Bit of a Head Scratcher Today

The action today has me a bit confused.  I expected a big rally off the open on the bailout framework in Europe.  Instead we have bounced around between negative and positive, or unchanged until around 2 PM - and then the furious rally of 2% to close out the day.  The one I expected at the open.  The only thing I can see on the newswire is some European officials saying "no, we're really quite serious about recapitalizing the banks".  CNBC also is breaking what appears to be a new 'twist' on the bailout.

It would have been a lot more typical if we gapped up and rallied within the first 30 minutes and then went sideways at the +2% level most of the rest of the session.

But either way our pattern of massive moves continue.  We had a +6% week followed by a -6% week, and already we have 2% down this week, 4% to go.  "Healthy" action... not.

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This seems to be another plan - not sure if it's the same one we discussed this morning.  It's a new twist as far as I can tell, with the same intent. Now they are talking about a "special purpose vehicle", funded by the EFSF.  Then that vehicle would issue bonds.  With the money from the bonds, the SPV would purchase the sovereign debt.  It's so circular at this point, it's beyond me.  I assume some of these maneuvers are done to avoid having to go back to individual governments and getting approval.

• The plan appears to have a lot of moving parts. It would involve money from the European Financial Stability Facility (EFSF), a bailout vehicle created in 2010 to alleviate the sovereign debt  crisis in Europe, to capitalize a special purpose vehicle that would be created by the European Investment Bank, a bank owned by the member states of the European Union.  The special purpose vehicle would issue bonds from investors and use the proceeds to purchase sovereign debt of distressed European states. 

And since the ECB cannot at this moment buy sovereign debt from EU nations directly - it can instead "buy" it from this special purpose vehicle.  Although we'll call it collateral to make the ECB feel 'pure' and not just another The Bernank.  Oooohhh, creative....

• The bonds issued by the special purpose vehicle could then be used as collateral for borrowing from the European Central Bank (ECB), allowing the central bank to make loans to banks faced with liquidity shortages.

• Although the structure is complex, the underlying result is relatively simple. Banks would essentially be allowed to exchange their sovereign debt for debt issued by a special purpose vehicle created by the European Investment Bank capitalized with funds from the EFSF. In some ways, this resembles the original plan for the Troubled Asset Relief Program (TARP).