Basic material (that group as the leader is all you need to know that this was a more-monetary-action-is-coming led bounce) and industrials led the rally.  Telecoms, utilities and consumer staples were the laggards.

Financials were in the middle of the pack yesterday, but have gotten clocked over the past six weeks -- as well they should have as the early-year run up was a joke, a move without any merit whatsoever in my opinion.  The group was the year’s best-performing sector at (up 22.9%) as of early April when the broad market topped out.  Now that gain has been trimmed to just 6.6% and it wouldn’t surprise me to it end the year as the worst-performing sector – which would make it two years in a row.

On the Euro scene, most of those major stock indices bounced from last week’s drubbing.  The Spanish and Italian markets were the odd ones out as Spain fell deeper below the 2009 low and Italy within 3% of that mark.  The latest rumbling was that Greece won’t be the first country to leave the zone, but Germany.  No one should take such talk in the least bit serious though as that would be beyond catastrophic for everyone – but for sure the Germans are extremely fed up with this whole experiment.  There is one thing that should be taken seriously.  While Germany is fiscally fit and economically strong (for a European country), they are not big enough to bail the entire euro zone out of its social-entitlement road to collapse.  They need France to make any resuscitation even remotely possible, and they lost Paris with the election of the full-blown socialist Francois Hollande.

On the Asian scene, the economic landing in China appears to be harder than expected – apparent by reported declines in steel and cement imports (and default rates on payments for those shipments), not so much by the GDP numbers, but as I’ve said, you can’t trust numbers that come from a Communist government.   The weakening has prompted Chinese Premier Wen to pledge more growth, which means lending and bank reserve requirement will be loosened, and probably dramatically.  Although, we’ve seen this game before and all it leads to is another round of weakness and then yet further easing.  However, previous implementations of Chinese easing (or Cheasing) had helped the U.S. stock market rebound, which is pretty much the reason I bring the whole discussion up.

Well, the Facebook IPO with expected to come with a bang, but it was more like a fizzle and would have been worse without support from the underwriters.  After an 18% pop out of the gate the stock succumbed to flippers as it quickly retreated back to the $38 price at which it came out – and by watching the bid side of the market, the only thing that held it from falling further were those underwriters vigorously supporting that $38 level.

So I guess the valuation of 107 times earnings – earnings that fell 12% in the latest quarter – did matter to some people; I was expecting most buyers to careless about such fundamentals.  Not helping matters was the fact that NASDAQ was unable to send trade confirms out in a timely manner when the stock opened (so the market had no idea if positions were actually filled or not) – and that was after a delayed opening as NASDAQ fumbled the ball all over the field.

We talk a lot about Europe lately (and for obvious reasons) but I don’t touch on the BRICs that often, unless it comes to disparaging the misguided theory of decoupling – and here I go again.  To my knowledge, the term decoupling began to pop up in late 2007 – it’s the thought that the major emerging markets (Brazil, Russia, India and China) will show little-to-no adverse economic effect when the developed world goes into recession.  Beyond the fact that very loose monetary policy within the developed world is the main reason at least two of these economies have been able to show strong growth at times in the first place – loose monetary policy that specifically drives oil prices higher and thus energy-heavy Brazil and Russia benefit greatly -- the BRICs have empirically shown the decoupling theory is a joke; these economies do get hit, and their respective stock markets clocked, along with everything else (and come on, it’s not what GDP prints but what the stock indices do that the vast majority of investors care about).   More beyond the click…

All of the major sector groups declined for the day, with telecoms, utilities and consumer staples faring the best.  Consumer discretionary and financials got hammered by 2%, with basic material and industrial shares close behind to round out the worst-performing groups. 

While stock traders wait, bond traders waste no time getting in front of future Fed buying by pushing the long-end of the Treasury curve higher (higher in price/ lower in yield) – the

10-year yield fell to 1.69% (lowest closing yield ever) and the 30-year to 2.80% (still above the low mark of 2.52% hit in December 2008).   Gold lovers are also showing their confidence Bubble Ben will step back in, pushing Au up $55 over the past couple days.

European stocks got hit again along with Spanish and Italian sovereigns. The yield on the Spanish 10-year closed at 6.36% (nearing that 7% mark that pushed Greece in need of bailout) and the Italian 10-year is up to 5.90% (the Italian economy has barely grown for a decade and is currently in recession again; this makes financing what is the world’s third-largest debt load about impossible).  In addition, as we mentioned yesterday, the ECB has suspended lending to the most under-capitalized Greek banks (guess Draghi has finally realized the risk he’s taken on) and Moody’s downgraded 16 Spanish banks (the ratings agencies are always so ahead of the curve).  

So we have a number of things hitting the fan again, and the only hope right now is the hope that has prevailed for years now, that central banks will come with yet more liquidity injections to keep the European banking system from collapse, prevent current euro-zone countries from becoming former euro-zone countries, hold corporate earnings from declining and incite another rally in stock indices.  But this behavior does come home to roost, if for no other reason it incentivizes governments, plenty of financial institutions and a heck of a lot of households to carry on with the activity that got us here in the first place.  And it’s in that matter for which – and to borrow and modify a phrase from Rick James -- hope is a dangerous drug. 

Commodity prices continue to go lower along with stocks – declining much more aggressively in fact.  They never really ramped higher when stocks bounced enthusiastically off of last October’s recent lows, and have declined 12% since March as stocks are down just 6%.  As you know, I generally focus on the energy segments, as that’s what inflicts the biggest pinch on consumers – crude down to $93/bbl and front-month gasoline down to $2.91 from the $3.42 hit back in March; the pump price is lower too but has remained sticky at $3.72. 

Below is a look at a basket of commodities.  It certainly has a deflationary feel to it, but I’m not going there quite yet.  Suffice it to say, with all of the liquidity central banks have pumped into the system, the fact that this index isn’t raging tells us a great deal about the economy’s structural issues. 

Yesterday we had the release of the minutes (notes basically) from the last FOMC (Fed policy-setting committee) meeting, but they were pretty much uneventful.  The minutes explained that the Fed is ready to provide further accommodation if the recovery falters…blah, blah, blah, we know this; the whole world knows this. 

The more interesting comments came from the Bank of England’s (British central bank) Mervyn King as he upped his stagflation forecast – that is, he lowered the economic growth forecast (which is already in recession), while raising the inflation forecast.  And even beyond that, made a point of saying the central bank is setting up contingency plans as they expect the financial storm currently brewing in the euro zone to hit them.  His actual statement: “I don’t think anyone is under any illusion that we’re not going to be affected by this.”  He went on to state, “[o]ur banking system is exposed to the euro area.  We are certainly going to be affected.”  And they’re not going to be the only ones, financial markets are way too interconnected.  

The day’s economic data was mixed, but I would say biased to the positive side.  That seemed to assist the major indices in bouncing back to positive territory on a couple of occasions, but the European problems were too much to offset – joining the Greek political issues, and the heightened risk they’ll leave the euro zone, were Spanish and Italian yields continuing to back up and equities markets getting slammed with Spain’s sinking deeper below the 2009 low. 

The most amusing news of the day (since no one was harmed) was that the just inaugurated French President Hollande’s plane was hit by lightning as he was en route to visit German Chancellor Merkel with an agenda to get the EU to ease back on their austerity plans.  The pilots returned the plane to France due to the incident; Hollande later boarded another plane and eventually made it to Berlin. 

I doubt nature’s attempt at electroshock treatment will prove efficacious – it’s probably impossible to convince a rabid Socialist that Europe’s social model will only lead to the euro-zone’s ultimate demise -- but it was quite the message nonetheless. 

Oh, and on those foreign-law Greek bonds that matured yesterday, the government chose to pay bondholders.  So congrats to the hedge funds that held out, unwilling to take the restructuring that involved Greek-law bonds and the 50% haircut that came along with it (a haircut that’s closer to 95% now as the newly swapped bonds trade at just 12 cents on the euro).  But the redemption was just €430 million of the €6.4 billion in foreign-law bonds outstanding.  So whether they’ll be able to redeem those bonds in full remains a big ongoing question.

More on Europe and U.S. economic data beyond the click…

The slide is a nice reminder that the U.S. is still the largest and most important market in the world. Still, there are plenty of well developed markets elsewhere worthy of investment dollars. 

Click here to see the world by market capitalization.

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Most retail consumers hadn't heard of ESRX until they stopped working with Walgreen's at the end of last year, but that deal (or no-deal) was a reflection of just how powerful ESRX has become.  For long-term shareholders, it has been a wonderful investment, up more than 23 percent annually over the last decade while stocks in general posted single digit returns.

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As usual, the Spotlight Stock isn't meant to be a hot tip, but an example of how we evaluate companies and their valuation.

Read the Spotlight Stock article here.

Utilities, consumer staples and health care were the best-performing sectors, but they too lost ground for the day.  Financials were the worst hit sector for a second-straight session.  Energy, basic materials and consumer discretionary shares were also among the biggest losers.  

The price of crude continues to drop along with rising concerns that the global economy will get walloped again.  (It’s too bad that’s what it takes to send oil to a still very high $94.80/bbl; this doesn’t have to be the case as I’ll remind everyone that crude averaged $20/bbl during the back-half of the 1990s when real GDP growth averaged 4.75% -- we’re averaging well less than half that right now.)  This move is reminiscent of the very same slide that occurred last year at about this time.  The price of front-month gasoline has dropped back below $3/gal.  However, the price at the pump is still at an unhelpful $3.72 for the national average.

So after a few years of bailouts and masking over serious structural issues in Europe, we are fast approaching the resolution of the euro-zone plot.  That is, we’ll find if it holds together or begins to break up with the Greeks being the first to exit.  The latter of course was always the likely development as it is only nonstop bailouts that have kept the zone from collapse, and it’s financial system from the chaotic event that certainly has the potential to make late 2008 in the U.S. appear somewhat tame.

And in terms of Greece, today we’ll see if they decide to pay the €430 million owed to untendered maturing foreign-law bondholders.  Those bonds were not part of the PSI (the coordinated debt restructuring that handed investors new bonds with longer maturities for the one’s the Greeks were about to default on – new bonds BTW that currently trade at 15 cents on the euro).  If they pay, they’ll need more bailout funds released almost immediately just to pay for social services, pensions and public-sector wages.  If they don’t, then anyone still pretending they haven’t already defaulted will finally be forced to concede. 

And beyond Greece, we’re seeing Spanish sovereigns blow out to higher yields (prices down) again, with the 10-year well above 6% at 6.23%.  Continued beyond the click…

The news out of JP Morgan, where they rolled the dice and lost (and rolling the dice is exactly what you get with the Fed at zero and pumping trillions into the banking system) dominated the headlines but it wasn’t the only thing out there.  A weaker-than-expected industrial production out of China (bringing back the hard landing worries – although massaged, to put it kindly, Chinese government numbers probably won’t reveal that reality) and an outright decline in Indian factory orders were pretty striking developments. There was also a serious increase in cancelations for North American heavy-truck orders (a functions of slower freight shipments). 

And then even that sweet fantasy that the Syriza Party -- the communists who won big last week in Greece – may just join up with the other politicos was crushed after the leader of Syriza stated that unifying with the other parties would “betray” the Greek people.  Now it’s onto a new government and the same old concerns of whether or not they’ll get future bailout payments, or simply leave the zone.  And leaving the euro zone would carry a wide swath of implications for the entire European banking system, which is probably why the EU would continue to provide some future funding for Greece even if they do leave.

Still, U.S. equity indices held in there well.  The NASDAQ Composite managed a slight gain, along with the mids.  And even though the Dow, S&P 500 and small caps lost ground, the damage was minimal.  Surely amazing considering the slew of bad news that hit the tape – well, amazing if Bubble Ben wasn’t out there providing a safety net to risk assets. 

So we’re down two weeks in a row for the broad market, but the 3.60% decline over this period is certainly bearable; we’re still up 7.6% year-to-date.  We’ll see if equities can withstand the post-April funk that sent indices lower over the past two years.

The areas of safety led the way again as utility, telecom and consumer discretionary shares outperformed.  (Financials outperformed too, but forget that for today as JPM shares will pressure the sector on news Mr. Master of the Universe – in his own mind – Bruno Iksil, tasked with hedging the banks credit portfolio, screwed up royally by selling too much protection – CDS strikes again -- and has cost JPM a few billion in losses.)  Tech, basic materials and industrials were the laggards.

While the slide in confidence pared gains, our market was certainly helped by a good rally in European bourses, with Spain’s main stock index leading the charge with a 3%-plus gain – coming off of a level that sank below the 2009 low.  But the Spanish bond market failed to confirm that the bottom has been put in as the yield on their 10-year remained above 6% -- and would clearly be drastically higher if not for the aggressive efforts of the ECB.

In other central bank news, the Bank of England ended their version of QE2 (the second round of bond buying) even as the UK recession has slipped back into recession.  The reason being is the current level of inflation, which has come down but remains above 3.5%.  This mild stagflationary situation has them worried, as well it should, but I’d bet the inflation gauge will continue to decelerate as the global situation has more of a deflationary feel to it.  The fact that central banks have engage in the most aggressive monetary policy action in the history of central banking – and for years now -- without inciting high levels of inflation by now is evidence of such.  It illustrates just how ugly the other side of a debt bubble can be.  Those very same central-bank actions have levitated risk assets, but the economic reality is really something to which investors should be paying closer attention.

All of the 10 major sectors closed the session down, but utilities and tech were the relative winners as they slipped the least.  Industrials and financials got hit pretty hard, closing off by more than 1%.

The commodity trade was mixed – we haven’t talked about that market lately – as natural gas (on quite the bounce lately, up 28% from the decade-low hit a few weeks back), OJ, hogs and gasoline gained some ground.  The grains (corn, wheat and soybeans), precious metals and crude declined.

Europe’s never-ending debt and economic troubles are certainly waxing again – waning at times only thanks to aggressive central-bank actions.  The overall problems will remain though so long as the euro-zone countries refuse to take their medicine and reform fiscal positions and economic structures.  More on this beyond the click…

The major indices did pare most of the early-session losses though in the final two hours of trading, which shows that the market has become robotically condition to buy the dips – literally, as volume is dominated by algorithmic trading.   It all smacks of the widespread belief that bad news/data will usher in the Fed and ECB to hold fears at bay for yet another spell.  (I guess one could also say that if the expectation of a quick and aggressive central-bank response is priced into stock price, or if algo trading models are incorrectly programmed, then we could be in for quite another swoon if Bernanke and Draghi hesitate to pull their next trick.  In any event, it hardly calms my concerns when more monetary actions continue to be counted upon.) 

The traditional safe havens were the play yesterday as utilities, health care and consumer staples were the best-performing sectors.  Consumer discretionary and financials performed the worst. 

The European concerns are more than about the French electing a full-blown socialist and his policy agenda to continue down the social model path that has the continent drowning in debt.  The elections in Greece – yes Greece is back -- appear to be taking center stage as the results show the Greeks have had enough with bailouts and the directed austerity that comes with it.  They gave the Coalition of the Radical Left (from what I understand is the traditional communist party) a primary position of power. 

The country is closer than ever to leaving the euro zone.  Frankly, I consider that good for the zone longer-term, but it can certainly disrupt markets in the meantime.  Make no mistake though, if the European people don’t have the will to reform their economic framework, then the entire euro zone doesn’t stand a chance of surviving.  Such an event will bring a chaotic market event as among other things there will be no ECB to bail anyone out – but such a collapse would be down the road a bit still. 

Amid increasing worries about the global economy, the prices of crude has dropped to $96/bbl.  The front-month contract for gasoline futures (effectively the wholesale price) even dipped below $3.00/gal., before rising again with the late-day bounce in stock prices.    The national average price at the pump is $3.75.  How sad is it that it takes economic concerns to get the price of crude down to a still very high $96 and retail gasoline to $3.75. 

Helping those European bourses was a German factory orders report that showed a bounce in February, up 2.2% after a tough several months (but still down for the quarter, we get German GDP later this week).  This took focus off of the fact that French citizens voted to preserve the very model that has them headed for a cliff and Greece voted against more bailouts.  More on this stuff beyond the click. 

And there is surely plenty of evidence that not just domestic economic activity but overall global growth is on the wane.  Besides several European country’s falling back into recession, horrible service-sector PMIs out of the euro zone on Friday morning illustrate things are only getting worse.  Spain’s PMI for April came in the worst with its 42.1 print (deep in contraction mode as 50 is the line of demarcation); Italy’s service PMI printed 42.3; France posted a reading of 45.2; and while Germany remained in expansion with a 52.2, it did miss expectations and it’s only a matter of time before they do go sub-50.  These should not be totally surprising numbers, but then again much of the market has been flyin’ high on hopium and apparently didn’t care to notice.

I am somewhat joking with that comment, otherwise the weak ISM number would have caused another ramp higher in stock prices, but it is hard to tell these days as we’ve seen the weak data/higher stock market playbook set up several times of late.  More than anything, people probably took a step back, booking some profits, unwilling to get directly in front of this morning’s April jobs report. 

But weak U.S. data has been known to fire stock prices higher these days as traders bet more Fed stimulus is around the corner.  This didn’t quite happen yesterday because four Fed officials gave speeches saying that additional accommodation probably wouldn’t be needed.  But don’t worry you fans of nonstop Fed juicing, one of these regional Fed Bank presidents is not even an FOMC voting member and Bernanke (Chairman), Dudley (NY Fed) and Yellen (Vice Chair) will convince (steamroll) the other three who disagree with their agenda.   The market came to share that view in the afternoon session as the NASDAQ Composite along with mid and small-cap indices erases near 1% declines to close higher, while the Dow Industrials and S&P 500 recovered from most of their morning losses.  Now that’s more like it.

Chris Lissner is interviewed on CBS Chicago radio (WBBM).

{enclose chris423.mp3}

Energy (helped by crude creeping back to the $106/bbl handle), financials and basic materials led the broad market’s gain.  Consumer staples, tech and industrials were the laggards – although even these groups closed higher. 

The S&P 500 declined for just the second time in seven months as concerns about the global economy and Europe’s sovereign debt crisis led to increased volatility.

Earnings season in the U.S. has been largely positive, with profit growth of 6.01% on sales growth of 6.37%, but softening economic data took center stage in April.  Manufacturing, which has been a key driver of the recovery, has shown signs of cooling and although retail sales data has been significantly higher than projected, disappointing payroll data and higher jobless claims suggest consumers face an uphill battle.

Despite some disappointing data and the eerie calendar similarities to the past two Aprils when economic data weakened and markets swooned, all signs still point to growth in the U.S. (albeit very slow growth).  Household financial conditions are healthier, banks are lending more, and corporations have more cash than in the past two years.  Additionally, the Federal Reserve’s policy setting committee offered further support by pledging to take additional action to boost the economy if necessary.  (See my post from yesterday: When Will the Fed Raise Rates?)

Potential shocks in the near term are more likely to come from Europe where the impact of the European Central Bank (ECB) loans to local banks are fading and the region faces recession.  Grabbing the most headlines right now is Spain, the eurozone’s fourth largest economy, which missed its 2011 fiscal deficit target by over 40%.  Spain is not insolvent, but the large gap between Spain’s nominal yields and growth is only getting worse as their bond yields rise.  Yields on Spain’s 10-year debt surpassed the psychologically important 6.00% a few times in April and currently rests at 5.8%.  Yields in Italy, the world’s third-largest sovereign borrower, also remain elevated as the nation pushed back its deficit reduction target amid a deepening recession.  Italy’s 10-year yield finished the month at 5.5%.

The problem for many eurozone economies is that austerity measures are choking growth.  Slow growth (and recession) causes economies to miss deficit targets, which leads to even higher bond yields and, in turn, triggers more austerity.  Making matters worse is the crippled European banking system that holds eurozone sovereign debt as a significant portion of their core capital.  According to the International Monetary Fund (IMF), European banks need to reduce their balance sheets by €2 trillion and at least 25% of the deleveraging will be accomplished by reducing lending, which will hurt the region’s economic growth even more.

Domestic equities had actually rallied on bad data over the previous three sessions, one guesses on the view that the Fed would come along to juice things with more accommodation, but that view didn’t play out yesterday.  I guess the personal income & spending data (the day’s other major data release) was good enough to offset the weaker factory report – darn the luck.  We get into the specifics of these reports beyond the click.

The slightly more hawkish tilt in the Federal Reserve’s economic forecasts has some market watchers thinking that monetary policy will be tightened before 2014, but there are several factors that suggest 2014 is the earliest the Fed would begin unwinding accommodative policy.

But the latest ramp, or actually a recovery from the weakness that occurred early April, appears to be more about the rising possibility Bernanke will step back in than anything economically positive – and that possibility has certainly risen over the past three sessions after that debacle of a durable goods report, followed by initial jobless claims remaining near 400K and Friday’s weak GDP print.  (I’ll note: earnings season is shaping up well – particularly relative to easy-to-beat expectations, but the boost S&P 500 profits received from Apple’s results are fading fast as year-over-year growth has slipped to 7.4% after bumping to 12.2% immediately following iProfits.   Ex-Apple, S&P 500 earnings are up roughly 3.5% y/o/y.

These are all characteristics of a classic QE-waiting-in-the-wings juicing -- quite a shift after the prior day’s FOMC statement, followed by the Bernanke presser, which certainly had slight bias toward monetary policy standing pat.   But all it takes is for some weak data, and we’ve surely gotten it recently – the latest being a debacle of a durable goods orders report and jobless claims that point to a significant deceleration in payroll growth.