Mario Continues His Game of Chicken

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Today's market action is a tale of Before-and-After-Mario-Draghi, a.k.a. "B.D." and "P.D." After the ECB basically said it wouldn't do anything new, Draghi in his press conference uttered a lot of brave words, not the least of which was the phrase, "it is pointless to bet against the euro." Besides that, and hints at potential future action to come, he didn't back up last week's bravado with anything concrete.

The real question is, was he silly enough last week to just pop off and think he was going to be able to jawbone markets to where he wanted them, or is he now just buying time? Because doing the sorts of things required to get the ECB to mimic the Fed is going to take a while.

Sometimes Talk Is Expensive

Of course, we don't yet know the answer to that question. One would think that people in his position would know that more empty words will only lead to a disaster in the short run. He and the ECB don't have the luxury of the Fed, which only has to hint at taking action to move markets. The Fed doesn't actually have to do much, since it has shown its willingness in the past to print money with reckless abandon.

The market's response to today's disappointment was pretty swift and brutal. European debt markets, which had been rallying, were slammed, with Italy and Spain declining roughly 40 basis points (Italy is now yielding well north of 6% again, and Spain is over 7%). Equity markets in Europe were similarly smacked after being higher to the tune of 1-2%. Meanwhile, P.D., Italy and Spain lost 5%-ish.

The Sincerest Form of Floundering

My suspicion in all of this is as it has been: in the end, the ECB will become the Fed (after a fashion), but it is going to take more market pressure and fear, if not panic, to create that. Part of the reason is because the ECB can't act quickly, and part of it is because its powers that be don't really want to, preferring to keep the pressure on European governments. Thus, the financial psychodrama that is Europe continues unabated.

As for how our market behaved in the wake of all of the above, the Dow and S&P lost about 1% early on, though the Nasdaq was kind of unchanged.

It Was a Dark and Stormy Knight. . .

For all of us who hate algorithmic trading and the lunacy it has engendered in this anchorless, fiat currency, centrally planned world that we live in, another visible blow to the "financial system as we know it" was delivered, as Knight Capital Group (KCG) was crushed for 50% after announcing a $440 million trading loss caused when it sold the stocks it had erroneously bought Wednesday morning due to what the company's CEO referred to as "a large bug" in its trading software.

One can only hope that the pendulum has swung about as far as it can in that direction and that some sort of sanity will be brought forth so that we don't have to wait to for the computers to lose all of their money before they stop from making it even more difficult for the rest of us to make ours.

Turning back to the action, stocks sank as the session wore on and by day's end but they rallied a bit to close off the lows.

Away from stocks, as one might imagine, the euro sold off rather violently after seeing a nice gain B.D. (Before Draghi). But while the selloff eradicated gains, the euro didn't plunge deeply into negative territory and was kind of idling around unchanged before losing "just" 0.5%. The euro itself could be a tipoff as to how close we are to actually getting something of consequence from the ECB, but I don't want to read too much into one day's action.

As for the bond market, it was higher, oil lost 1.5%, and silver and gold were higher B.D. but quickly dropped about 1%, as they too were roughed up P.D. They followed the action in equities late in the day, also closing off the lows.

Positions in stocks mentioned: none.

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About Bill Fleckenstein