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The Joy of Flatness


The U.S. stock market has been pleasantly snoozing along over the holiday season, but was rudely awakened yesterday, and the Dow dropped 140 points.  You don’t need to ask who woke up our market so rudely, as you already know all bad news comes from Europe.

Even though there was good European news that interest rates paid on Italian government bonds dropped significantly, the ECB also announced a large increase in deposits.  The market immediately assumed this indicated a lack of demand for loans in Europe, which suggests immediate recession.  The Euro promptly plummeted, taking gold with it.  (By the way, Europe is already in recession.)

Closer examination, however, suggests the large increase in deposits at the ECB is just an echo of the huge new three-year lending program of the ECB, which was heavily subscribed.  That tells me that European banks know a good thing when they see it and took advantage of the cheap funding; borrowing as much as the ECB would lend them.  As this just happened this month, they haven’t removed all the funding the ECB provided from the ECB.  They’re trying to figure out what to do with this windfall.  I’ll bet next month’s report will be much more sanguine. 

The fact that the Dow lost 140 points by selling before anybody even understood the report shows me just how “jumpy” the stock market is.  Sell first, ask questions later.  Europeans will return from holiday next week and will make some more bad news.  The European debt crisis ain’t over yet . . . darn it!

Today, the Dow looks flat for now . . . enjoy that!  It beats the alternative, coming soon to a portfolio near you . . .

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