BAD CASE OF BAD MEDICINE

Imagine thirteen struggling businesses forming a coalition. They all do business together so they all want their colleagues to somehow keep the doors open. All thirteen spend more than they bring in. They decide to pool some resources to bail out those businesses that are in the MOST trouble. Once they pool their resources, they look at where they are: Business has gotten worse for everyone, and while they have started to cut expenses, revenues have fallen faster than the savings from the cuts. So they are now in a worse position. The biggest of the thirteen businesses is then asked to contribute more, but remember, they have their own issues and their own debt to deal with.

Furthermore, the weaker businesses (those needing the bailouts most) have much better retirement plans and workweeks, which so far, really haven't changed and this doesn't sit too well with the employees of the bigger business, which is causing further problems for the bigger business. The new plan being discussed would have these thirteen businesses taking this pool, their insufficient pool, which is about a fifth of what is really needed, and, um...borrows against it!, even though the collateral is eroding. Essentially they leverage the insufficient pool, backed by failing businesses, to lend to other failing businesses that are um, backing the pool as well. This almost makes the Subprime CDO's seem downright logical.

Although the situation is far more complex and complicated, that is the nuts and bolts of the new plan, which essentially would be financed by the ECB, and essentially, that's money printing. Printing there. Printing in England (new QE) and probably here (again).

The plan really lacks sense. And yet, the market rallies on this plan and for that matter every false promise that's been made out of the Euro zone, only to be disappointed again and again. Promises by Sarkozy and Merkel to have a solution by the end of the month therefore should be treated as specious. Details are lacking. So is credibility. Apostasy Now!

When mixed signals paint an uneven picture, it's usually best to default to what the markets themselves are saying.

Treasury markets echo what the Fed has been saying: that the forecast calls for pain. Yields are at all-time lows and below the inflation rate. This suggests that Treasury traders are calling for continued malaise if not something worse. Dr. Copper, with a PHD in economic forecasting remains near its lows and in a downtrend. Chinese stocks have bounced over the last few days but are in a Bear market. While some intra-bank spreads have come off the boil, Credit Default Spreads are showing a contagion well beyond the PIIGS countries. And then there's the stock market.

Monday's stout rally came on non-existent volume. While there was some positive aspects to the rally, (we FINALLY broke through the 50-day moving average and it was a 90% up day, with 90% of stocks moving higher), nothing has really changed in that the trading range since early August is still in place. Rallies have been on light volume and we haven't seen proper leadership emerge, or an abatement of institutions feeding stocks into rallies.

Furthermore, extremely volatile markets that turn on a dime are rarer than a cross between a California condor and a Whooping Crane. Previous instances of markets that have this look technically over the last 100 years nearly all have resolved with an undercut to the trading range, then a basing formation whilst fear and uncertainty beget an ultimate healing cycle. The charts on our markets look eerily similar to 2008. IF we see volume and leadership return, we will happily change our minds and start nibbling, but guessing where a bottom is would be akin to guessing when policy will make more sense and it's certainly not showing on the charts yet.

The bottom line for us is that until something really changes, nothing has changed. The trading range for the equity markets is still in place. European leaders have not emerged with a credible plan or details. No pro-growth policies have been implemented in either Europe or the US. Therefore the deficits continue to grow. Risks abound. Discretion is the better part of valor here, so while will be watching the markets for signs of a "market spring", looking for resolution will be akin to my waiting for a phone call from the Dallas Mavericks...it hasn't happened yet.