I'm back and see our bounce is proceeding nicely

This is the Euro bounce that 3C has been signaling since last week, the catalyst today seems to be hope (and hope is a dangerous word in trading, even more so when it is used in a sentence that has "EU" in it) in the EU (as seen in today's Spanish Auction of debt) that tomorrow's ECB LTRO (Long Term Repo Operation) in which the ECB (European Central Bank) will provide up to 3 years of long term financing for banks and that those banks will take that money at 1% interest and gobble up sovereign debt at 5+% interest in a sort of carry trade, thus reducing yields that are growing ever more unsustainable, like Italy's 6.5+% 10 year BTP.

However, expanding balance sheets with more PIIGS debt when they have been trying to rid themselves of it the last 6 months, seems, well... "Hopeful", considering many of these banks are still way under capitalized, the cash may very well be used for more practical matters.

This has given the Euro the bounce we have seen coming, $1.30 just needed to be defended long enough, but I expect we will see distribution in to the bounce making it an excellent tactical window to get short the market. In the mean time, the short term long trades I put on last week in anticipation of the bounce are doing well and we have a nice selection of short candidates that will look even better on a little price strength-this has nothing to do with a Santa Claus rally, the timing is simply coincidental.

Now for the bad news for the ECB as Central bank actions always come with unintended consequences, such as QE2 sending commodities through the roof and killing manufacturers.

The ECB is taking collateral from these banks, as noted this is a REPO operation, that is as low as single A credit. So the banks will and have saved the higher quality collateral for private funding operations while giving the ECB the worst collateral they hold that the ECB will still accept.

Furthermore, while the ECB can give liquidity to banks, they can't make them use it to lend of buy PIIGS debt.

Also the LTRO operation greatly diminishes the chances, in the market's eye (Draghi has already been clear on the issue) that the ECB will print.

One other issue as the ECB loads up on tier 2 collateral (don't expect the banks to offer bunds for funds), the ECB has now expanded their balance sheet to the point in which it is now bigger then the F_E_D's ($3.2 tn vs 2.9 tn respectively). The problem? The ECB is now leveraged 30x over, which happens to be the precise leverage Lehman had when they collapsed and now they add more tier 2, junk collateral. If and this is nearly guaranteed, EU banks start failing, where will the ECB get its money back from? They'll be stuck holding collateral of diminishing value.

While Draghi is doing exactly what he said, following the ECB mandate and bailing out banks, not sovereigns, but providing liquidity hoping the banks will bail out the sovereigns, investors are becoming more and more concerned about the ECB's growing leverage and the lack of transparency about what exactly is on their balance sheet. This will become a bigger issue as investors question the wisdom of the ECB's ultra-high leverage and much of it holding sub-par collateral.

But for now, we have the bounce, lets see what can be done with it. Market updates are coming...