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7/2/12

The U.S. ISM Manufacturing number dropped to a three year low this morning.  Economists were expecting a reading of 52.0 which would have been down from last month’s 53.5  The Index dropped to a disappointing 49.7 which indicates fewer orders coming in than production can support.

The market had its biggest up day of the year last Friday on an agreement out of the eurozone to use previously approved ESFS and ESM bailout funds to buy bonds and rescue banks.  The Finnish government sent a report to their parliament this morning detailing why they would stand against this plan along with the Netherlands.

That didn’t take long.  Changes in the use of these funds require unanimous approval.  So the deal is dead, or is it?  A European Commission told Reuters that even though the treaty governing the use of funds doesn’t detail recapitalization of banks and direct buying of bonds, the uses of the money can be changed by the board of governors.

There is also a ‘get-out’ clause that allows the European Central Bank and European Commission to declare the eurozone under threat.  This would allow them to act on an 85% majority. Two countries holding out of seventeen would still allow an 88% majority.  Lesson should be learned here…never trust a bureaucrat with money.

French President Francois Hollande is pushing for growth and more spending so he can spend more money.  He cannot unless the eurozone goes along with his plans to shore up bonds as his are under increasing pressure.  Last week saw French borrowing costs rise as bond traders looked at Spain and Italy.  The next weak issuer was France.  French GDP did not grow in the first quarter and unemployment is rising.

Humayun Shahryar, CEO of Auvest Capital Management Ltd told Reuters “France is going to be a big domino in the eurozone.  At the moment markets are more focused on Spain and Italy, but that could change very fast.  It could even be that the markets ignore Italy and go straight to France.”

French borrowing costs were down this morning, France sold 51-week notes at a record low yield, but as Humayun said, that could change very fast!

U.S. markets will close tomorrow afternoon at 1:00 eastern time, be closed on Wednesday for Independence Day then reopen on Thursday for a regular session.

Thursday morning, the European Central Bank will announce their Interest Rate Decision.  It is widely expected they will cut the rate from 1.0% to 0.75%.  In the U.S., Initial Jobless Claims and ADP Non-Farm Employment Changes will be announced.  ADP is expected to show 105,000 jobs added while Initial Jobless Claims are expected to come in at 385k.

Friday morning the market is looking forward to the Non-Farm Payrolls report from the Bureau of Labor Statistics.  Economists are hoping for improvement over the 69,000 last month to 90,000 jobs added.  The Unemployment Rate is expected to hold steady at 8.2%.

We are negative on the market at this time.  We have a shortened week with low volume.  The eurozone agreement is on the rocks.  Earnings season will start on July 8 after the market close with Alcoa.  Why should investors get in a hurry to commit money this week?

Quote:
In general, the art of government consists of taking as much money as possible from one class of citizens to give to another.--Voltaire

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