Rip Van Winkle Market: 40 Years of This?

When the plan to save Dexia came out a couple of weeks ago, some saw it as a precursor for the plan to save Europe as a whole. Not so fast.

The European Union is going to have a summit held this weekend to talk about how to solve the fiscal problems of European banks, leveraging up the €440 billion in the European Financial Stability Facility to almost €2 trillion, and saving Europe. However, yesterday and today we have gotten more rumors that nothing will be accomplished this weekend. Just a short while ago,German Chancellor Angela Merkel cancelled a statement due out tomorrow talking about the EU summit.
In other words, we are still stuck at square one, while Germany and France, the two largest economies in Europe, figure out how to pay for the PIIGS and bail out their weakened brethren. The only two viable ideas - expansion of the EFSF, and Eurobonds - have been met with so much headway that neither seem viably anymore. Leveraging up the EFSF would almost certainly cost France its AAA rating, and Merkel has been vehemently opposed to Eurobonds.

Greek debt is beyond blown out, the yield on Italian ten year debt is back over 6%, and spreads of Franco CDS continue to rise. There is so much more stress on the European financial system than anyone realizes. Contagion is spreading, and we could see the cracking of the Euro right before our very eyes.
The markets trade on every headline positive or negative out of Europe, and will continue to do so until there is a plan. We were supposed to have a plan this weekend.

Of course, there never was really going to be a plan. It has always been a plan to have a plan. Once you get into the fine details of the supposed plan, no one wants to be a part of it. Germany's citizens will not bail out all of Europe, and France can not do it alone.
Even Greece's Prime Minister, George Papandreou, recently said there are serious doubts the EU Summit will have a decision by Sunday. That means another Sunday night of looking at the futures trading on every headline. We have reports of a second meeting planned for next week, but given what we have seen in recent history, there is no reason to think a deal will come out of that summit either.

Wolfgang Schäuble, Germany's finance minister, said that a decision to boost the EFSF will be decided "later." Notice how no firm date is given?
When rumors came out at the end of September that the EFSF could potentially be levered up to almost €2 trillion, the market took another shot of "hopium," and stocks rallied for two weeks. The beginning of this week has felt very different, as reality as set in, and the "hopium" effect has worn off. Copper is back down to almost $3 per pound, and Europe is still broken.Until Europe comes up with a plan, we will forever trade on the whims of every headline from Der Spiegel, Die Welt, Financial Times, the Guardian, and every other European newspaper.

In other words, nothing is different. It is just a giant circle until Merkel and Sarkozy come up with a real plan.
Wake me up when all of this drama is over. Just please do not let me turn into Rip Van Winkle.

ACTION ITEMS:

Bullish:
Traders who believe that Europe will fix its problems before the year is out might want to consider the following trades:

    Consider going long the Euro ETF, CurrencyShares Euro Trust (NYSE:FXE), as the Euro could rally back to the $1.40 level.
    Also consider going long European banks, such as Deutsche Bank (NYSE: DB) and BNP Paribas, which may rally on recapitalization plans.

Bearish:
Traders who believe that nothing will happen at the second European summit scheduled for Wednesday, October 26, may consider alternate positions.

    Consider shorting the S&P 500 ETF (NYSE: SPY) if you believe Merkel and Sarkozy do not have a real plan and this fiasco will go on until the market forces action.