The easier part of Italy’s bond auctions this week took place earlier today as they sold a 2 yr zero coupon bond and a 6 month bill. Both though were priced at yields well below one’s sold last month. The 2 yr ytm came at 4.85% vs 7.81% in Nov and the 6 month bill yields 3.25% vs 6.5% one month ago. Whether the catalyst for the sharp drop in yields over the past 4 weeks was due to the ECB 3 yr lending facility remains to be seen but a good test of the appetite for Italian debt will be tomorrow’s bond sales that have maturities past 3 yrs (up to 10). Looking at 2012 with respect to Europe, it is inevitable to me that Europe will have a tough recession, not mild that many believe. Their banking system is literally shrinking and while foreign banks will fill some of the void, it won’t be enough over the next 6-12 months. European companies source 80% of their loans from banks and the credit dearth will be obvious, notwithstanding ECB longer term funding facilities. Slower economic growth will then lead to further stress on sovereigns and the ECB will then be left with the political choice of presiding over economic pain that will ultimately lead to debt restructurings (the healthy long term solution) by not sterilizing bond purchases or they will print and print and try to inflate their way out. With respect to stocks in 2012, it may simplistically come down to this, pre printing action and post printing action. Sell the former and buy the latter. I didn’t mention the Fed in this discussion but be sure, QE3 will come along when the travails of Europe hit the US economy. II: Bulls 50.5 v 48.4, highest since May, Bears 29.5 v 30.5
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