Daily State of the Markets
Thursday Morning – December 1, 2011

Good morning. The good news is that the next EU Summit begins in just seven days. And this time, they tell us, they have a plan to fix the sovereign debt crisis once and for all. The bad news, of course, is that investors will have to play the waiting game for eight more days before anyone learns whether or not it is time to unleash the bazooka on those nasty bond vigilantes who keep driving up rates for the fine folks in Greece, Italy, Portugal, Spain, Ireland, etc.

Besides the surprise intervention in the markets by a collection of Central Banks in order to boost greenback liquidity, and the equally surprising cut in the reserve requirement ratio at China’s big banks, the talk in the market yesterday was that the Eurozone leaders have one more best chance to save the Eurozone. Oh and by “save the Eurozone,” we really mean that leaders have one last chance to convince the ECB that it is time to step up to the plate and start buying bonds of the troubled European country with both hands.

With the talk of the Eurozone breaking up, shrinking, falling apart, and/or imploding increasing at an exponential rate over the past week, one might have expected to hear at least one ECB official step up to the microphone and effectively say, you know, maybe it is indeed time to bring out the bazooka. But so far at least, mum’s been the word.

The ECB and their German friends have remained adamant that solving the debt crisis is not the ECB’s problem. There has been lots of talk about the legality of lending money to Member States, the singular mandate of the central bank, and of moral hazard. So, with no hints at all from anyone in any government capacity about the ECB preparing to take action, the markets had, up until Monday, begun to accept the fact that the European countries with too much debt were on their own when it comes to refinancing that massive debt load.

However, with most of Europe on the precipice of what will likely turn out to be a nasty recessionary period (forced austerity tends to do that to a country) and the term ‘credit crunch’ being used with alarming regularity on the continent these days, there are suddenly reports (from unnamed sources familiar with the situation, of course) suggesting that it might be time to bring the big gun to the table.

In battle parlance, there are some that suggest the ECB may be waiting to see the whites of their opponents’ eyes before using their one and only weapon in the fight. So, with rates rising everywhere you turn in Europe, economic data tanking, and credit growing more dear by the day, many believe the ECB will soon stand up and say “it’s time”.

But as I rambled on about yesterday, the issue holding back the bazooka seems to be the ever tricky problem of moral hazard. To review, the ECB fears that if the problem children are provided the money they so desperately need before taking the unpleasant medicine, the budget busters will likely be back at the ECB’s doorstep sooner rather than later. So, before the ECB wields the big gun, it needs somebody with a big stick to force the debt-ladened PIGIS to cut their deficits.

This is where the upcoming EU Summit comes in. Those wearing the rose colored Revo’s suggest that since the EU leaders are quite aware of the deteriorating situation in the Eurozone, they will surely create a fiscal or stability “union” pact either before or during the December 8-9 summit. The thinking then follows that with the ‘big stick’ in place, the ‘big gun’ will make an appearance.

Of course, our furry friends consider this scenario to be sheer folly as the ECB has but one mandate – to fight inflation. The bears go on to suggest that unlike we emotional Americans, the members of the ECB are not going to be swayed into doing something outside their realm by a little market volatility.

Thus, it would appear that investors have a decision to make regarding our question of the day. Those card carrying members of the glass-is-always-half-full club will likely be willing to bet that it is time for the ECB to recognize the severity of the current problem and bring out the bond-buying bazooka. However, anyone who is less than enthusiastic about the outcome of this saga may be of the mind that the ECB doesn’t even own a gun.

From my perch, the key to the next eight days is this question. So, we will be listening closely to any and all commentary coming out of the EU leaders between now and then. And since the market appears to be voting “yea” on the issue right now, we will also be “listening” closely for any message Ms. Market may provide.

Turning to this morning… Although the Manufacturing PMI’s in China and the Eurozone were weak and clearly signal that a contraction is occurring, ECB President Mario Draghi’s speech, which appeared to hint that ‘the bazooka’ might be on the table if a ‘fiscal compact’ can be agreed to, is giving traders reason to continue to be hopeful.

On the Economic front…Initial Claims for Unemployment Insurance for the week ending 11/26 rose by 6,000 to 402K. This was above the consensus estimate for 392K and above last week’s revised total of 396k (from 393K). Continuing Claims for the week ending 11/19 came in at 3.740M vs. consensus of 3.650M and last week’s 3.705M.

In addition, we will get the Bloomberg Consumer Comfort index at 9:45 am eastern then the ISM Manufacturing and Construction Spending reports at 10:00 am.

Thought for the day… Be sure to take time to breathe today…

Pre-Game Indicators

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

  • Major Foreign Markets:
    • Australia: +2.47%
    • Shanghai: +2.30%
    • Hong Kong: +5.63%
    • Japan: +1.93%
    • France: +0.27%
    • Germany: -0.10%
    • Italy: +0.91%
    • Spain: +0.21%
    • London: +0.51%
  • Crude Oil Futures: +$0.14 to $100.50
  • Gold: +$1.60 to $1751.70
  • Dollar: lower against the Yen, Euro and Pound
  • 10-Year Bond Yield: Currently trading at 2.129%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -1.16
    • Dow Jones Industrial Average: -6
    • NASDAQ Composite: +2.75

Positions in stocks mentioned: None

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

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