ECB sets off a rally, and it's just the beginning

Stocks surge to levels not seen since early 2008 as the European Central Bank unveils new stimulus.

By Anthony Mirhaydari Sep 6, 2012 12:11PM

Eurozone mapOne down. Two to go. In my recent video segment, I outlined three major events that would shake stocks out of their long sideways crawl. The first was Thursday's policy announcement from the European Central Bank. With Spanish and Italian borrowing costs flirting with unsustainable territory, with the European economy falling into a new recession, and credit no longer flowing properly in countries like Greece, fresh stimulus was needed. And boy, did the ECB deliver.

 

In a well-telegraphed move, the ECB delivered what it's calling the Outright Monetary Transactions plan, or "OMT" -- a new, unlimited "sterilized" bond-purchase program focused on buying the bonds of troubled countries that sign up or are exiting a eurozone rescue package. The OMT will operate in parallel with purchases from the Eurozone bailout funds and will require that countries sign up to stiff budget austerity terms.

 

Complex in design, the OMT is having a very simple effect on the markets: It's causing stocks and other risky assets to blast higher. Here's why it's set to continue.

 

 

In plain English, the announcement Thursday means the ECB will push down short- and medium-term borrowing costs of countries that agree to stick to budgetary oversight terms while mopping up any new money it prints in the process via short-term deposit offerings to banks. This will be a positive for the eurozone, given that the ECB hasn't acted to push down sovereign borrowing costs for 25 weeks.

 

 

Further, ECB head Mario Draghi has apparently won strong support with all but one official (Germany's Jans Weidmann) on the ECB council supporting the move.

 

Both German chancellor Merkel and German finance minister Schaeuble seem supportive of the ECB taking this action. Merkel indicated to German lawmakers she finds the idea of ECB purchases of short-term debt acceptable on a temporary basis. Schaeuble said he is comfortable that the ECB will maintain price stability and not finance individual country deficits, which would be a violation of the ECB's mandate.

 

This is huge, as it shows that Europeans, frightened by the prospect of Spain's going down and taking the entire eurozone with it, are beginning to set aside their political differences and rally to a common cause of protecting the union.

 

Indeed, Draghi said the OMT program will remove any doubt about the irreversibility of the euro. And this follows his pledge back in July to do whatever it takes to preserve the currency, warning speculators betting on the failure of Europe that his actions "would be enough."

 

For their part, traders have been stealthily positioning for the announcement and an upward resolution to the recent market standoff. Small-cap growth stocks are coming alive. Financials are perking up. And despite a strong effort by the bears over the past few weeks -- as seen in the way the CBOE Volatility Index has spiked and in the way put option activity has surged -- they haven't been able to generate panic selling. Market breadth is hanging tough.

 

For investors looking to participate, I believe the focus should remain on precious metals and the related mining stocks. In the Edge Letter Sample Portfolio, examples include Keegan Resources (KGN), up nearly 10% since I added it on Aug. 27. Older holdings include the VelocityShares 3x Silver (USLV), which is up nearly 70% since July 25.

 

 

Financial stocks are also showing promise. I'm adding Bank of Ireland (IRE) to my holdings, a position I recommended to my newsletter subscribers earlier this week.

 

Now all eyes turn to the German constitutional court decision on Europe's effort to use its bailout funds to recapitalize banks in Spain as well as the Federal Reserve decision on the 13th. I expect a positive result from those events as well.

 

Disclosure: Anthony has recommended IRE, KGN, and USLV to his newsletter subscribers.

 


Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.c​​​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

 

 

98Comments
Sep 6, 2012 2:30PM
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Large market moves based on speeches.

 

We are in a lot of trouble.

 

 

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The mother of all asset bubbles is now being inflated.

 

It will not take more than a year for this one to pop as the BRICS countries have decided to quit dealing with countries that cheat like the US, JAPAN and now EUROPE.

 

pretty much things are going to go from worse to worse to worse.

 

the Great Depression is going to look like a full blown economic expansion compared to the coming freight train about ready to hit us.

Sep 6, 2012 3:48PM
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This is nothing more than news media pump and dump lies, lies and more lies!  The ECB and the Feds have been in the markets manipulationg them since November 2011.  The economy is no better it's just pump and dump BS.  365,000 newly unemployed again today.  The ADP is reporting 201,000 new payrolls.........to bad those are just temp and contract positions.

Sep 6, 2012 6:37PM
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@GUSTAVO   I mow my own lawn,clean my own house. I don't use 7-11s, or Wawa ,or Starbucks I make my own coffee every morning because it's cheaper. You see my country has been destroyed by POLITICIANS not immigrants who unfortunately have used you to think that cracker and conservatives are Satan so you will vote for someone with a D by their names. Look at all the cities that have been run in the ground the last 60 years by the D party and you will know why they perpetuate the myth.

Sep 6, 2012 3:52PM
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Really amazing on how the market reacts with just talk, no evidence i.e. financial, GDP, scary.  Wish you could borrow money on just talk.
Sep 6, 2012 5:00PM
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Bond repurchases is the equivalent of printing money....disguise it any way you want.  You can't put lipstick on a pig and present the hog as a princess.  Likewise making a purse out of a sows ear cannot pass for an expensive purse at tiffanys.  Pushing debt down the road seems good, it makes everyone feel warm and fuzzy.  Like the guy who poops his pants, he gets relief right away but the smell overwhelms everyone very soon.  Pushing interest rates down is punitive to thrift and rewards those who are careless spenders.  The destruction of societies have followed this path repeatedly.   

Sep 6, 2012 4:23PM
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You are not solving economic problems by printing money and setting up programs to buy bankrupt assets. It is a fools game. The bill will come do!!

 

The Federal government spends 3.9 trillion, takes in 2.6 trillion, has to borrow 1.3 trillion. It won't last for much longer!!

Sep 6, 2012 4:00PM
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CS in AZ,

 

This rise is on very, very light volume.............which means.........some entity has just pumped in billions of dollars and is hoping to draw in suckers to buy stocks off of them at these extremely over inflated prices

Sep 6, 2012 4:57PM
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Hey look everyone, look what we just found... more fake money created out of thin air backed by nothing!....Subsidizing the speculators and ponzi schemers at the expense savers and pensioners is fun!!!...Your welcome Wall Street Douche bags
Sep 6, 2012 3:55PM
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So???   One of these times the poor old can gets kicked right off the cliff.

Nothing has changed or improved, just added some more "non" money to the markets. Big deal, won't help.

Sep 6, 2012 3:59PM
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The rally will be crushed by how fast gas prices will start to rise in a growing economy....while employement and real wages are eithe decreasing or stagnant....people will not be able to afford gas...high gas prices will continue to inflate the cost of all goods and services....and we are sure to get a lot of inflation in general due to all the fiat money being injected in to the economy....so a stock market rally is not neccesarily the sign of any real good things from our economy....the basic dynamics that screwed up the economy under GW Bush are still in full effect if not worse....and it doesnt appear they can do anything to change it...
Sep 6, 2012 4:58PM
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Let's see.  So the ECB is going to use OMT to buy "inifinite" amount of Spanish and Italian bonds.  To pay for this, they won't print money, but rather take it out of the system elsewhere.  But won't "taking it out elsewhere" cause the private sector in Europe to contract faster, meaning less taxes for the same governments, which will borrow more, so more money is taken out elsewhere,  ....?  Sounds like a vicious cycle to me.
Sep 6, 2012 4:19PM
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The national debt has hit 16.006 at this rate of .006 per 24 hour period, how long will it take for the US to hit the debt ceiling of 16.4?  Debt to GDP is 104.327% and government revenue is way down.
Sep 6, 2012 5:32PM
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N Y times

that is too Funny

the mexicans are leaving in droves because of the lack of any work

ask any mexican and you get OBAMA NO BUENO
Sep 6, 2012 5:36PM
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urena 

they left one  socialist regime, and came  to another

Obama quote" we are ready to RULE from day one"
Sep 6, 2012 4:51PM
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Okay.  So, you must go deeper and deepter iton debt in order to improve the stock market. right?  ?!  Yet ohe more time, my investment is just the opposite.  Pay down the debt and then I will invest,  Not before.

Sep 6, 2012 3:56PM
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I knew it was Anthony behind this headline before I clicked the link. I knew it would basically be the same article he published the last time the market popped 200+ points, and he called the beginning of a bull run. Interestingly enough, it looks like we’re closing today about where we did on that day.  And we’re all better off…..why?

 

What I want to know now is whether the framework for these articles has already been written and sits in the can somewhere, waiting for the next 200+ point day to publish again? Is it actually done by people, or do computers automatically produce it all of that from other headlines?

Sep 7, 2012 12:53AM
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every government should just print lots more money and give it away to all the citizens.  Then they can spend it and raise the economy that way.  And they should also allow unlimited debt to banks, corporations, local governments and just keep printing enough money to cover everything.  Oh wait, in a way they are already doing this.  People need to get a clue, more debt is not going to salvage the economy.  It will devalue currency, creating inflation and eventually stagnating markets.  Current stock market is over-valued by a large percentage - look at a simple graph and get a clue.  Politicians are blowing smoke up our asterisks because it's election year, and dummies writing from what should be an informed viewpoint are repeating the government line.  It's all bull, and a depression is coming soon.  Read economic history.  Economies are CYCLIC, and depressions are adjustment periods that reset the economic base.  Since the keeping of economic records around 700 years ago this has been shown to be the case time after time, and efforts to stave off financial disasters generally cause a deeper, more prolonged depression.  Pres. Obama is hoping and praying that there is no crash until AFTER the election, and Romney doesn't care, because he can blame it on Obama.  Neither party is willing to take responsibility for action needed by our country, or the world for that matter.  Politics is the dirtiest word of all.
Sep 6, 2012 4:49PM
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More bs from a daily hack. Was there any plain english in that whole story? The ecb said it wouldn't print money but it sure sounds like it if they are buying short term bonds. And how are they going to enforce the austerity measures in the countries that are being helped. The people will  riot and they know it. This whole thing will be coming to an end real soon, then watch out for the collapse to spead to the rest of us.  Scary times indeed.
Sep 6, 2012 4:06PM
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I was worried that my short bets would kill me, but then I saw Tony calling for a continued upswing, so I feel much better now!

 

'Wrong Way Tony' is very consistent is his exactly opposite forecasts for what the market actually does.

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