A New Week, Old Problems
- Europe again weighs on the market and stocks fall, but all in all a modest loss and still a nice setup for continued upside.
- European industrial production lowest in 2 years.
- Now Spain’s bond yields are surging.
- Retail earnings continue supporting a solid sector as stores plan more holiday hiring this year.
- Plenty of leaders still in great position after the Monday pullback.
Europe issues still there but stocks show a bit of backbone, mitigate losses.
A new week, old problems. Well, perhaps a new old problem as well. Italian bond yields enjoyed a new surge in yields with the 5 year bond sporting its highest yield since 1997. Hello? ECB? This is Italy. Would you buy some more of our bonds again?
Spain also contributed to the Monday morning issues. Its 10 year bond yields rose over 6% to record highs. To top off the usual European issues, over EU industrial production limped in at a 2 year low.
Japan is feeling the effects. Not from its earthquake/tsunami gut punch, but from exports. Japan’s GDP jumped 6% as its industrial sectors rebounded. Sounds great, but there is a ‘but.’ Japan noted that exports were likely peaking because European demand is falling. So Europe does matter after all, and it looks as if Europe cannot avoid a second recession. As noted last month, the UK is likely already in a recession.
Of course that has implications for the US, namely its exports to Europe and other regions, exports that have kept the economy from totally collapsing. It is the export economy that is working as chronicled over the past several months, not the domestic smaller businesses that are the strength of the US. That is what bites about an export economy: you go into recession when those buying your goods go into recession. Ever since the 1900′s the US has made its own wake, not relying on others for its economic growth and productivity. Others geared their economies to feed US demand. If the US suffered, they suffered. Now the shoe is on the other foot. Stinks.
Some say the US won’t suffer as a result, that our economy will withstand a European recession. If other regions hold up that can work as we can export to them. Won’t be a great recovery, but goodness sakes, this recovery even with Europe up to now has been a pathetic caricature of a typical US recovery. It is now 2.5 years since the recession officially ended and the results are stark.
Compared to that sharp 1981-82 recession that lasted 16 months, this ‘recovery’ is dragging out way past the norm. In the seven quarters after the 1981-82 recession ended GDP quarterly growth rates averaged 7.1%. Those same seven quarters of the current economic slump averaged 2.8%, and they went down after that. Unemployment after 1982 fell to 7.5% at the seven quarter mark; until just the past month unemployment was over 9%. Long term unemployed? 18% after 1982 recovery started; 45% in the current disaster. Consumer confidence was over 100 at this point after the 1982 recession; currently it is still in the 50′s.
What about the ‘inherited’ recession? Well, it was ending before the current President took office and over 6 months after the Presidency changed hands. Thus the recession was ending before Obama’s policies were implemented. Those policies: huge spending increases, massive increases in regulations, healthcare takeover, higher taxation mantra, anti-business (today we heard the President say our businesses have been ‘lazy’ the past 20 years) – - particularly anti-small business where our real strength, wealth, and standard of living increases come from. Compare that with 1982 where industries were deregulated, taxes were cut and streamlined, and the US small business entrepreneur and the free enterprise system were advocated.
Right now it looks as if the US may turn right back down into recession in 2012 according to ECRI and some other big names. If so, that is the current Administration’s recession and a clear answer to the policies promulgated. At the very best the current policies have produced the worst recovery in 70 years, and with over 14M people unemployed (conservatively) with many for well over a year, that is pain that is killing the US. Throw on some inflation to come and this could be as bad as it gets.
BUT, I digress.
Futures were lower and stocks started soft but were not killed on the European issues. Some US earnings from LOW helped soften the blow, and TIF reported some solid earnings as well later in the session. ‘Luxury’ continues to perform as well as discount (e.g. DLTR). Thus despite the European worries US stocks were holding their own. We even posited that stocks could rally off a modestly lower open and continue to the upside.
They did. For about 20 minutes. Then they peaked and fell negative once more. That lasted the entire session. A late bounce made things look better, but losses nonetheless across the board.
NASDAQ -0.80%. SP500 -0.96%. DJ30 -0.61%. SP600 -1.55%. SOX -1.29%
Down but not the kind of collapse seen the prior two times the indices tried to break free of the August/October trading range. Those rallies were tossed back by some heavy selling on European worries. This time, thus far, just a modest pullback to near support that leaves the indices still in position to make a higher low and break out from their pennant patterns formed the past three weeks. Plenty of stocks are sporting excellent pullbacks and are in position to rally as well.
TUESDAY
Okay we got Monday and some European issues out of the way without any major selloff. Indeed the action allows the indices and stocks to digest some of the late week gains, hold their patterns, and continue to set up for the next move upside. As with the constructive action I noted last week ahead of the Wednesday dive lower, this action is again constructive.
Now I am not saying a Wednesday-like selloff will not occur, but note that even with that dive lower the indices held support, put in a higher low, and rebounded, keeping the pattern developing. Monday the indices survived some more European problems quite well. Building a bit of character for the holidays perhaps.
While there are stocks breaking lower, as there always are, many leaders as noted are holding up nicely, setting up good upside patterns just as the indices. As long as good stocks continue to set up good patterns we will be ready to step in when they break higher, playing the move higher into the holidays or year end, whichever comes first.
