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12/12/11

Friday’s market signaled “Happy Days” are here again.  Today’s market resembles a drunk that woke up the morning after asking “What did I do?”  European leaders congratulated themselves on Friday.  Plans were made to meet after the first of the year to start negotiating a treaty for eurozone countries to sign.

This morning, Nicolas Sarkozy told Le Monde “In the next fortnight, we will put together the legal content of our agreement.  The aim is to have a treaty by March.”  The “next fortnight” means the legal agreement may be ready before Christmas.  Sarkozy knows the battle is not won to win the confidence of investors.  Italy sold $9.25 billion dollars in one-year notes at 5.952% this morning.  Ten-year bonds were trading at 6.57%.  France is selling a similar amount in short term notes today.

The market is bracing for the promised review and possible downgrade of all or some of the eurozone credit ratings.  France’s “AAA” rating is certainly gone, but what about Germany’s.  The market’s move lower today is another overreaction, just as Friday’s was a snapback higher from Thursday’s rally.

This can get tiring for most investors, but get ready…tomorrow the Federal Open Market Committee (FOMC) meets.  Many traders and investors expect the Fed to roll out some form of quantitative easing.  There is a chance the Fed will follow up on discussion from the last meeting to ease monetary policy, but we don’t see another round of QE.

Last month’s Federal Budget Balance is released this afternoon; economists expect a jump in the monthly deficit to $138 billion.  The Fed may drop interest rates on short term lending for U.S. banks after lowering the “swap rates” two weeks ago with the European Central bank.

Retail sales have shown growth this fall and business inventories were down last month.  Low business inventories can spur economic activity as companies work to replenish inventories to meet orders.

We believe the FOMC statement tomorrow afternoon will be relatively unchanged from last month’s meeting.  If the Fed engages in any additional policy accommodation, it will be recognition of danger from the eurozone debt problems and/or China’s slowing economic numbers.

The market would greet any accommodation with a strong rally, but we would read it as a warning the Fed recognizes greater danger (contagion) from overseas than the market presently discounts.

Quote:
The concentration of surplus assets in the hands of the state is a negative aspect of anti-crisis measures in virtually every nation.  In the 20th century, the Soviet Union made the state’s role absolute.  In the long run, this made the Soviet economy totally uncompetitive.  This lesson cost us dearly.  I am sure nobody wants to see it repeated.—Vladimir Putin

Editor's comment:  Something pithy about overbearing U.S. government regulations and economic “planning” is in order, but I am out of pithy comments.

John

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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