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What the Mother of All Bailouts Means for Investors

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May 10, 2010 – Comments (5)

In an incredible weekend development, the EU has established a near $1 trillion bailout plan for the entire European continent in the hopes of preventing a string of sovereign defaults. Stocks are rocketing up on the news, making it a nice day for those of us who believed all along that Europe would ultimately step up to defend the euro and therefore that stocks in countries such as Portugal and Greece were largely oversold.

What the plan essentially does is bind Europe together so that it can borrow as a union rather than as individual member states. This is a historic development and one that will have significant long-term implications. Leaving aside the merits of this bailout for Europe, what this means for investors is that the EU is willing to preserve the EU at incredible cost. This is good for the countries that have already been sold off (Greece, Portugal, Spain) and very bad for the countries that have held up relatively well (Germany, France). It's also likely in the long-term bad for the euro since it was heretofore viewed as a relatively safe currency and its risk profile as a reserve currency is now heightened. Thus, we should see convergence now between things Greek (risk assets and southern European bonds) and things German (EUR and flight to quality). This is why companies such as NBG and PT are rocketing up today.

I also agree with this take from David Zervos of Jeffries & Co.:

My quick thoughts on markets are as follows: great for risk assets, terrible news for bunds, great news for southern European bonds, bad news for the flight to quality UST trade, and ultimately terrible news for the EUR. Maybe the EUR tries to rally on this, but it the end this bailout has done nothing positive for the EUR. The market will inevitably look at the ECB as being forced by the EU to monetize the debts of EU rogue nations.

5 Comments – Post Your Own

#1) On May 10, 2010 at 11:13 AM, XMFSinchiruna (27.15) wrote:

All it really means is Western quantitative easing to infinity in a failing attempt to ward off the $600 Trillion derivatives beast from tearing the entire ponzified system apart.

Even supposed fiscal conservatives like Merkel's German stared into the eyes of the beast, and were so frightened by the sight that all prior insistence on an austerity-focused approach were tossed out the window as Europe became the second quarterback to toss a hail mary pass that will never be caught.

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#2) On May 10, 2010 at 11:25 AM, russiangambit (29.45) wrote:

> Stocks are rocketing up on the news, making it a nice day for those of us who believed all along that Europe would ultimately step up to defend the euro and therefore that stocks in countries such as Portugal and Greece were largely oversold.

I always thought that Europeans are more sane than Americans, in terms of expecting something for nothing , especially germans ( such as fixing a problem of not being able to pay debt with yet more debt). I guess it aint so. I misjudged the situation. I expected the Europeans to hold on longer.

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#3) On May 10, 2010 at 12:01 PM, PSU69 (86.66) wrote:

As a business leader with over 50 trips to Europe and operational responsibility for factories in Europe, to me this means Europe is covering or helping their faltering members.  This will erode the Euro and strengthen the dollar.  My next Porsche will be less expensive in dollar terms.  This bailout will support the staff heavy government and extensive vacations of Greece.  This bailout helps our stock market stability and for that I am thankful.

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#4) On May 10, 2010 at 5:05 PM, djemonk (< 20) wrote:

All it really means is Western quantitative easing to infinity in a failing attempt to ward off the $600 Trillion derivatives beast from tearing the entire ponzified system apart.

If anyone needs me, I'll be in my bunker hugging my stockpile of ammo and canned leeks. Report this comment
#5) On May 10, 2010 at 5:14 PM, ragedmaximus (< 20) wrote:

 I seriously don't know if or why ANYBODY would be happy about today. I got lucky I bought ko friday 52 sold premarket 54 but seriously Today was bull poop If you bought a stock friday and sold a winner. IF you bought this morning and thought the stock market was all rosey then you got suckered again because pretty much all stocks opened higher and well fell back down so more bagholders. I am going to wait for every 2-3 down days and then poke at a stock but other than that were in a sure slow slide down.

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