Daily Investment Interpretations
November 30, 2010
(Tuesday Night): The
trim losses on data The NASDAQ
Composite fell 26.99
to 2,498.23. The Dow dropped 46.47
to close at 11,006.02,
and the S&P 500 slid 7.21
to end at 1,180.55.... its tipping point. Oil slipped to $83.68
a barrel, and Gold climbed to
$1,387. The VIX rose 2.04
On the domestic front, most of today's news was good news: Chicago PMI makes stronger-than-forecast rise, and November consumer confidence jumps. The only bad news was that Home prices post decline, and Home prices not even close to a bottom (audio).
Mark Hulbert writes: Has the tide turned in the bond market?
Michael Ashbaugh's weekly column is entitled: Market bears rattle cage on major support.
Overseas, it was a different matter.
Spanish bond yields soar "The yields on 10-year Spanish bonds have risen from 5.43% last week to 5.63% this week. The recent pressure on Italian bonds is particularly worrying since the nation’s debt had been relatively immune to the most recent round of sovereign-debt fears, said Gary Jenkins, head of fixed-income research at Evolution Securities, in a note.
“'Spain has a funding requirement in excess of 150 billion euros ($196.7 billion) for 2011 and Italy needs close to €340 billion. With the market moving rapidly onto Spain and Italy it is possible that too big to fail becomes too big to bail,' Jenkins said.
"European Union finance ministers on Sunday finalized an €85 billion aid package for Ireland, which became the second country in the 16-nation euro zone to seek a bailout.
"More importantly, officials outlined plans for a new European Stability Mechanism that will take the place of the €440 billion bailout fund put in place after the Greek bailout. The new program, which would take effect in mid-2013, includes provisions that could require private bond holders to take write-downs in the event of future sovereign-debt crises. Read about the reaction to the ESM.
"If bond yields continue to rise sharply 'we may see a much faster move toward a de facto fiscal union with a central debt management office and single European government bond, possibly under the auspices of the [European Financial Stability Facility] initially,' Jenkins said."
The take-away message from this is that Europe has options that should work. It becomes a matter of choosing the least-worst option.
In Permanent Link to The Italian Job, Paul Krugman presents the chart below that shows how bond rates have exploded for Italy during November.
In The Spanish Prisoner, Paul Krugman explains that Spain's problem is the Euro. If Spain could devalue its currency, it could render its goods and services more competitive in world markets, but without that escape hatch, recovery will be long, slow, and painful. And this will impact the stock market until it's resolved (although we've seen this European sovereign debt crisis resolved several times, and each time, the crisis rises from the ashes worse than ever).
Europe opted for austerity measures on the hypothesis that this would assuage the "bond vigilantes", holding down interest rates for the PIGIS. Instead, interest rates have soared in the face of austerity moves just as Paul Krugman predicted would happen. And now, Europe is facing the worst of both worlds, with austerity programs reducing their GDPs and their tax revenues, and debt costs skyrocketing in spite of their austerity programs, possibly because potential lenders realize that austerity gambits are lowering the abilities of the PIGIS to service their debts.
Has Paul Krugman been right about this?
European markets drop as debt cloud darkens
It seems to me that European outlook is going to get worse before it gets better. Spain and Italy are going to need bailouts, and as one pundit puts it today, are they "Too big to bail?" One way or another, this problem will be solved, but there may be a lot of bad news before that happens.
Belgian — even German — bonds are feeling the heat
Pick your global-upheaval scenario
Oh, and S&P may downgrade Portugal's "A-" sovereign rating. Cheers!