Outside of technical action, the story continues to be that point of no return we have talked so much about recently and how Spain, the one economy the Troika can't save, needs saving.

First though, Asian trade sentiment soured a bit as Chine refuted rumors of stimulus (some as high as 1 tn Yuan).


A few weeks ago it was a slow motion train-wreck, now it's moving a bit faster. Just like that tipping point for Lehman, there comes a point in which the last straw breaks and suddenly everything around you starts to break as Europe's last major domino in the PIIGS starts calling, setting off a chain reaction that is leading directly to the core and the very survival of the Euro-zone and its member states.

We know from past bailout experience that 10 year bonds yielding 6% or more is the trigger, it's an unsustainable level of debt burden, it keeps the country from being able to go to market to raise cash via debt issuance and what they do instead is sell a bunch of shorter, LTRO covered debt (3 years or less) in smaller amounts just to finance day to day operations as the debt to GDP gap widens and with it, all of the consequences like failing banks. However even their short term debt like their 2 year notes are yielding 5%, there's virtually nowhere Spain can go across the yield curve to obtain survivable (not even affordable) financing.

Overnight Spain's 10 year hit a new record high of 6.72% which is a 30 basis point jump in a single day, at this rate they'll be over 7% in days or less. As much as they may kick and scream to the contrary, don't be surprised to see some sort of coordinated Central Bank move or at least an ECB move.

JPM estimates the cost of the total Spanish bank bailout to reach as much as $350 bn Euros, the Spanish fund has $4bn Euros left in it and just yesterday there was an immediate need for at least $30 bn more. Just as we saw Bankia's bailout amount jump by 40-50% every other day, the same will happen with all of these other banks as the amount they need now is not a static number, it's a moving target as depositors withdraw money in what is otherwise known as a bank run; then the bailout cost rises significantly and this isn't even considering the tangental issues that spider-web out across the economy. Take for instance European corporations that depend on banks for 70% (on average) of their financing needs (vs. 30% in the US); with no money in deposit, it doesn't matter what the RRR is, there's nothing in the way of hard money to back those loans, so the economy worsens, more businesses shut down, the unemployment rate rises, and these are just the obvious effects, it always seems to be the ones that no one thought of that become the real trouble.

It's not just Spain...

Every time one of the PIIGS goes out to issue debt, it kills overnight market sentiment. Italy had an auction of 5 and 10 year debt. The auction originally slated for $6.5bn fell short only selling $5.75bn. The 5 year priced out at 5.66%, almost a 100 basis point jump from the last auction about a month ago. The 10 year came in at 6.03% which was a 30 basis point increase since April; the Bid to Cover on both auctions were very poor. Italian debt is once again over the 6% mark on concerns over Spain-NOT GOOD.

In an article from WSJ (which is just re-cycled news from yesterday,

EU Proposes 'Banking Union'

EU WILLING TO `ENVISAGE' DIRECT ESM BANK RECAPITALIZATIONS


EURO ZONE SHOULD MOVE TOWARDS BANKING UNION


However, it's important to distinguish the EU from those who control the purse strings, meaning it's just talk and really it's not much different than the Reuters story yesterday. As of now Spain doesn't have the much needed ECB support, whether that will change remains to be seen, it almost seems as if there's little left the ECB can do, remember their balance sheet is worse than the F_E_D's.


Shortly after this story broke (less than 2 hours), the EU divide became evident in this story...

Germany's Government Still Opposes Direct ESM Aid For Banks

The German government on Wednesday reaffirmed its opposition to allowing European Stability Mechanism, Europe's permanent bailout fund, to directly lend to troubled banks in the Eurozone.

This is the bigger story, while Germany isn't the ECB, it is the closest thing and they still wield the most power and influence-the North vs South Divide as there are clear communication breakdowns as the EU splits.




In some good news, 

Sweden Escapes Recession As Growth Returned In First Quarter

However, this is a glaring example of the North vs South divide in the EU as northern countries that still haven't been mortally infected by contagion look for ways to cut their losses and close the transmission routes. I truly believe this will be the next big political story out of Europe, the reshaping of the Euro-zone or collapse of it, at least as we know it now.

The one question I have been getting a lot lately is "How can we pass the point of no return and still expect a sharp rally?"


The answer is simple, short term trade (up to several months), has very little to do with the discounting mechanism in the market and more to do with market manipulation. Even in the worst bear markets we have seen such as the 1929 Crash, we still had very intense, strong counter trend rallies (they are actually generally more powerful than a bull market rally).


The market is a Zero-Sum game, for someone to make money, someone has to lose it. Just as Jesse Livermore noted over 80 years ago, everyone can be right on market direction, but few will make money even if they were right in his talk about "I didn't make money from being right, I made money from sitting". In other words, counter trend rallies are there and they are strong on purpose to move people emotionally, if everyone is a bear, who does Wall Street trade against?