Feasting on Euro Turkeys (DIA, SPY, UUP, EFZ, EUO, VIX)

I trust you had a Happy Thanksgiving and, as always, it was a bad week for turkeys as we partook in our national, traditional holiday feast.

However, while we celebrated our Thanksgiving with turkey and dressing and cranberries and our markets were closed or on shortened schedules, the “wolf pack” was feasting on the turkeys of Europe. 

It was quite a week as trouble percolated across the world, first focused on Korea and then in Europe as the problems in the Eurozone's financial markets resurfaced. 

First, it was Ireland falling into the clutches of the European Central Bank after claiming for weeks that they didn't need help, and the ink was barely dry on the Irish bailout before the “wolf pack” turned its attention to Spain and Portugal. 

The cost of insuring Portuguese, Spanish and Irish debt soared to record levels late in the week while the spread between their bonds and the benchmark German bund also hit record levels with the yield on Spanish 10 year bonds rising to a record 7.6%. 

The Spanish Ibex 35, Spain's version of the Dow Jones Industrials, dropped approximately 8% for the week while Standard and Poors cut Irish bank ratings to junk status.  

This steady stream of bad news comes amidst rising questions about the ability of the European Central Bank to fund a Spanish rescue and growing conflict about who will take a haircut for all of these losses. 

Odds are that Portugal will be “next” with a high likelihood of Spain soon after joining the ranks of European economic zombies. 

As investors, problems always spell opportunity and for now, most opportunity seems to be on the “short” side of the ledger. 

Looking at My Screens 

Risk is definitely off, at least for now, as we can see in the charts below:

Chart courtesy of http://www.stockcharts.com

In the chart above of (VIX) the CBOE “fear index,” we see new fear coming back into the market and replacing the complacency seen earlier this month with the index jumping above its 50  Day Moving Average. 

Chart courtesy of http://www.stockcharts.com

In Europe we see the impact of the problems with (EFZ) the ProShares short MSCI EAFE exchange traded fund taking a sharp jump since early November. 

Finally, the “safe haven” trade, the U.S. Dollar, has been on a steady rise as tensions multiply around the world. 

Chart courtesy of http://www.stockcharts.com

 Times seem difficult, at best, and the “risk on, risk off” trade continues.

 Wall Street Sector Selector remains positioned in inverse exchange traded funds, expecting lower prices ahead. 

The View from 35,000 Feet

In addition to the problems in Europe, Korea made headlines as tensions remain high on the Korean Peninsula.  The U.S.S. George Washington is enroute to the region and China is expected to play a major role in this developing conflict. 

Approximately $2 trillion has been shed from global markets over the past three weeks as China works to slow inflation, political tensions erupt in Korea, Europe tilts towards insolvency and a widening insider trading investigation threatens U.S. hedge funds and investment banks.

As I've said before, you just couldn't make this kind of stuff up. 

This week's economic reports were mixed with durable goods orders falling -3.3% from a previous level of +5.0% and the lowest median home prices reported in three years. 

On the upside, 3^rd Quarter GDP was revised upwards a notch to +2.5% and unemployment showed improvement.  

Investors continued their departure from equities with an unbroken string of negative outflows from U.S. equity funds since the May flash crash while the first arrest from the insider trading investigation occurred.

What It All Means 

We remain in treacherous territory as conflict, confusion and uncertainty ripple across the globe.  From a technical standpoint, multiple attempts to breach the 1200 level on the S&P 500 (SPY) have failed in spite of the ongoing asset purchases by the Federal Reserve. 

The Week Ahead 

We face another huge week of data as we head into December.  Important market movers are scheduled for the housing market on Tuesday, the Institute of Supply Management and construction spending on Wednesday, and the all-important non-farm payrolls report on Friday.  

Tuesday: September Case/Shiller Housing Index, November Chicago PMI, November Consumer Confidence 

Wednesday: November ADP Employment Report, Q3 Productivity, November ISM, October Construction Spending, November Car Sales, Fed Beige Book 

Thursday: weekly and continuing unemployment claims, October Pending Home Sales 

Friday: November Non Farm Payrolls report, November ISM Non Manufacturing, October Factory Orders 

Sector Spotlight: 

Winners: U.S. Dollar (UUP) 

Losers: Eurodollar, (EUO) Italy, Spain

My #1 son came home from college on Tuesday and so the four of us were together for Thanksgiving dinner.  As we enjoyed our traditional meal in the candlelight, we talked about the things for which we are thankful, as we have every year since the boys were very young. 

With my #1 son graduating from college next week and #2 graduating from high school next spring, it occurred to me that this might be the last Thanksgiving that would see the four of us all together around the dinner table.  Life intrudes on family time in so many different ways, but as we raised our glasses in the candlelight, I was thankful for the time we have had together. 

I trust you had a wonderful Thanksgiving and wish you a great holiday weekend wherever you may be. 

 All the best,  

 

John Nyaradi