Euro-Banks Worry Fed and Investors

The reprieve from Euro-news was short-lived. News that the Fed has been meeting with the executives at U.S. branches of European banks is raising the fear level of investors this morning.

It’s being reported that one European bank has recently borrowed $500 billion from the European Central Bank. And that’s the first time such lending has taken place since February.

Needless to say, at least some European banks are having liquidity problems. The recent statements from European banks like France’s Societe Generale that they are fine are being called into question. Rightfully so.

This is reminiscent of the financial crisis because there are liquidity problems at banks, and we don’t know how deep they run. Plus, given that European leaders have been consistently behind the curve in dealing with debt problems, it’s hard to imagine them being on top of any problems in their banking system.

On top of the Euro-bank problem, we also have weakening economic data. Jobless claims were up last week and the Consumer Price Index rose more than expected.

Gold prices are ramping again as investors flee stocks for safe havens. Treasury bond prices are up sharply, too.

Tomorrow is August options expiration. I suspect you could sell some covered calls to make a little money. The odds for a rebound for stocks seems pretty slim at this point.

What will the machines do today and tomorrow? As we know, the majority of volume on the NYSE these days come from computer based trading programs. And on days when there is very little buying interest, stock prices are highly vulnerable to relentless declines.

Stocks seem to be set up for such a drop today. If you have stop loss orders entered for your positions, they may well get hit as these computer trading programs seem designed to seek out levels where stops may be triggered.

Now, that may not be a bad thing. As much as I dislike selling on weakness, lightening your exposure isn’t the worst idea I’ve ever heard. Economic data is weak, and growth estimates are being revised lower.

Watch for the U.S. Fed to take some action concerning European banks. The Fed backstopped them (in addition to U.S. banks) during the financial crisis, and I won’t be surprised if the Fed does it again.

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