U.S. stocks dropped to end the week lower -- down six of the past seven weeks -- as European bourses tumbled late in their session on increased default/financial concerns.

There was all kinds of talk emerging early Friday morning that there was no way of preventing a Greek default (what a revelation), and that just increases all of those concerns about the eurozone’s banking system.   The ECB will be there to provide all the liquidity those banks need and our Fed will provide all the currency swaps needed for short-term dollar funding, but worries prevail nonetheless as the situation is fragile.  In many corners of the marketplace the ultimate troubles within the eurozone (and elsewhere) have been mispriced as that’s exactly what excessive monetary actions and government bailouts do, engender the mispricing of risk.

Telecoms, utilities and consumer staples fared the best during Friday’s beat down – but even these groups closed lower.  Energy, basic material and financials were the hardest hit areas of the market.

Not helping things was news that the Japanese economy shrank more than expected last quarter, falling 2.1% rather than the 1.3% contraction that was previously estimated.  Their economy has been in bad shape for 20 years as GDP hasn’t advanced since 1991, but part of this export-driven economy’s current problem is a super-strong yen.  This is why rumors are floating that some massive coordinated effort to weaken the yen is in the works.

Or maybe with Greek CDS (essentially default insurance) exploding and showing that default is inescapable, the currency plan is more about supporting a euro that would crumble than about weakening the yen. Portuguese and Italian CDS are exploding higher too.   And the big question is:  Who sold all these CDS?  That is, who is Europe’s AIG?

This morning the fears continue to roll as European bourses are down another 3% across the board – our futures point to a 160-point Dow Industrial loss at the open (and that’s all the futures are good for is the opening price as things can get far worse or turn in the opposite direction several minutes into trading).  Pressure remains on the European banking system as those stocks continue to get smoked as French and German governments scramble to get plans in place to shore up bank capital in preparation of Greek default.   Our bank stocks aren’t faring much better.

Market Activity for September 9, 2011

Sector Activity for September 9, 2011

Wholesale Inventories

The Commerce Department reported that wholesaler inventories rose 0.8% in July (beating the 0.7% increase that was expected), but the sales data posted a goose egg.

The rise in distributors’ inventories will support what will be another weak GDP reading for Q3 – assuming there’s not a reversal in August and September -- but the fact that stockpiles rose as sales came in flat (actually printed 0%) is not a good sign.  The sales data was dragged lower by a large 1.5% decline in petroleum-related sales – exclude petro and sales rose 0.3%.  Nevertheless, inventory building has outpaced sales growth for four months now.

Again, assuming a reversal doesn’t occur over the following reporting months, this will support a Q3 print that will need all the help it can get.  But the lackluster sales data shows that the help from the inventory side of GDP will be fleeting and may adversely affect Q4 GDP.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900