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European bourses are trading in positive territory ahead of the North American following a relatively quiet morning in Europe. Markets are led by the financials sector, currently trading up around 1.10%. This follows yesterday’s ECB LTRO. As such, the 3-month Euribor fix has fallen to 0.967%, a significant fall in inter-bank lending costs. PMI Manufacturing data released earlier today came in roughly in line with preliminary estimates. The Eurozone unemployment rate for February has also been released, showing the highest jobless rate since October 1997. There has been little in the way of currency moves so far in the session; however there may be fluctuations in USD pairs following the release of ISM Manufacturing data and weekly jobless claims later today.

As the ECB supposedly takes it foot off the gas, and EU Summits and 'events' loom large for the careening wagon of shared sacrifice, unity, and sovereign risk, perhaps it is the nodding donkeys of Greek and Italian technocrats juxtaposed with Ireland's feistier "R" word gambit (and of course Zee German Overlords) that makes Art Cashin reflect somewhat philosophically on recent headlines. Their stereotypical interpretation has him concerned as the potential for ever-increasing culture clashes increases across the pond as sour memories and generational hatreds abound.

For those confused, the Fed's Beige Book has been upgraded to the Beige iPad (apparently Ben is not a fan of the black or white version). Regardless, the latest version has just been released spewing forth the usual reflexive platitudes, in which the economy is said to be better because the stock market is higher, and so forth. In other words, the same stuff that completely ignores $110 WTI. Via Bloomberg:

• FED SAYS U.S. ECONOMY EXPANDED AT `MODEST TO MODERATE PACE'
• FED SAYS CONSUMER SPENDING WAS `GENERALLY POSITIVE'
• FED SAYS MANUFACTURING EXPANDED AT `STEADY PACE' NATIONWIDE

And more such headlines which nobody will actually read, except for the algos which scalp the optimistic tone put there precisely for such a purpose.

Silver as ever outperformed gold yesterday and traders attributed the surge to “massive fund buying” and to “panic” short covering. Some of the bullion banks with large concentrated short positions covered short positions after the technical level of $35.50/oz was breached easily. Massive liquidity injections and ultra loose monetary policies make silver increasingly attractive for hedge funds, institutions and investors. This time last year (February 28th 2011) silver was at $36.67/oz. Two months later on April 28th it had risen to $48.44/oz for a gain of 32% in 2 months. There then came a very sharp correction and a period of consolidation in recent months. Silver’s fundamentals remain as bullish as ever and the technicals look increasingly bullish with strong gains seen in January and February.

...European banks are three times larger than the European sovereigns, the ECB is not the Federal Reserve Bank of the United States, the leading economy in Europe, Germany, is 22% of the economy of America, that there are ever and always consequences for providing free money, that Europe is in a recession and it will be much deeper than thought by many in my view, that the demanded austerity measures are unquestionably worsening the recession and increasing unemployment, that nations become much more self-centered when their economies are contracting and that the more protracted all of this is; the more pronounced Newton’s reaction will be when the pendulum reverses course.

For a while there it seemed that together with the LTRO and the Bernanke testimony, tomorrow's event trifecta would be joined by ISDA, which it had previously been rumored would make a decision on whether a credit event (read CDS trigger) had occurred in the context of Greece, and specifically following the ECB's stripping of its own bonds under some arcane exchange offer that only the ECB was privy to (this is not a determination whether a credit event has taken place related to the PSI - that will take place in late March). According to a just released PR, this won't happen, and instead ISDA will hold the meeting at 11 GMT on Thursday, March 1, the day after the LTRO, and announce everything was voluntary and by the books, just to avoid overloading the algos with bullish news at the same time (recall that the LTRO announcement will take place at 11:15 CET). In this way, the upside love will be spread over two days, which should hopefully result in another 30 ES point, as the headline scanning aglos no longer care what the headlines actually say, as long as there are headlines. Remember: when dealing with a bipolar Atari 2600 - quantity trumps quality any time, especially when coming off the biggest short-term central bank liquidity infusion in markets in history.

While the discipline of behavioral finance is relatively new, the performing art of magic has long exploited many of the same principles about human nature and decision-making.   While much is made of the smoke-and-mirrors market we exist in, Nic Colas, of ConvergEx Group, reviews the 'Basics' of this ancient form of entertainment, courtesy of a recent Smithsonian magazine article by Teller (the quiet half of Penn & Teller), and draws some analogies to the modern world of investing and economic analysis.  The seven crossover points include pattern recognition, overconfidence, and the illusion of free choice. It seems to us that investors can benefit from reminding themselves that their own powers of perception are severely limited.   As Nic points out, if we can be regularly fooled by a Las Vegas magic act, then many of the same flaws in our thinking must be at play when we watch the screens at work.  We seek out patterns that don’t really exist.  We confuse choice with freedom. We grow emotional and limit our ability to process information.  Watching a show, this is amusing.  Making investment decisions, not so much.

Bill Gross' monthly letters are always a fresh source of jovial imagery, although the bond king may have outdone himself in his latest monthly letter which collapses the principles of investing onto the football field: "My point about pigskin offense and defense is the perfect metaphor for the world of investing as well. Offensively minded risk takers in the markets have historically been the ones who have dominated the headlines and won the hearts of that beautiful gal (or handsome guy).... Canton, however, has an approximately equal number of defensive in addition to offensively positioned inductees, so there must be a universally acknowledged role for both sides of the scrimmage line. What fan can forget Mean Joe Greene, Deion Sanders or Mike Ditka? The old, now politically incorrect showtune laments that “you gotta be a football hero, to fall in love with a beautiful girl,” but football and any of life’s heroes can play on either side of the line, it seems." And it only gets better. While at its heart Gross' latest is merely yet another lamentation against the confines of the financially suppressive regime that arises from ZIRP and ends with what many expect is a whimper (when in reality they all forget to factor in the facility of hitting the CTRL+P keys as many times as necessary), the flourish of abandon this time around is palpable. We would not be surprised to soon see Gross hang up his offensive (and defensive) jersey, and sit back and enjoy the coming lunacy from a distance (but hopefully not before he allocates just a little to the Ron Paul SuperPAC).

Stocks advanced as market participants looked forward to tomorrow’s 3yr LTRO by the ECB where the street expects EU banks to borrow around EUR 400-500bln. All ten sectors traded in positive territory for much of the session, however less than impressive demand for the latest Italian government paper saw equity indices lose some of the upside traction. Of note, the ECB allotted EUR 29.469bln in 7-day operation, as well as EUR 134bln for 1-day in bridge to 3yr loans. In other new, although Portugal's finance minister announced the country has passed its 3rd bailout review by the EU/IMF, this did not stop S&P's Kraemer saying that if there is a probability of default, it is higher in Portugal than in any other Euro-Zone country.

Credit markets are not priced for Greek PSI Nirvana. With the Greek government bonds (GGBs) and CDS basis package trading at its highest in six months (over 96% of Par) and GGBs trading below 20% of Par (compared to considerably higher 'expected' PSI-based valuations), it seems the market is much more convinced of an imminent credit trigger and no PSI deal than headlines are crowing about. Combining the new 30Y bond, 2Y EFSF add-on, and GDP warrant, BARCAP arrives at a price of around 26.6% of Par for PSI-able bonds - considerably above the current depressed price of GGBs and together with S&P's negative outlook change to the EFSF this morning, it would appear that market participants are not expecting a deal to get done by March 20th. Perhaps that is why hope is so high this morning for a quadrillion Euro LTRO2 to see them through? That should help oil prices!

Sorry, you can't blame dollar and gold for the surging oil and gasoline price.

Like sands through the hour-glass, these are the fears of our lives. Just as we noted last week, the focus of risk is shifting from Greece (where while 'tail-risk' has perhaps receded for now, it is all-but certain that the insolvency predicament will resurface as a source of political, policy, and market tension in the not-too-distant future) to other foot-holds on the growing wall-of-worry. As UBS' Larry Hatheway notes this week, several candidates may replace Greece in the risk headlines, among them rising bond yields, French elections, or a Chinese hard landing. But his sense, and ours, is that oil prices will become the next risk item for market participants. Partly this is because oil prices are already approaching levels where worries have occurred in the past (and the velocity of the move is also empirically troublesome) and partly as the remedy for all global-ills (that of central bank printing) is implicitly impacting this 'risk' in a vicious circle. With global growth expectations already low, the 0.2ppt drop in Global GDP for each $10/bbl rise in oil will do nothing for Europe and US hope - and leaves Central Banks in that dangerous position of reinflating their low core inflation data while all around them is inflating rapidly. With modest schadenfreude, we remind readers of our comments from last week: "Alas, as noted previously, the central bank tsunami is only just starting. Watch for inflation, and concerns thereof, to slowly seep into everything". Given oil's potential 'real' impact, as SocGen notes: "Perhaps Greece wasn't so bad after all."

It was only logical that following this weekend's quote unquote surprise announcement by Juncker that a third Greek bailout is likely in the cards, that Angela Merkel would follow up during her much anticipated Bundestag speech today and tell fellow politicians that there is no guarantee that a Greek bailout will work. That was to be expected. That this announcement is somehow responsible for the market selling off, and the EURUSD being at the lows of the day, once again proves that the market is no longer a discounting mechanism, and merely reacts to headlines that could be anticipated by anyone who steps back from the blaring noise and flashing headlines for even just one minute.

The “Placebo Effect” is fascinating. In a typical drug testing trial, one group of patients will receive the actual drug being tested, and a “control” group will be given an “inert” medicine (or “sugar pill”) that shouldn’t do anything for the patient, but the patient doesn’t know that. So much of what I find wrong about “economics” is that it masquerades as far more of a science than it actually is. It doesn’t have theories that can be “tested” in a real world, where 2 similar situations are treated differently to see which “treatment” works better. Each economy and each situation is so different that it is IMPOSSIBLE to determine why policies failed or what should have been done differently. It is possible to come up with reasonable ideas and theories of what could have been done or should have been done, but they are only theories. The systems are so complex that finding situations with similar starting conditions with similarly motivated entities involved is simply impossible to find. The fact that so much of our policy seems to be based on research into what should have been done in the Great Depression and what has been seen in Japan is frankly scary. There is no way to “know” how the Great Depression would have turned out with a different set of policies. We can make conjectures, but that is all they are – conjectures. The LTRO was designed to support the market, the market is up, so the LTRO must be working. That at least is the logic many investors are applying. They see the improvement in sovereign debt yields, the avalanche of “positive” (if unfounded) headlines, and the relentless march higher of the stock market. So the plan is working? Not so fast.

My advice is to put all of the headlines aside because they are not accurate. No deal has actually been struck and there is just the possibility of one at present. The PSI is also nowhere near certain. There has certainly been a proposal made with innumerable and probably impossible conditions to be met by Greece including a demand for a Constitutional change, which under the current Constitution, cannot even be voted on until 2013. I often wonder if Europe really wants to bail Greece out or if Germany is not forcing so many conditions that they are trying to have them exit the Euro on their own so the Germans are not seen as the Lord High Executioner; to quote Mr. Gilbert & Sullivan.