigger haircut than the 21 percent cut that is currently being offered.

No surprise here: the bonds are trading at 50 cents on thedollar already.

Rara avis: a 3-day rally! If recent patterns hold, it will be tough to keep the streak going. In the past two months, there have been only two periods where the S&P rallied more than 3 days in a row: a 5-day rally at the end of August, and a 4-day rally in the middle of September.

No wonder traders are so cynical about the latest move up: not even momentum trading has worked. "This market is nuts, Bob," one trader said to me. "Let's be honest — there is NO reason why these euro bourses should be rallying like this."

So why are we rallying so much in the past two days? A combination of 1) expectations for some type of rebalancing by pension funds at the end of the quarter, into stocks and out of bonds (both Goldman Sachs and JP Morgan had notes out over the weekend on this, noting the huge outperformance of bonds over stocks this month and this quarter), and 2) hope that Europe is groping toward some kind of feasible plan to address the debt crisis.

The rebalancing is difficult to quantify, but Europe is clearly the driver of this rally, and with some reason. Traders increasingly believe that Europe is groping toward a package that will include some combination of the following three elements:

1) expansion of the ECB's mandate — corporate bond buying, buying sovereign debt, swap lines open, collateral requirement rules change, etc.

2) recapitalizing the banks, and

3) enlarge the EFSF beyond the program that is being voted on by eurozone members now.

Elsewhere, the votes on expanding the EFSF, which must be approved by the 17 euro zone members, are proceeding:

1) Slovenia approved the euro zone bailout fund today. That makes seven countries that have approved. The other six are Belgium, France, Spain, Italy, Luxembourg, and Greece. Finland votes tomorrow, Germany Thursday, Austria Friday.

2) Greece did approve an increase in their property taxes, part of the effort to plug a shortfall in their austerity package. This was a key step in Greece satisfying the conditions of the EU/IMF and puts them one step closer in getting the next 8 billion euro tranche.

Does this mean the all-clear is sounding? I doubt it. Expect participants to downplay expectations in the next couple days.

There's a meeting of Euro zone finance ministers October 3-4. There are growing expectations that that some wider package may be seriously discussed at the meeting.

Given how leaky this process is, and the fact that none of the details to the package have been even discussed, I would expect the more sober-minded (read: the Germans) to downplay expectations.

Another reason for caution: U.S. economic data is the other side of this tape. ISM is Monday, and as we all know the regional manufacturing numbers have been awful.

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