This week, the market has taken a beating and there is no reason to believe this will turn around quickly. Economic conditions are deteriorating and credit fears in Europe are escalating.
The ECB has been very slow to react. It has taken them more than a year to help Greece and the landscape has changed dramatically in the last few weeks. Spain and Italy are 12 times the size and interest rates have reached a critical point. The ECB made its statement this morning and they did not have much to say about the melt up in interest rates. In the chart below, Italy’s rate is the spread between its rate and Germany’s rate. For comparison with Spain, just add 3%.
The new EU credit facility should be raising bailout money like mad. Unfortunately, the parliament of each member country needs to ratify this decision and it will be months before they can ramp up. The only logical thing for European officials to do during a time of crisis is to go on vacation.
It’s appropriate that this week is “Shark Week” on the Discovery Channel. There is blood in the water and bears are shorting with confidence. They know nothing will change in coming weeks and panic is setting in. Italy has to raise €150 billion in the next few weeks and it might not be able to.
Last night, Spain held a bond auction and it went fairly well. Yields rose, and the bid to cover was 2.1 vs. 2.5 a month ago. The ECB and China supported the auction and they will need to support Italy’s bond auctions in coming weeks to avoid a financial crisis.
By comparison, any other news is minor. ADP came in better than expected and ISM services missed by a small margin. This morning, initial claims came in at 400,000 and that was a decent number. Traders are pricing in a horrible Unemployment Report and any surprise will be on the upside. I believe based on initial jobless claims the last four weeks that we will have job growth. Analysts are expecting 83,000 new jobs and I believe it will come in around 50,000. This number should spark a small bounce if the market is down big today.
Any rally will be short-lived. Economic conditions are deteriorating and China could raise interest rates as soon as next week. Earnings season is winding down and corporations are providing cautious guidance.
The economic news next week is fairly light. It will be highlighted by the FOMC and their statements should be “friendly”.
We are in a seasonally weak period and there are many unresolved issues. I am out of my put positions and I am waiting patiently for another opportunity to get short. This has been a great couple of weeks and I don’t want to give back my profits.
If we sell off hard today, I feel we will bounce a little tomorrow. If the S&P is down less than 20 points today, I believe we will be flat tomorrow. Look for continued weakness next week.
I don’t mind missing the downside from here and I know that patience will pay off.