U.S. stocks began a holiday-shortened session higher on Friday as traders believed EU officials would respond to the latest round of trouble in sovereign debt markets with yet another “solution.” However, instead of that, Greece hit the tape with their call that investors take a 75% cut on their bond holdings. The market reversed course on that news to close down for a seventh-straight session.

Strangely, financials joined safety sectors utilities and consumer staples in outperforming the broad market. Tech, energy and health care were the biggest losers.

So stocks fell, but crude didn’t follow suit as it rallied a bit to hold at the $96/bbl mark. The overall commodity complex did close lower as 14 of the CRB’s 19 components fell in price, but crude remains sticky, refusing to fall below $95 even as the broad stock market has slid 10% over the past month. In fact, it is back to $100/bbl this morning as stock-index futures ramp higher, but we’ll get to that.

As the European debt crisis reaches new heights, consumers in the U.S concentrated on the things that really matter: Mad lines of pushing, shoving, trampling and even mace attacks all in an attempt to get those sweet bargains. In a strange way, developments on both sides of the pond converge as each day it looks more like a pre-euro world. In Europe, it sure looks like we’ll see the return of the drachma, escudo, peseta and lira. In the U.S., according to one source, the best selling product on Black Friday was the Air Jordan Retro. It looks like the 1980s/90s are back in more ways than one. Now if we could just have the growth of those decades we’d actually be on to something.

But today’s a new day, or is it? This morning stock index futures are up big, presumably on the news that Black Friday weekend holiday sales were strong and this idea that European leaders have a plan to that will get the ECB to come in and buy sovereign debt with both hand, Bernanke style. You’d think the market would have figured out by now that when we get consumer spending numbers that outpace the labor market and income dynamics there’s payback effect in the following quarters. You’d also think the market would have figured out that the eurozone as we currently know it cannot be saved. But traders are traders, they’ll buy on any inkling of a day or two of gains. More on what’s occurring in Europe below…

Market Activity for November 25, 2011

Sector Activity for November 25, 2011

The Euro scene deteriorated further on Friday as private-sector selling of government bonds overwhelmed ECB buying – Draghi will have to get much more aggressive to halt this spreading contagion. (I’m not saying that is the best policy to implement; if we refuse to allow the market to send strong signals, which in turn would force governments to get their fiscal positions in order. then we’ll never truly get out of this mess. However, that is not the world we’re living in, policymakers will continue to manipulate markets – that’s how bad things really are.)

Italian and Spanish yield trajectories were straight up ugly last week as Italy’s 10-year sold off to the point that resulted in the highest yield yet. Spain’s 10-year backed up to 6.70% (also a new record, for the eurozone era) and it’s just not the long end, but every point on these curves were wider; the Italian TSY curve has inverted as they’re paying more for two-year borrowing than they are for 10-years. Of course, there’s Greece, which suddenly began demanding investors accept just 25 cents on the dollar Friday morning (previously believed to be 40-50 cents) but Greece has become a small issue with what’s going on in much larger Italian and Spanish markets.

Funny thing, if the ECB would just step away we’d probably see some buying come in to stabilize the market. At these yields, even as Italy and Spain have a very tough time managing around 7%, investors look at the situation and say I’m not getting compensated for the risk.

Obviously, if these yields were to back up (sell off) to 10-12% we’d have a new round of nasty on our hands (which is why many people reading this right now are calling me crazy), but at least we may get the right type of stabilization. Instead, the ECB is buying to suppress these yields and they’ll become more aggressive over the coming days. This is not the right type of stabilization because it’s a manipulation of the market and fiscally-wrecked governments are never forced to really get things right. In addition, it’s difficult to even call it stabilization as these yields (as we’ve seen) eventually back up again anyway.

But EU leaders have a new old plan. Germany and France wants to take control of the budgetary decisions of the other eurozone countries. By doing so, they think they can convince the ECB to step in and buy sovereign debt, Bernanke style. (The reason being, it will give the ECB the confidence that Germany will force fiscal austerity on the problem countries and Draghi & Co. won’t have to carry these debt burdens forever. The reason this is a new old plan is that it’s been talked about for a long time. The problem is they can’t change the EU treaties quickly by changing the constitution via the official process. So this time they think they’ll just go with a straight up vote, bypassing the official process and getting this done is quickly.

There’s one little problem, this type of overt control from Germany is what’s brought on European war in the past. Now, the Europeans have no will to fight these days, so I don’t think that is a concern. But handing over sovereign decisions to Germany will certainly engender plenty of antagonism between euro-zone members and I don’t know how that results in the cohesion they need. We’ll see how things turn out.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900