Yesterday was not a good day for stocks, and Europe was to blame. Spain in particular was cause for alarm, with Spain's credit default swap (bond insurance) rising to 4.83%, far higher than the 4% level that prevailed at the time of the first LTRO operation and nearly the highest level yet. This backup occurred despite the two EUR 500 billion tranches of LTRO, the ECB's aggressive initiative to lend money to European banks for three years at extremely attractive rates.
US markets were caught flat-footed by the downdraft, which started out rather minor and got progressively worse as the day wore on. Towards the lunch hour Spain's stock market closed, leaving Spanish stocks lower by a full 2.96%, or over 11% lower than LTRO's initiation date of last December 21. Italy was even harder hit, closing down 4.98% and leaving Italy down over 4% for the year. Even stalwart Germany was down 2.49%, shaving its year to date gain down to exactly 12%--still spectacular, but much less spectacular than a week ago.
Markets don't move in a straight line, and we're due for at least a small bounce. Alcoa's 10 cent per share earnings vs a 4-cent expected loss may give us the catalyst for this short-term scenario. But I don't want to mince words: I have been bearish for a few weeks now, and am of the opinion that bounces are to be sold, rather than dips are to be bought. The landscape has changed, and our over-levered, over-stimulated chickens are coming home to roost.