Another day in the life of Europe's sovereign debt crisis sent the U.S. dollar higher and stocks lower with the S&P 500 putting the breaks on a six-day rally. When the dust settled on Wednesday, the index was off by half a percent. The Dow Jones Industrial shed 19 points on the day while the Nasdaq lost 10.5 points. Gold was adversely impacted by the dollar's jump, careening to a 1.3% loss.
The euro slid against the dollar, helping the U.S. Dollar Index to a solid day. If you're long stocks and commodities or short the dollar, blame Spain for your Wednesday headache. The ''S'' in the PIIGS acronym and the second-largest economy in that motley crew behind Italy dominated the headlines in a big way today on news that Moody's Investors Service is mulling a downgrade of Spain's debt rating.
Throughout this European debt saga, I have opined in this space that it has been frustrating and vexing to see economic lightweights such as Greece, Ireland and Portugal weigh on global equity markets. After all, these aren't lead actors on the global economic stage. I also noted that Spain is a different ballgame, the ninth-largest economy in the world, and if the contagion spread its way, there would be unfortunate repercussions.
The other side of this coin is that Moody's or any other ratings agency for that matter, is not doing anyone any favors by considering a downgrade to Spain's debt rating now. It is practically 2011 and Spain's problems have been well-known for a couple of years. There have been a couple of times in the past year that I have highlighted the iShares MSCI Spain Index Fund (NYSE: EWP), the only Spain-specific ETF listed in the U.S., on days when the ETF has been subject to some unusual bearish trade and I highlighted the reasons why Spain was likely to be on the receiving end of some pain.
In the go-go days of the easy credit economy, Spain went the way of U.S, which is to say ''houses for all.'' When the real estate bubble burst, the same thing happened in Spain that happened here in the States: Folks were stuck with homes that were less than what they paid. Factor in an unemployment rate that is close to if not the highest in the Eurozone (it was once as high as 20%) and it is no wonder Spain is in trouble. Welcome to the party Moody's because these statistics were readily available in 2008. As the chart illustrates, dollar bulls do not care how late these downgrades come because buying the news in this case seems to work.
The timing of all this is quite bad for Spain, which will commence its final bond sale of 2010 on Thursday. Moody's says the country needs to raise $226 billion next year.
Dollar Index Chart
As has been the problem throughout the European fiasco, the problems faced by Spain and friends are not confined to their borders because foreign banks have exposure to these countries as well. In the case of Spain, German banks own almost $217 billion in Spanish debt, French banks own over $200 billion and the U.S. is vulnerable as well with almost $173 billion in Spanish debt holdings, according to the Bank of International Settlements.
Spain Debt Exposure Chart
Belgium is no peach either. Standard & Poor's took the knife to its outlook for Belgium on Tuesday, cutting that rating to ''negative'' from ''stable'' while warning the country could be in for credit rating downgrade within the next six months.
''We believe that Belgium's prolonged domestic political uncertainty poses risks to its government's credit standing, especially given the difficult market conditions many eurozone governments are facing,'' S&P said. Belgium's current credit rating is AA+, just one notch below the perfect AAA rating. It does not look like the country will be obtaining that lofty rating any time soon, but it does look like the iShares MSCI Belgium Index Fund (EWK) is quite vulnerable right now.
Belgium ETF Chart
Staying in Europe, a couple of European companies that are not going to win any popularity contests this year were in the news and not the good kind of news. Well, it is rarely good when the Justice Department gets involved and that is a lesson BP (BP) and Transocean (RIG) are bound to learn. Both stocks were doing alright today until the Justice Department announced it is seeking an unspecified amount of civil damages from BP, Transocean and several other companies with ties to the Gulf of Mexico oil spill.
The suit, filed today in a New Orleans federal court, shows DOJ is pursuing damages under the Clean Water Act and that the agency wants to hold BP, Transocean and Anadarko Petroleum (APC), which owned a 25% non-operating interest in the Macondo well project, liable under the Oil Pollution. BP's Australian-based insurance provider was also named, but Cameron International (CAM) and Halliburton (HAL) escaped the wrath of DOJ, at least for the time being.
BP slid 1% after the news broke, giving back some of Tuesday's gains that were accumulated on the back of takeover rumors. For more extensive coverage, head over to OilSlick.com.
While it may seem like today was a pretty glum day, there is some positive news to report and one such example comes from the materials sector. Joy Global (JOYG), the mining equipment maker whose primary rival, Bucyrus (BUCY), is being acquired by Caterpillar (CAT), reported stellar fiscal fourth-quarter results AND gave an outlook for 2011 that investors cheered.
Wisconsin-based Joy Global said it earned $1.39 a share on sales of $1.05 billion in its fiscal fourth quarter. Analysts were expecting a profit of $1.16 a share on revenue of $922.8 million. That is a pretty good beat, but even better was the outlook. Joy Global said it expects to earn $5-$5.30 a share on revenue of $3.9 billion to $4.1 billion for fiscal 2011. That tops the Street estimate of a profit of $4.79 a share on revenue of $3.86 billion.
Mining companies have increased capital spending this year by as much as 35% and spending is expected to rise another 15%-20% next year as emerging markets continue their thirst for commodities. Analysts said Joy Global will be targeting emerging markets for growth and will probably expand its product line to better compete with the combined Caterpillar/Bucyrus.
Joy Global said its fourth-quarter bookings rose by 48%, driven by North America, Australia and Russia, Reuters reported. The shares surged as much as 8% to a new 52-week high before settling up 6.94%.
Joy Global Chart
Looking at the charts, I do not want to be the one that rains on the rally's parade, but the S&P 500 is having a tough go of things with regard to surpassing 1250. To be specific, 1251.70, the index's close on Sept. 12, 2008, is next resistance. That number is the pre-Lehman collapse high, so it is probably very psychological. Support is fair bit back at 1225-1228.
S&P 500 Chart
Yesterday, the Dow got a small boost from a trio of constituents, Caterpillar, Kraft (KFT) and Verizon (VZ) on some upgrade news. Today it was a trio all falling by at least 1.1% -- Alcoa (AA), General Electric (GE) and JPMorgan Chase (JPM)-- that dragged the index lower. Today's loss is hardly alarming the Dow is still a long way from support at 11,335.
After eight consecutive up days, the Nasdaq has fallen back for two straight days and today's decline violated initial support at 2625. Some Nasdaq darlings did not pull their weight today. Google (GOOG) retreated below its 50-day moving average. F5 Networks (FFIV) endured a nasty tumble and Apple (AAPL) barely moved.
It was another down day for the Russell 2000 and the index is now flirting with support at 765. How firm this support is should be a tell as to how strong small-caps will be heading into year-end.
Russell 2000 Chart
As Keene is filling in for me next Monday, I will not be back with you until after Christmas, but I wanted to leave you with a fun, and perhaps profitable, fact. According to Bespoke Investment Group, the trading day before and after Christmas are usually positive for the S&P 500, but make your preference the day before, which sees an average gain of 0.21% as that day is positive almost two-thirds of the time over the past 25 years. Happy holidays to you and your family.
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