Europe’s Game of Chicken
Market Commentary
By Charles Payne, CEO & Principal Analyst

Spain is taking a page from Greece and becoming more demanding of its European neighbors and organizations to come in and rescue its banks. The question is how to get this done and what are the risks of letting this fester to the point of massive bank failures.

The ECB has already pumped in billions of Euros via its Long Term Refinance Operation, which lent out money for three years at 1% with the hope several issues would be resolved.

* Weak banks with maturing debts would have funding to operate
* Stronger banks would lend
* Stronger banks would buy sovereign debt

It's safe to say LTRO has been a total bust as loans have decreased, sovereign debt is still a huge problem and weak banks remain on the edge of disaster. Now Spain is asking the ECB to cut to the chase and simply pump in money by buying its sovereign debt directly. Moreover, there is speculation Spain is also looking to European emergency funds to help recapitalize its banks.

According to one report, JPM estimates a Spanish bailout through the end of 2014 (including €75.0 billion for bank recapitalization) would cost €350.0 billion, or half of the money committed in the two funding programs (not sure they are completely funded).

If the EFSF and ESM recapitalize banks, it spreads default risk to all of Europe and that's a tough one for northern nations including Germany, the Netherlands, Finland, and Austria to accept. That said, this is why all these nations supposedly got together in the first place; to get each other's back. The Obama administration is also pushing for quick action that amounts to huge movements of money.

It's clear to me someone will blink soon or the dreams of a united Europe will crash and burn and maybe never return. Of course, if there aren't fundamental changes in spending and work ethic, then it's a bad deal for hard working saver nations.

This is a tough call, but I see a deal happening to keep alive the multi-centuries dream of a united Europe. If Germany lets the union die, it means a bunch of weak nations fighting to create weak currencies because it would be the only way to compete and that could hurt the export sector in Germany—its main driver of prosperity. Moreover, there would be issues of inflation, nationalism, and even military conflict. The dirty truth is that with a common currency, all the money eventually will flow back to Germany, which is selling government bonds today at zero percent interest. In some ways this is a way of rebating debtor/consumer nations and keeping the golden goose alive.

It's not unlike the relationship China is trying to develop with the United States. But these would-be geese are squawking because they want to max out how much it will take to cook their own futures.

Of course at the moment all the players are chicken and all risk is getting burned. The markets are speaking loud and clear, actually trying to force would-be decision makers into action.

Europe Did It
By Carlos Guillen

Equity markets have given up all the gains from yesterday, with the Dow Jones Industrial Average down over 150 points. Once again all eyes are on Europe, and particularly on Spain. So far the approval of bailout for Spanish bank Bankia has not been granted by the European Central Bank, and this has Spanish yields on 10 year notes higher today. Nothing out of Europe is positive, and there are not indications of anything getting fixed any time soon. The bottom line at the moment is that, financially speaking, Europe is a disaster.

Also today, according to the European Commission, twelve European Union countries are suffering from macroeconomic imbalances that need to be corrected, with Spain and Cyprus being the most serious cases. While the commission said that the problems were not excessive, markets appear to be saying something else. Also worth noting was that the commission described the economies in France, Italy and Hungary to be experiencing serious imbalances, which was a notch down from the language used for Spain and Cyprus. Investors are clearly seeing lots of uncertainty in relation to the massive amount of debt in Spain, and as a result, borrowing costs in the nation have spiked to the highest level since the country joined the euro, close to levels where other debt-stricken countries such as Greece and Ireland have asked for an international bailout. The yield on Spanish 10-year bonds shot up 25 basis points today to 6.67 percent. It should be noted that a yield of seven percent is considered to be unsustainable by market experts. Also for perspective, the difference between the Spanish bond and the equivalent safe-haven German bunds was a record 5.36 percentage points.

Here at home, clearly disappointing was that home sales data not only came in less than expected but also put doubts on the notion that the housing market is bottoming. While yesterday's S&P-Case-Shiller index of property values showed some signs that the housing market had indeed reached a bottom, Pending Home Sales today was a total contradiction of that. As is stands, according to the National Association of Realtors, sales of used homes took a turn for the worse, declining 5.5 percent in April after increasing 3.8 percent in the prior month. The result was well under the Street's estimate calling for a 0.6 percent gain and represented the sharpest drop in a year. Despite the fact that mortgage rates are at record lows, it was not enough to boost demand for used homes. What is apparent is that home buyers are still waiting for home prices to drop even more. In addition, continuing foreclosures and limited access to credit are threatening to sink the housing market further; more details on this below.

If there is any good news at the moment, it is that stocks are trying to make a comeback. Now that the European markets are closed, perhaps there will be a bit less pressure from abroad, but tomorrow the volatility will continue to come from Europe.

Europe Dragging on Housing?
By David Urani

The housing market might be due for a reassessment now, as pending home sales fell by 5.5% from March to April while the Street was expecting a slight gain. If you've been following the trends, you know that after going flat in the earlier parts of this year, housing was showing a move back to the upside in recent months as we headed into the spring selling season. However, it would have made sense that as European misery kicked back into gear over the past couple of months, buyers would become more cautious.

Pending home sales are a more forward looking indicator than the likes of the new and existing home sales reports, and suggest that we could be headed back into a slide. In a way, it's not all that surprising given that most economic data has become tepid lately. Nevertheless, anyone hoping that simply low prices and mortgage rates would continue to entice buyers may want to rethink. We'd like to see some more supporting data before we call a stall in the housing market but it makes sense given the global economic issues right now.

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