Euro Leads Stocks Lower, Then Higher; Income Disparity Hits Young Hardest

There are plenty of correlation trades that make plenty of sense, but perhaps the only one worth watching - from a macro perspective - is the Euro-Dollar trade because of its unique correlation to the US stock market.

Today was a prime example of how that trade controls markets, from weak hands to strong, from dead to money to risk-be-damned, full speed ahead.

As trading opened for the week, the Euro was under a great deal of stress, not only from the continuing crisis, but by way of the dual southern European national plight being waged in Greece and Italy, where both leaders - George Papandreou of Greece and Silvio Berlusconi of Italy - were rumored to be ready to step down at the drop of a falafel or calzone, so precarious their countries' dilemmas.

While Papandreou finally agreed today to step down from his post as Prime Minister in an effort for the country to form a unity government (whatever that may mean in a nation on the brink of dissolution), Berlusconi seems locked into a similar fate, given the debt issues facing his country. Bond yields have risen dramatically on Italy's benchmark 10-year bonds over recent weeks and the spread between the Italian 10-year and the 10-year German Bund hit 490 basis points today.

Also weighing on the Euro was the nearly failed auction of Euro 3 billion in bonds by the EFSF, the entity created to save European banks from catastrophe. The auction was lightly subscribed and only 2.5 billion of the bonds were sold - at a price 171 basis points over the Bund - the rest going back to the issuers at a hefty premium. The EFSF does not have enough heft to buy Italy's bonds, putting Berlusconi and his government in a very precarious position.

As the Euro sagged in the morning so did stocks in the US, as every hedge fund manager worth his or her salt is short the US dollar, a trade that provides cheap dollar liquidity to US markets but is also inherently ruinous to the long-term survivability of the world's reserve currency. As the day wore on in Europe and issues began to straighten themselves out, especially in the case of Greece, the Euro began to rise, taking the dollar down and US stocks up. Simple, Easy. A piece of cake.

The real problem with this trade - as it has been all along - is that the US is probably in better shape than Europe, which has been on the brink of a currency collapse for months, making the premise for being short the US dollar somewhat specious, or perhaps totally false, a straw man trade designed only to make the impression that all's well in the USA and keeping stocks trending higher.

Therein lies the fatal deceit of the short dollar trade. If somehow the Euro must be kept propped up - when it's true value is somewhere closer to parity with the dollar than the current 1.38:1 ratio of dollars to Euros - then the inevitability of the failure of the Euro as a currency, the EU as a common trading bloc and a massive decline in US stocks must occur. This is, without a doubt, how tightly intertwined markets now are, dangerously so, and the heads of most US banking, trading and political entities are well aware of this situation.

When the Euro blows, which it almost certainly will, US stocks will follow, and isn't that a nice, pleasant note upon which to start off your week? Of course, it gets worse. Because when stocks drop, what the middle class is going to do will make the continuing "Occupy" protests look like a kindergarten cookies and milk party. Nothing riles up a people than having their wealth pulled out from under them, and, while the bankers and politicians have thus far succeeded in keeping complete collapse a fringe argument, Europe's failings could quickly become an American nightmare.

It was revealed today just how badly broken the American system has become. Pew Research Center reported that the wealth disparity between young and old has reached its highest level ever, with "Households headed by a person 65 or older have a median net worth 47 times greater than households headed by a person under 35."

Unarguable as that fact may be, it exposes the soft underbelly of American life, wherein the elderly, otherwise known as collectors of entitlements, such as Social Security are prospering at the expense of the young, who must work hard and pay bills, debt and support their elder countrymen. It's as unfair a situation as the top 1% holding 40% of the nation's wealth, and perhaps worth fixing, with means testing, rather than turning our nation into an armed camp of elderly versus youth.

In between are the Baby Boomer generation, the first post-WWII generation to begin reaching retirement age. Some have saved, others not so much, but, as a whole, the largest segment - those born between 1950 and 1960 - are still years away from collecting a Social Security check. If one were to take a bet on just how much a person 55 to 60 years old today should expect as a monthly stipend at age 65 or 67, it would probably be wise to cut that number down by 25-45% from current expectations.

If one is inclined to believe the situation is tough right now, imagine another 50 million expecting to receive Social Security checks in coming years. The math simply does not add up unless those paying into the system are going to be taxed at 80% of their wages. It's just the truth, we're headed for even harder times ahead.

Dow 12,068.39, +85.15 (0.71%)
NASDAQ 2,695.25, +9.10 (0.34%)
S&P 500 1,261.12, +7.89 (0.63%)
NYSE Composite 7,590.43, +38.20 (0.51%)
NASDAQ Volume 1,735,945,625.00
NYSE Volume 3,629,465,250
Combined NYSE & NASDAQ Advance - Decline: 2773-2795
Combined NYSE & NASDAQ New highs - New lows: 88-64
WTI crude oil: 95.52, +1.26
Gold: 1,791.10, +35.00
Silver: 34.83, +0.74

Stocks Drop Initially on Poor Employment Data, Recover Late; G20 Soothes Nerves

Friday was a fitting end of the week for stocks, a the BLS released some very sketchy employment data that sent investors initially to the sell windows, shedding stocks that have run up nicely over the past two sessions.

The week included two rather large down days followed by a pair of higher sessions and Friday's slight sell-off. The Labor Department reported that the US gained 80,000 jobs in its monthly non-farm payroll release, 104,000 of which came from the private sector, offset by 24,000 government job losses.

There were a number of revisions - all upward - to September and August data. September non-farm private payrolls, originally pegged at 137,000 job gains, was revised to 191,000. August, originally reported at a flat zero, was revised for a second time, adding in another 57,000 job gain, following last month's 47,000 upward revision, making August a much better month for employment - if one is inclined to believe government data, of which everyone is not - at a net jobs gain of 107,000.

Disappointing results at the outset sent stocks to their lows of the day in early trading, but as traders digested the data, found some reason for optimism, mostly in the revisions, and, though October's gains were not enough to keep pace with natural labor force growth (roughly 125,000 a month is needed), another positive month, on top of other positive economic data, was enough to erase those losses as the session wore on.

Catching up on other data releases, third quarter productivity increased by an estimated 3.1% after two consecutive quarterly declines.

Factory orders increased by 0.3% in October, on expectations of -0.5%, and the ISM services index inched lower, to 52.9, from 53.0 in September.

The official unemployment rate was pegged at 9.0, down from 9.1 in September, though most of the decline was due to job seekers falling off unemployment roles rather than finding new employment.

Another factor in the calculation of the overall strength or weakness of the US labor market comes in the form of the BLS' notorious birth/death adjustment, which measures the number of businesses closing and shedding jobs (death) and new business start-ups adding jobs (birth). According to this arcane, rather sloppy assessment, the BLS concludes that 103,000 more jobs were created in October by new businesses than were destroyed by business closures. In other words, almost all of the private sector job gains in October were statistically generated, which is why there is some doubt to the veracity and reliability of government statistics.

In Cannes, France, leaders of the G20 nations concluded a meeting without offering any new IMF funds to help Europe deal with its lengthy debt crisis. The fact that the member nations effectively told Europe to "fix it yourself" was less of a surprise than the IMF putting Italy under monitoring of its pension, privatization and labor reforms, long overdue.

That the leading economic powers of the world would defer to next year a decision on whether Europe needed additional help could be viewed as a positive development, especially after the referendum in Greece on that country's bailout money was effectively shut down on Thursday.

For the week, the Dow lost 248 points, the NASDAQ shed 51 points and the S&P dropped 32 points.

Dow 11,983.24, -61.23 (0.51%)
NASDAQ 2,686.15, -11.82 (0.44%)
S&P 500 1,253.23, -7.92 (0.63%)
NYSE Composite 7,552.23, -52.91 (0.70%)
NASDAQ Volume 1,959,105,000.00
NYSE Volume 3,947,110,000
Combined NYSE & NASDAQ Advance - Decline: 2093-2430
Combined NYSE & NASDAQ New highs - New lows: 73-59
WTI crude oil: 94.43, +0.17
Gold: 1,756.10, -9.00
Silver: 34.08, -0.41

Stocks Rally in Spite of Global Issues

My apologies for the extreme brevity of this post, but seriously, no time today. - FR

Stocks, after a brief decline at the open, went straight up all day, almost without pause. Even the threat of Greece defaulting didn't allay the bulls. It was remarkable, in the face of so many financial headwinds.

Dow 12,044.47, +208.43 (1.76%)
NASDAQ 2,697.97, +57.99 (2.20%)
S&P 500 1,261.15, +23.25 (1.88%)
NYSE Composite 7,604.97, +143.81 (1.93%)
NASDAQ Volume 2,081,688,750.00
NYSE Volume 4,664,793,500
Combined NYSE & NASDAQ Advance - Decline: 4290-1341
Combined NYSE & NASDAQ New highs - New lows: 87-64
WTI crude oil: 94.07 +1.56
Gold: 1,765.10, +35.50
Silver: 34.50. +0.56

Markets Rebound as Fed Stands Pat; Greece in a Bind over Bailout

Dow 11,836.04, +178.08 (1.53%)
NASDAQ 2,639.98, +33.02 (1.27%)
S&P 500 1,237.90, +19.62 (1.61%)
NYSE Compos 7,461.10, +123.96 (1.69%)
NASDAQ Volume 1,942,050,875
NYSE Volume 4,062,845,250
Combined NYSE & NASDAQ Advance - Decline: 4528-1072
Combined NYSE & NASDAQ New highs - New lows: 47-45
WTI crude oil: 92.51, +0.32
Gold: 1,729.60, +17.80
Silver: 33.94, +1.21

Recapping the days events in no-frills fashion:

German Chancellor Angela Merkel and French President Nicolas Sarkozy met with the IMF and Greece's Prime Minister George Papandreou to discuss the Greek leader's abrupt call for a national referendum on whether or not to accept the Euro bailout and associated austerity measures. According to early, unconfirmed reports, Papandreou would not budge on a plebesite early next year, pushing the EU leaders to issue a freeze on Greece's $8 billion in bailout funds, a move which could send the whole European debt crisis into a new, more dangerous phase as the Greek government will surely run out of cash prior to the proposed referendum.

The Federal Reserve chose to take no policy action on the federal funds rate, keeping the effective rate between 0.25% and zero. The Fed added some language to its statement, highlighting more positive tones as the US economy gathered steam in the 3rd quarter.

The ADP private payroll survey estimated that US employers added 110,000 private sector jobs in the month of October, after a revised 116,000 job gains in September.

Stocks ended a two-day losing streak, though the Fed's announcement and subsequent news conference didn't move markets much in either direction.

Volatility remains quite high, with the S&P Volatility Index (^VIX) ending the day at 32.74.

All interest will turn to employment over the next two days, as unemployment claims are announced Thursday morning and the BLS' non-farm payroll data come out on Friday, both releases timed for prior to the markets' opening bell. Continuing news from Europe is also likely to be at the top of investor interest.

Greece, Italy Send Stocks Overboard Again

Doings on the Continent have been keeping traders on their toes for months, but today's antics bordered on the bizarre.

First Greek Prime Minister George Papandreou called for a public referendum on the latest bailout plan, just approved days ago in late-night negotiations by European leaders. Making matters even more confused, Papandreaou scheduled the referendum for some time early next year, which would hold global markets hostage for months while the Greeks decide their own fate.

A "NO" vote on the austerity plans tied to Greece receiving more funds from the EU and IMF, would scuttle months of planning and negotiations and would likely result in Greece being tossed from the European Union. Such an outcome would surely roil markets terribly, though the mere thought of waiting two to three months for what almost certainly would be a negative result sent shock waves through European bourses and US exchanges today.

Reacting to the news, German Chancellor Angela Merkel and French President Nicolas Sarkozy planned emergency talks with leaders of the EU and the IMF, though it was not clear whether Mr. Papandreou would be invited.

And, if Greece's gambit wasn't enough to turn investors away, there's a confidence vote set for Friday, in which Papandreou's Socialist Party could lose control of the government, which it holds by only two seats in the parliament. The situation in the Mediterranean nation have moved from bad to worse to bizarre over the past few months.

In Italy, despite the agreements worked out last week, bond yields continued to spike higher, with the 10-year Italian bond reaching upwards of 6.22%, a more than 400-basis point difference over the stable German Bund. The bond spread blowout added to fears that Italy might be in more danger than previously thought - which, in itself was already severe - as the Italian government has to roll over nearly $2 trillion in bonds over the next year, a hefty sum.

Under the leadership - if one can call it such - of Prime Minister Silvio Berlusconi, Italy has failed to act on measures set down by the EU in August and leaders of two main banking and business associations have called on the prime minister to act swiftly or step aside. For his part, Berlusconi has made promises to act quickly, though many doubt he has the emotional or political will to implement the harsh austerity measures called for by other European leaders. As can-kicking goes, Berlusconi is world class, a foot-dragger with a penchant for putting off the obvious, though most of the other leaders in the EU have displayed similar inability to act courageously or quickly.

Also nagging US markets was the early-in-the-day report on ISM Manufacturing Index, which showed a marked decline, from 51.6 in September to 50.8 in October, another sign that the US economy was in danger of falling into another recession.

Stocks were pounded right from the opening bell, though a late day rally was attempted and then scuttled as news from Greece suggested more of a guessing game than any kind of deliberate policy action.

Speaking of policy, the Federal Reserve is locked in meetings on rate policy, which will be announced at 12:30 pm Wednesday, a deviation from the usual 2:15 pm time. The policy decision will be followed by a press conference with Fed Chairman Ben Bernanke. While it is virtually assured that the Fed will not change the federal funds rate from levels approaching zero, some are betting that another round of QE will be announced in some form, though the effectiveness of such an undertaking - already tried twice since the 2008 financial crisis, without effect - is very much in doubt.

Prior to that, ADP will release its private payroll data for October, which serves as a proxy for the "official" non-farm payroll data release by the Labor Dept. on Friday.

Not surprisingly, some of the biggest losers on the day were the large banks, such as Wells-Fargo (WFC), Bank of America (BAC), JP Morgan Chase (JPM), Citigroup (C) and Goldman Sachs (GS), the usual culprits now caught between a sagging economy, exposure to Europe and the unwinding of MF Global, which filed for bankruptcy protection on Monday.

The silver lining for consumers came from a two-day rally in the dollar - mainly against the Yen and Euro - sending commodity prices lower across the entire complex.

Dow 11,657.96, -297.05 (2.48%)
NASDAQ 2,606.96, -77.45 (2.89%)
S&P 500 1,218.28, -35.02 (2.79%)
NYSE Composite 7,338.48, -226.55 (2.99%)
NASDAQ Volume 2,314,571,500
NYSE Volume 5,656,978,000
Combined NYSE & NASDAQ Advance - Decline: 859-4813
Combined NYSE & NASDAQ New highs - New lows: 24-89 (flipped)
WTI crude oil: 92.19, -1.00
Gold: 1,711.80, -13.40
Silver: 32.73, -1.62