U.S. traders/investors continued to fret over European sovereign debt troubles as stocks endured a little pressure on Friday’s holiday-shortened session.  The broad market slipped about 0.90% for the week. 

Basic materials, energy and financials led the market lower.  Telecoms, tech and consumer discretionary (it was Black Friday) were the relative winners; however, all 10 major industry groups did close lower for the session.

The CRB, which we’ve been keeping a close eye on these days as profits are particularly susceptible to higher input costs in this environment of little pricing power with which to pass these costs on, slipped but remained above that 300 mark – closing at 301.02.  Continued concerns regarding the latest Korean conflict, not helped from the North’s bellicose statements on Thursday night, increased worries about Asian growth and thus commodity demand. 

Market Activity for November 26, 2010

Euro Domino

Well, Portugal is the next domino and Friday government officials were stating they don’t need a bailout.  We heard these exact words from Greece and Ireland, so you know what’s next for the Portuguese – a bailout. 

In fact, EU finance ministers will pressure the Portuguese to accept a bailout as a way to halt the shorts (the rolling bear raid) from hitting their government bonds even harder.  EU officials are petrified of the situation in Portugal, as Spain has huge exposure to the country and if Spain goes then the EU/IMF bailout is fully tapped.  Spain has $70 billion in government debt it will need to refinance in the first half of 2011, so it’s going to endure challenges beyond fallout from Portugal.

Over the weekend the European finance ministers endorsed a $113 billion EU/IMF bailout for Ireland, about 60% of which will go to restoring capital positions within Irish banks.  Beyond that, the EU found its happy place by stating that there will be no restructuring of debt (bondholders will not be forced to take a haircut on positions, accept longer maturities, or both) until mid-2013.  So they assume the fetal position and ignore reality instead of facing this contagion head on – we see despite each new bailout the market puts pressure on the next likely spot of trouble.  It’s highly questionable whether or not they’ll have the luxury of kicking this can down the road until 2013.  That is, a forced restructuring may very well come sooner.

The Eurozone system as we know it is probably done.  It never made much sense to begin with anyhow.  Sure, there were big trade benefits and other economic enhancements due to the elimination of currency fluctuations among these continental neighbors when they moved to the single currency.  However, the larger issue is that you just can’t manage monetary policy within a system of various fiscal policies – many of which were nothing but lies as the debt burdens were much worse than officially reported.  And more importantly, the euro system actually imploded upon itself – Milton Friedman was right a decade ago when he said it wouldn’t last very long.  The peripheral economies enjoyed very low risk-free rates as they rode the back of the stronger German and French economies.  But the level at which rates fell in these peripherals (Greece, Ireland, Portugal) was not justified, and it sparked a debt boom.   We’re witnessing the fallout.  Delay they will try, but solution will not be found until this debt is restructured – a painful but necessary condition. 

Holiday Shopping

The shopping season kicked off well as massive promotions drove traffic and consumer spent more than last year.  Traffic was up close to 9% and spending per consumer was higher by 6.4% relative to a year ago.  Now we wait for the critical December 15- Christmas period (which normally accounts for 40% of holiday shopping).  But based on the weekend’s results the season should show nice improvement based on the weak results of the past two years. 

Week’s Data

We get back to the data today as the Dallas Fed’s manufacturing survey for November is released – two of the three regional reports we’ve received thus far for November  have been good.

Tomorrow we get the Chicago number, which is the daddy of all the regionals, along with the most-watched consumer confidence survey.  Later in the week we get the nationwide manufacturing report, the Fed’s assessment of economic conditions within its 12 districts (known as the Beige Book) and by Friday the November jobs report.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900