Stocks traded in a relatively tight range all session; some afternoon momentum pushed the major indices to positive territory briefly, but faded in the final minutes to close down, ending the broad market’s winning streak at three.

There wasn’t much news to trade on yesterday as we were without an economic release.   There was very little talk of Friday’s disappointing jobs report; it was really the Bernanke interview in which he stated there could be more QE2 to come (hardly a sign of confidence for those thinking this recovery has much left in the gas tank, but good for those trading on the Fed printing press).  Those comments helped to offset weakness overseas the night before.  Policy makers did move a big step closer to extending current income tax rates for two years, but that came after the market closed.  We touch on this situation below.

Energy, tech and telecoms were the best-performing groups.  Health-care, utilities and consumer staples were the session’s losers.

The CRB Index marched higher, closing in on the post-crisis high mark of 319.  The measure ended the day at 317.29, led by orange juice, cocoa, natural gas and silver.  Gold hit it a new high and silver extended its 34-year high – hit close to $50/oz. back in 1980.  With gold hitting a new high, looks like silver has room to run.  But when the run is over – and with Bernanke’s deflation paranoia his policy may drive these metals for some time still – you better have an ability to get out, and fast. 

Market Activity for December 6, 2010

As the Eurozone Turns

The latest from the Europe comes from the finance ministers of Luxembourg and Italy as they floated the idea of setting up a Eurozone Debt Agency that would issue paper (bonds) worth up to 40% of debt for all Eurozone members that’s currently outstanding.  Of course this means that Germany and France (and mostly Germany) would be on the hook for such debt as they are the strongest members.   Germany is already opposing the idea and it has about zero chance of getting approved without them.  If the situation gets to a point in which the contagion spreads to Spain and Italy coming under serious attack, then one can’t rule out that Germany will threaten to leave the union rather than backstop every financial basket case in the zone.  From a political sense this is certainly a possibility.  Back in the summer, polling showed half of Germans wanted to return to the Deutsche mark.  What could that percentage be now?  This wouldn’t be the next step in the process, but with ever more backstopping from Germany, the German people will grow even more discouraged with the euro system. 

It’s not clear whether this idea of creating Eurobonds means that the banks/investors that own the paper of those countries in the worst financial state would take a haircut (the needed restructuring) on their current holdings before being swapped for the Eurobonds or not.  Without such a mechanism, it does nothing to solve the problem, adding debt onto debt only exacerbates the issue – and the troubled countries enjoying lower interest rates on the backs of the stronger members has clearly been the main element in causing this crisis in the first order.  You’ve got to just let these countries go; they should have never been invited into the union to begin with. 

For now, the ECB will continue to buy government debt in their attempt to mask the problem.  Such action would make some sense if the Eurozone had a chance of achieving high rates of growth over the next 2-3 years.  If so, central-bank purchases would buy time while growth heals the financial situation.   But there is about zero chance of this occurring.  Restructuring European economies, weaning them from high dependency on government spending to a more dynamic, flexible and private-sector driven framework can certainly achieve higher growth rates, but it would take several years to achieve.  Reality is we’re going to see the eventual restructuring of this troubled debt.  The question is: How long do policymakers kick the can down the road and how great are the losses? 

Clearing Some Uncertainty

Policymakers moved a big step closer to a compromise yesterday that would extend current income tax rates on labor and investment income for two years and maintain higher business spending expensing allowances for a 13-month extension of long-term unemployment benefits and a two percentage-point reduction in payrolls taxes (social security taxes) for one year. 

While this merely maintains the status quo with regard to labor and investment income, it certainly clears uncertainty and that’s something that has been vastly underestimated with regard to retarding economic growth.  The extension of jobless benefits and temporary payroll tax reductions will certainly boost spending in the near term, but they have paybacks that must be dealt with thereafter. 

We’ll touch on this a little more in depth tomorrow after we see how the House reacts to the compromise.  There’s talk that House democrats will oppose the plan, but there is also a chance that the Republicans will do the same – specifically the Tea Party-friendly representatives that will not like the extension of jobless benefits. 

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Today marks the 69^th anniversary of the Pearl Harbor attack.  This epoch has had its own domestic attack with which we’ve had to live. 

Have a great day, and never forget.

Brent Vondera, Senior Analyst

Phone: 636-449-4900