Most major U.S. stock indices ended flat on Monday after beginning the day nicely higher.  For reference, the Dow Industrial Average was  up 45 points out of the gate but ended down 12.   

That early-morning gusto was basically on the heels of the European bourses, which ended their session higher across the board.  But when Europe closed at 10.30 STL time and the Greek discussions were halted (there was speculation early in the day that EU officials and private investors were getting somewhere) domestic stocks lost steam and never really recovered. 

All in all though, flat isn’t bad at all after the run we’ve been on, up 4.6% thus far for January.  That makes for the best start since 1997.

The commodity complex gained ground even as stocks were pretty much flat.  The move was led by energy, precious and industrials metals, soybeans, and, yes, OJ.  Recall a couple of weeks back when OJ was on fire (hitting record highs), regulators came in and hiked margin requirements to quell the spike in prices.  Well, as we discussed, such actions only work for a short period of time unless the supply/demand dynamics shift.  That dynamic hasn’t yet shifted, thus here come the speculators, pumping the price of OJ back to a new record high.

And back to Europe, those discussions between EU officials and private investors over the exact haircut and interest rates (30 cents on the dollar on the defaulted bonds with interest rates of 3.50%-4.00% on the new bonds seem to be the talking points), apparently were called off for the week. The importance of this is that the first Greek bailout has run out, and to get a second bailout their must be an agreement on the private-sector haircut – this is needed to get that “voluntary agreement of default.”  Otherwise, Greece defaults the hard way in March. 

EU members aren’t going to allow this to occur because they know what will happen in the markets as a result.  Thus, they’ll probably end up caving to private sector demands.   No matter, Greece won’t be able to meet even the reduced debt obligations (that economy has no ability to grow in its current structure) and the whole story will keep returning – but that’s a topic for later in the year. For now, when the deal is eventually announced, stocks will probably rally. 

Rallying on bailout news, think about that.  Nothing we’re doing (either in Europe or the U.S.) is actually going to make the debt problems go away because debt doesn’t just go away,  especially at these levels of indebtedness.  Absent default, it will take a combination of very strong growth and meaningful budget cuts to solve this situation – and such sweet events have yet to even begin to materialize.

Market Activity for January 23, 2012

Sector Activity for January 23, 2012

We didn’t have an economic release yesterday, but that doesn’t mean it won’t be an important week. 

This morning we get the Richmond Fed – the third regional survey on the state of manufacturing for January.   And of course, we have the State of the Union address tonight – people can debate its importance – but it’s a significant ritual at least. 

The rest of the week will shape up like this:

Tomorrow, we’ll see if mortgage applications can expand upon the last week’s strong results.  We’ll also get pending home sales (not quite as important as usual as contract cancelations are running at 30% -- the average during normal times is 4%).  We’ll then get the statement that follows the latest FOMC meeting.  And this will be a big one as 12 Fed banks will release their expectations for the fed funds rate over the next three years.  The expectation is that this will pave the way for the FOMC to extend their stated period at which fed funds will remain floored – out through 2014 from the current mid-2013. 

And then on Thursday and Friday we get durable goods orders, jobless claims, new-home sales, the first look at Q4 GDP (expected to come in at 3.0%, I think it’s closer to 2.5%) and finally the latest from the University of Michigan on consumer sentiment.  

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Have a great day!

Brent Vondera, Senior Analyst