U.S. stocks fell for a second-straight session on Friday (and down four of last week’s five sessions) to post the worst weekly performance since mid August.   Renewed worries over Europe’s government debt problems, what looks to be additional rate increases in China, and the latest news from Cisco regarding business spending and state and local financial straits have put pressure on stocks.

What’s kicked off this latest round of worry over Europe was talk that the EU wanted to transition the cost of future sovereign defaults onto investors and away from their member governments. That caused investors to flee the debt of EU peripherals (Ireland, Greece, Portugal and to a lesser extent Spain) and those bond spreads blew out as a result.  (This just shows what eventually will occur when government bailouts no longer exist, and they can’t backstop everything forever.)  Now, this weekend EU ministers did clarify things to say that the government guarantees will cover all issuance through mid-2013.  This is likely to ease concerns for a while, but fears will flow again because this doesn’t fix the problem – and it’s just that, fixing the problem is going to take time and will be financially painful.

On China, their inflation measure has hit the mid-4% level, moving higher above their stated target zone of 3.0%, and this is forcing the government to consider slowing activity by increasing rates some more.  This is another thing we’ve talked about for some time now.  The stimulus eventual runs out and it doesn’t seem the global economy has the juice to withstand the tightening of policy.

All 10 of the major industry groups fell on Friday, led by basic material, financial and tech shares.  Consumer staples and utility shares were the relative winners.

The CRB took its biggest one-day hit since December 2008 on Friday, down 3.57% on the China worries. 

Market Activity for November 12, 2010

University of Michigan Sentiment

The survey on consumer sentiment out of the University of Michigan rose to a reading of 69.3 for November (69.0 was expected) from 67.7 for the previous month – this is the preliminary look, a final reading for the month will be released in a couple of weeks. 

The overall reading was helped most by improvement in the current conditions part of the survey, which rose to 79.7 from 76.6 in October.

The expectations measure, respondents’ view of their financial state a year out, inched up to 62.7 from 61.9. 

I don’t know what this move really tells us.  For one, it remains in recessionary territory.  And two, if the current conditions reading is driving the improvement, what does this say of what respondents think of the future?  That the current environment is going to be better than what’s in store a year from now? 

ECRI’s WLI

The latest from the Economic Research Institute’s Weekly Leading Indicators index showed continued improvement, pulling further from the dreaded -10 mark that has predicted every recession since 1970.  The best week in nine for stock prices (up 3.6% for the week ended November 5) and initial jobless claims falling below the elevated 450K mark again were likely the strongest forces for the WLI.

The measure rose to -5.7 for the week ended November 5 (meaning the index fell at an annual rate of 5.7%) after spending two weeks at -6.5.  Still, one wonders what the other indicators are doing if a massive rally in stocks still can’t pull the WLI to zero.  The WLI was stuck at -10 or worse for an eight-week stretch that ran late July through early September.  The improvement coincides with the 17% romp in the S&P 500 that began when Bernanke first signaled another round of QE was coming on August 26.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900