Photocopy

by Larry Levin


Today's market action was nearly a photocopy of yesterday's action: down early, then a rally, then a fall from the high that simply led to a choppy. There wasn't a great deal of news today to move the markets. Although the 10-YR Note auction was graded a D by Rick Santelli on CNBC, the auction results didn't move the market. It's doubtful that tomorrow's 30-YR Bond auction will either.

Bloomberg said this of the auction - Blame it on the weather but results for today's 10-year auction are disappointing. Like yesterday's 3-year auction, today's auction produced a tail as the high rate of 3.692 percent was more than 1 basis point over the 1:00 bid. Direct bidding was heavy with the group taking down 13% of the auction, down from 17% last month but still well over the recent average of 8%. Dealers have been complaining that strong direct bids will undermine how strongly they bid at auctions. Indirect bidders were very soft, at 33% vs. an average of 41%. Indirect and directs combined total 46% to indicate soft demand from non-dealers. Demand for Treasuries fell in reaction to the results.

There were more rumors of a bailout for Greece again today. The new news is that Germany will help Greece if France goes "Dutch" on the funds. Once that happens, do you think Spain and the others will have their hats in hand as well? I do. And what about here in the US? Once the Feds bailout California, surely my state of Illinois, then Nevada, then Michigan, Ohio, etc will be knocking on Congress' door with their hats in hand.

Bill Bonner recently wrote a piece on this subject that can be read here:

http://dailyreckoning.com/bailing-out-a-welfare-state-the-california-greece-debate/

but a portion is found bellow.

And from the west what do they have to fear? Well, there is that business in Europe. You know, Greece and all. The PIIGS, Portugal, Italy, Ireland, Greece and Spain. Europe's peripheral countries are in trouble. Lenders fret that they might be forced to default on their debt. So, they want higher interest rates. This, of course, just makes state finances worse pushing the PIIGS closer to default.

The PIIGS owe $2 trillion, which might need to be restructured. Yes, dear reader, the sovereign debt problem is a big one, much bigger than Bear Stearns, Lehman Bros. and AIG. But the biggest porker of all, the USA, has fives times as much sovereign debt as all the PIIGS put together.

It won't take investors long to figure out that there isn't a whole lot of difference between Greece's finances and those of the US. Each has about the same amount of debt and the same size deficit, relative to GDP. The big difference is that the US ultimately controls the currency in which its debt is calibrated. Greece does not. Neither does California.

Both California and Greece borrow long-term at about the same rate around 6%. Lenders know that when their backs are to the wall, both governments will have only two choices, not three. They can cut spending. Or, they can default. What they canâ?Tt do is wiggle out of their obligations by inflating their currencies.

Jean Claude Trichet has already made that clear:

"belonging to the euro area, you have an easy means of financing your current account deficit. You share a currency that is credible, so that you have a quality of financing that corresponds to that of a credible currency."

He went on to say that Greece contributes only about 3% to the total output of the euro-zone. If push comes to shove, Greece will be pushed out rather than allowed to weaken the euro.

Then, Mr. Trichet made an odious comparison. California is a much bigger part of the US economy than Greece is of the euro economy. In fact, it is more than four times as large. Will the US come to California's aid? Mr. Trichet didn't say.

It is possible, of course, that Mr. Obama will say to the Golden State what Gerald Ford said to the Big Apple. In 1975, New York City's back was to the wall. It appealed to Washington for help. "Ford to City: Drop Dead," was the famous headline in the New York Daily News, reporting the presidentâ?Ts response.

New Yorkers were incensed. Later, they realized that by vowing to veto a bailout President Ford had done them a great favor; he forced New York to clean up its act. The city went on to its greatest years. Likewise, the feds would be doing all of us a favor by letting failure fail with dignity.

Will Obama help California mend its ways? Or will he turn it into a zombie state?


Previous Day's Trading Room Results:

Trade Date: 2/10/10

E-Mini S&P Trades*
(before fees and commissions):

1) OTF sell @ 10:09am at 1061.50 = +.25 (1 lot)

2) 80% buy @ 10:44am at 1062.75 = -.50 (1 lot)

3) Algorithm positions (8)

4) Reading the Tape positions (19) combined Secret's, Algo, & Reading the Tape total +11.25




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