Kass: A Brief Bounce
NEW YORK (Real Money) -- On Tuesday, I made another ludicrous forecast:
Suppose there is some progress at the EU Summit on Thursday.
Given that Friday is quarter-end, is it possible for another rip-your-face-apart rally just as everyone has de-risked?
Overnight, an upside surprise occurred at the European leaders' summit in Brussels. (The tip off was the cancelation of Merkel's press conference early last night.)
Initially, the leaders signed off on a 120-billion-euro growth pact, which was disappointing, and S&P futures dropped 5 to 6 handles. After an all-night session, however, the leaders of the eurozone agreed that rescue funds could be used for sovereign debt purchases ("to stabilize markets for member states") without forcing countries to adopt extra austerity measures. (The ECB would act as an agent and purchase bonds on behalf of the EFSF/ESM.) In addition, after a single supervisory body for European banks has been created, funds could be lent directly to banks for recapitalization without penalizing existing debt holders.
Of course, the devil is in the details.
The announcement said, "We task the eurogroup to implement these decisions by July 9, 2012." Does this include the sovereign bond buys? It is unclear. (There needs to be unanimous agreement of this deal.)
Here is the complete communiqué.
How long will the euphoria of the meeting's decision last?
How long will today's rip-your-face-apart rally last?
Hard to say.
But for a number of reasons, it is most likely that it will be short-lived.
The most significant reasons for this view include the recently weakening corporate profits picture in the U.S. -- see Nike (NKE) , Ford (F) and the like -- and the likely expanding divide between the Republicans and Democrats following yesterday's Supreme Court decision on healthcare. On the latter point, there is a positive in that the Supreme Court's ruling could energize the Republican Party's base and lead to a stronger turnout, which would bolster Governor Romney's chance of election in November.
As well, another important reason why today's ramp might exhaust itself is that the initiatives fail to address the deep structural problems facing the EU.