Santa Rally Snuffed Out?

Dec 16, 2011   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Looks like investors rolled out of bed on the wrong side this past Monday and stayed grumpy for most of the week.  The markets headed lower into the middle of the trading range that was established in October.  Institutional investors are making year end changes to their portfolios causing wild swings in otherwise less volatile stocks while retail investors just threw in the towel and called it quits.

In terms of Europe, rumors abounded this week suggesting that Fitch was going to downgrade France’s credit rating.  This drove rates higher in not only France but Italy as well.  In fact, at its five-year auction on Wednesday, Italy saw yields rise to a euro-era record of 6.47%, surpassing the 6.29% previous record that Italy paid last month.  One journalist put it like this, “If you take a blank piece of paper and look at it, that’s the current plan Europe has.”  Unfortunately, the markets will continue to be roiled until the European Union gets their act together.  Fortunately, Fitch affirmed France’s AAA rating late Friday but changed the outlook to negative.  The negative outlook is all about “contingent liabilities,” i.e. if French bank liabilities become French state liabilities.  In addition to France, Fitch also placed Belgium, Spain, Slovenia, Italy, Ireland and Cyrus on negative watch.

If there was one connecting theme to the reports this week it would be “less”.  Several large companies lowered their Q4 and 2012 earnings guidance, states are trying hard to find ways to slash budgets, and economists are lowering forecasts for GDP growth both here and abroad.  It would seem the world is going on a diet.  California announced $2.5 billion in budget cuts following an estimated revenue shortfall of $3.7 billion.  Ironically, the bulk of the savings would come from a seven-day reduction of the school year, projected to save $1.5 billion!    Not to be left out, economists and analysts are feverishly scratching earlier forecasts in favor of now lower GDP and S&P estimates for 2012.

As for companies in the news this week, both Intel and DuPont lowered 2012 guidance.  This is important because both companies are economic bellwethers and could indicate a weak first half to 2012.  Other companies lowering guidance include First Solar, Freeport-McMoran, Charles Schwab and Nucor.  Even the Federal Reserve reiterated in their FOMC minutes they have no plans to raise rates until mid-2013 given the widespread weakness in the economy.  In fact, some pundits pointed out that the lack of inflation leaves the door wide open for the Fed to pursue further quantitative easing in the first half of next year.

And in closing, I was skimming through the news when this headline caught my attention, “World Watches as Norway Runs out of Butter.”  It seems Norwegians have eaten up the country’s entire stockpile of butter, partly as the result of a low-carb diet sweeping the Nordic nation.  “Sales all of a sudden just soared, 20% in October then 30% in November.”  Adding to the shortfall was the unusually wet summer which reduced the quality of animal feed and cut milk production by 25%.  The irony is that right across the narrow sea channel, top dairy produce Denmark is sitting on huge stores of the stuff.  Unfortunately, the high import duties in Norway prevent the butter from being imported.  This is really shaping up to be an interesting year end!

December 16, 2011: Market Update

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