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Let Me Get This Straight...

Daily State of the Markets 
Tuesday Morning - December 13, 2011

Good Morning. Let me get this straight. Stocks rallied early last week because traders assumed that the EU was going to create a fiscal compact. It was assumed (for good reason, by the way) that this compact would allow the ECB to start buying bonds with both hands. But then traders then threw a temper-tantrum that reminded me of what it was like to have a two year-old again on Thursday after Super Mario said that the ECB wasn't going to buy any more bonds right now. And then stocks rallied anyway on Friday on word that the EU leaders had agreed to a fiscal compact. Hmmm...

So, in keeping with the recent (and by recent, I am really referring to the last four-plus months) manic depressive behavioral pattern, what would we expect stocks to do on Monday after a weekend of reflection? Oh, that's right, the market tanked on the idea that the fiscal compact might not be all it was cracked up to be and because a couple of rating agencies (no, make that all the rating agencies) told leaders yesterday that they'd best stop dithering or there would be some downgrades coming - and soon.

All we heard about during Monday's session was that traders were now disappointed. Disappointed that the EU leaders couldn't get the Brits on board (and for the record, why on earth would Britain want to subject its financial industry, which, by the way, is the largest in Europe by a wide margin, to the new taxes being proposed by the new treaty?). Disappointed that the fiscal compact sounded a lot like the current agreement, which all the member states have managed to completely ignore. Disappointment that the there wasn't any real enforcement mechanism. Disappointment over the EFSF, the ESM, and the IMF. And finally, there seems to be an ongoing disappointment over this idea that the ECB isn't going to bring out the bazooka.

It's this last part that has been driving me nutty, so allow me a brief divergence. Under the category labeled "Duh!?!" what exactly did people think Mario Draghi was going to say last week? Did traders really expect a central banker to provide them with a wink, a nudge, or any other kind of hint that he was going ignore the ECB's charter and simply start bombing into the sovereign debt market - so long as seventeen different countries promise (and yes, they have to mean it this time) not to spend more than they earn in the future? Again, who in their right mind "expected" a central banker to do that?

Pretty much everyone agrees that the ECB is the only entity that can actually save the day in Europe. But unless the member states will commit to something besides a handshake and a smile for the cameras, any banker worth their salt isn't likely to get started. Thus, I'm guessing that the ECB might actually want to see the fiscal compact be signed, sealed and delivered - yes, legally - before it starts filling its vaults with the debts of Spain, Italy, Ireland, Portugal, and Greece.

Since it was rather extraordinary for Mr. Draghi to even mention the bazooka prior to the EU summit (sure sounded like a carrot to me), I am still puzzled as to why traders are now freaking out about this. Do the boys with the computer toys on Wall Street REALLY think that Mr. Draghi misspoke about the bazooka carrot? So, here's an idea; how about we all just take a breath and wait until the compact gets signed before we decide what the ECB will or won't do? I know that sounds insanely silly to the breathless, fast-money crowd that is now addicted to the daily moves of 1.5% - 3%. But hey, it does seem logical to me.

Speaking of logic, there is another thing that I need to get straight in my head right about now. What's the deal with the rating agencies, as they are politely called, these days? Isn't this the same gang of three that put their stamp of approval on just about everything in sight during the mortgage boom? And aren't these the same folks that labeled all of that toxic garbage as Triple-A? Since the answer is yes, will someone please help me understand why on earth anybody cares about what they have to say now? In most businesses, if you botch a job so badly that people lose trillions of dollars, yen, and euros, and it sends the globe into crisis, you'd be either out of business, in jail, or both.

Isn't the bond market doing a fine job of telling us which bonds are "safe" and which aren't? Do we really need not one, not two, but three companies to tell us that a bond yielding 7% over two years is a higher risk investment than the one yielding 2%? And since S&P, Fitch, and Moody's continue to be woefully behind the curve at all times, why are they still in business again? I'm just saying...

My point this morning is that the market's "logic" is making even less sense than normal right now. As such, one might want to give the math whizzes and their computers some room to work before making any big decisions right now.

Turning to this morning... Although concerns linger about the state of the Eurozone, lower rates at Spain's T-Bill auction seem to have improved the mood in the early going. European bourses are up modestly and U.S. futures are pointing to a slightly higher open.

On the Economic front... The Commerce Department reported that Retail Sales were up just +0.2% in the month of November, which was below the consensus for +0.6%. When you strip out the sales of autos, sales were up +0.2%, which was below the consensus for a reading of +0.5% as well as last month’s revised +0.6%.

In addition, we will get a report on business inventories at 10:00 am eastern.

Thought for the day... Keep in mind that not every person's opinion is worthy of your attention and/or consideration...

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

 

  • Major Foreign Markets:
    • Australia: -1.38%
       
    • Shanghai: -1.87%
       
    • Hong Kong: -0.69%
       
    • Japan: -1.17%
       
    • France: +0.28%
       
    • Germany: +0.80%
       
    • Italy: +1.18%
       
    • Spain: +0.25%
       
    • London: +0.99%

     
  • Crude Oil Futures: +$0.62 to $98.39
     
  • Gold: +$0.10 to $1668.30
     
  • Dollar: higher against the Yen, lower vs. Euro and Pound
     
  • 10-Year Bond Yield: Currently trading at 2.051%
     
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +5.53
       
    • Dow Jones Industrial Average: +48
       
    • NASDAQ Composite: +12.74

 

Positions in stocks mentioned: None

For more of Mr. Moenning's thoughts and research, visit StateoftheMarkets.com

 


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