A Hostage to Europe No Longer

 | Jan 31, 2012 | 11:23 AM EST
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Had a real tiff at 4:45 a.m. EST this morning @JimCramer on Twitter. I was trying to make the point that Europe's now been put in perspective -- that potential defaults by  whole nations no longer seem to trigger big sell programs in the S&P 500.

I was met with an onslaught of people telling me Portugal is going to default, and how dare I suggest that a Portuguese default wouldn't be devastating.

Here was my reply, before I started blocking all of the catcalls: devastating to whom? To Portugal? For certain. To Spain? Maybe. To Europe? Doubtful. To the U.S.? No. That was my point.

You see, something happened when the Europeans decided to extend hundreds of billions of dollars to European banks to do with as they pleased. Initially we heard the credit lines weren't being used. That rumor was so wrong that it had to have been spread by the bears.

It turns out banks used the credit lines not only to stop selling sovereign bonds, but to buy sovereign bonds. The next thing you knew, yields went down and bonds went up, and we began to see the makings of a two-way market.

I am now realizing that the two-way market is what's salvaging everything. This, more than anything else, is what is buoying our markets and making them less of a hostage to Portugal or to Greece or Italy.

Let me explain.

First, as long as these bond markets had been in free fall, you had to bet against everything Europe, from the sovereign paper to the banks that owned it to the euro in which these were denominated.

But that all changed once we got a two-way market, with supply drying up thanks to the end of fire sales by the big banks. Once this happened -- once you got a sense that there were buyers -- you not only had to stop shorting, you had to start buying. In other words, you had to turn opportunistic.

You saw this when Spanish bonds were shooting up in value off auctions. If you had borrowed billions to buy billions in Spanish debt, you had the biggest home run of the last decade. The same goes for Italy --the markets went from being death marches to being bountiful cornucopias.

It gets better. There was a lot of chatter about how the gigantic rights offering for UniCredit, the largest bank in Italy, was a disaster. But those who took the stock down made 60% almost overnight.

Next thing you knew, U.S. money started flowing in, aiming to get some of the higher-yielding bank paper from the more solvent European institutions. Now the big bad auctions in Europe seem like the best way to make money, particularly if you are an American -- because you'll have gotten a win not only in the bonds, but the currency as well. Augment that with the German market being one of the best in the world so far in 2012, and you can see that, if the tide hasn't necessarily turned, at least it's gone back and forth.

That's the reason why Europe is no longer holding the U.S. hostage. The markets can make you money, not just lose you money -- and that's why 2012 has been U.S.-focused. Let's hope it stays that way.


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