The Irish bailout didn’t quite have the ameliorative effect EU finance ministers had hoped for as traders continued to punish EU peripheral debt and U.S. equities traded down in unison.   That was until the second POMO of the day closed – that’s right there were two Fed monetary injections into the financial system (POMO stands for Permanent Open Market Operations, which is the Fed outright buying bonds from primary dealers, leaving them with more reserves). 

Stocks were down more than 1% for most of the session, even the first round of Fed pump priming ($2.17 billion), which occurred in the morning session, failed to turn the market around.  But when the second round closed (this one a larger $7.23 billion) stocks surged to nearly erase earlier declines.  

Financials, energy and basic materials were the top-performers – the only three of the top 10 industry groups to close higher for the day.  Telecoms, consumer discretionary, and tech were the session’s biggest losers. 

The CRB managed a decent gain, enough to erase Friday’s loss, even as the U.S. dollar continued its three-week jaunt – a move higher based on the latest bout of risk aversion.  The commodity index was driven by additional gains in the prices of cotton, the energy complex (crude, gasoline and heating oil), silver and wheat. 

Market Activity for November 29, 2010

Can It End at Portugal, or Does Spain Fall as a Result?

News of the latest EU bailout provided only initial help to Eurozone bond spreads, the euro and stock indices; they quickly turned back down as it’s looking increasingly likely that the emergency fund doesn’t have enough pledged to cover the next domino to fall.  Portugal would be next, then Spain and now traders are thinking even Italy is possible (Italian bonds have become the latest to come under assault).  And the Irish may very well find themselves going back to the till as $17 billion of the funds to pump capital into their banking system had to come out of their won National Pension Reserve Fund – take it from one pocket to place into another, an old trick of government. 

So EU finance ministers state there will be no debt restructuring until 2013 – we’ll see if they make it that far before the market forces it upon them.  These peripheral economies better find a way to grow or the debts will only add up over the next couple of years.  It’s all good that these individual countries have engaged in austerity measures, but because these economies have become intensely dependent upon government spending it means growth will remain extremely challenged for the next couple of years.  This is a key reason a debt restructuring (bondholders taking a hit) is extremely likely, and the only way out. 

Dallas Fed

The November results from the Dallas Fed Manufacturing Survey came in at a much stronger-than-expected reading of 16.2 (3.8 was expected) after the 2.6 print for October.  The Dallas Fed’s report is not one that gets much attention, but it does combine with Philly and Richmond to make for three out of four good reports for the month – remember that New York factory report slid hard into negative territory. 

New orders jumped to 9.1 from -4.3 (ending five months of contraction); unfilled orders rose to a reading of zero after the -6.3 in October (also ends five months of negative readings); the average workweek rose to 6.2 from -7.7 in October (ending four months of contraction).

The worst aspects of the report were the readings on prices.  Prices paid (input costs) rose to 34.9 from 29.9, while prices received came in at 6.0.  That prices received figure did increase substantially, up to 6.0 from -3.5 (and negative for four of the previous five months) but it is hugely trailing what’s occurring in prices paid.   Too, the inventory reading for all of the regional reports over the past couple of months suggest that the inventory cycle has stalled and thus what has been a major driver of GDP will be absent for the current quarter. 

Bottom line:  This is a good report and combined with two of the other three regionals so far for November shows factory activity to be quite resilient.  However, these readings are a measure of how the net positives responses changed from the previous month – that is, you get a positive overall reading when the number of respondents that state activity increased exceeds those respondents that say it decreased.  Since the 11th Federal Reserve district (Dallas) was hardest hit by the deep-water drilling moratorium, it makes sense that more respondents are stating activity increased now that the initial effects of that halt to production have worn off.  Also, the input cost situation continues to show problems from profit margins. 

Nevertheless, manufacturing activity remains much more resilient that I’ve expected and these regional numbers suggest that ISM (nationwide factory activity) will continue to post solid readings (remain above the 53 mark – a reading below 50 shows activity contracted) for at least the next two reporting months.  This will prove helpful for the equity market, particularly as European debt concerns have returned to focus.   The first sub-50 we get from ISM is likely to be harsh for stocks, which is why we pay such close attention to these regional readings. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900