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Stuck In The Middle With EU

Daily State of the Markets 
Tuesday Morning - December 20, 2011

Good Morning. I have to give credit for this morning's theme to my son, who has been working with me for five years now. About 10:00 am yesterday morning, he pinged me with the following: "So... we can't go up because of the Europe mess (which seems to find a new way to disappoint each and every day) and we can't go down because of the better-than-expected economic data here in the U.S. I guess we're stuck in the middle then until something breaks." To which, I replied, "Exactly!"

As I've said a time or two lately, this market has "felt" like it wants to go higher (it hasn't been able to but it sure "feels" like it want to). Perhaps part of this has to do with the spate of U.S. economic data that has exceeded expectations lately. But then again, another part of it may just be the holiday season. As my colleague Curt reminded me yesterday, stocks have a very strong tendency to rally during the last week and a half of the year. And when I asked him why he was adding a little to the long side into the afternoon swoon (in his defense, he was effectively net short at the time), he replied, "I'll play 85% odds anytime."

Frankly, it would be easy to stop this morning's report right there as I think the points made by Don and Curt nicely sum up the current situation. However, something else has been happening lately that I think is worthy of note.

On my quote screen, I have the usual indices listed as well as the basic market internals such as volume, advance/declines, bonds, oil, etc. But I also have a spot where I keep the symbols of what's hot or what I deem really important. And right now that spot has the following symbols displayed: EWZ, EWG, FXE, UUP, and $BKX. In case these aren't familiar to you, the quotes of ETFs representing the EU, Germany, the euro, the U.S. dollar, and the banks are my keys right now.

In fact, if you want to know what the stock market is doing these days, you really only need to look at the euro as the S&P has been moving tick-for-tick with the EU currency of late. But that's really not my point. No, don't look now fans but the U.S. banks are currently in a world of hurt.

I don't follow the individual banks that closely (why would I want to own any of these, again?). However, I do find it interesting that while the credit crisis has been over for more than two and one-half years and the U.S. Treasury Secretary has assured us that our banks are not at risk to the European sovereign debt mess, the stock prices of Bank of America, Citi, and Goldman Sachs are all either at or near the lowest levels seen since the credit crisis here in the U.S. ended in March 2009. Hmmm...

The reason for the recent dark days in the U.S. banking sector is relatively easy to understand. In short, the Fed isn't happy with the amount of capital our banks have on their books. And since there is a chance (a chance that seems to grow with each passing day) that the European crisis could spill over to our side of the Atlantic, the banks are going to be asked to put a few more dollars aside in reserve - just in case something bad happens again. Oh, and then there is the idea that the banks will be forced to adopt a new loan loss accounting method that could, yep, you guessed it; require banks to increase their loan loss reserves.

Although all of the above sound like excellent ideas, there is one not-so small problem. Higher capital requirements means banks have to either (a) go out and raise money or (b) put more money aside from operations. If the U.S. credit crisis taught us anything it is that this process leads to less lending. And, of course, less lending tends to lead to slower economic growth. Which, last I checked wasn't such a good thing for stock prices.

So, while it may be frustrating to be stuck in the middle between the EU, the U.S. economy, and the banks, the bulls remind us that sideways beats the heck out of what is going on in some other places around the world.

Turning to this morning... With the ECB's 3-year LTRO facility being offered later today, it appears that banks in Europe are indeed interested in buying sovereign bonds as yields plunged at the latest T-Bill auction in Spain. This, when coupled with a surprisingly strong business climate survey in Germany, has allowed traders to breathe a sigh of relief as markets recover most, if not all, of yesterday's declines in the early trade.

On the Economic front... The good news continues this morning. Housing Starts rose 9% in November to an annualized rate of 685K. This was well above the consensus for 627K. Building Permits for November rose to a rate of 681K. This was also above the consensus of 635K and last month’s revised reading of 644K.

Thought for the day... Are you in the holiday spirit yet?

Pre-Game Indicators

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


  • Major Foreign Markets:
    • Australia: -0.17%
    • Shanghai: -0.10%
    • Hong Kong: +0.06%
    • Japan: +0.49%
    • France: +1.08%
    • Germany: +0.95%
    • Italy: +0.97%
    • Spain: +0.79%
    • London: -0.18%

  • Crude Oil Futures: +$1.91 to $95.79
  • Gold: +$10.40 to $1607.10
  • Dollar: higher against the Yen, lower vs. Euro and Pound
  • 10-Year Bond Yield: Currently trading at 1.852%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +13.78
    • Dow Jones Industrial Average: +109
    • NASDAQ Composite: +21.83


Positions in stocks mentioned: None

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


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