Investors seemed to be frustrated that nothing material came out of Europe and the G20 meeting on Friday. Without a market moving headline the markets fell into a funk while they waited the fall of the Greek government.

Market Statistics

Without a European headline to rock the markets it was a relatively calm day. The indexes started off in the hole after a mediocre jobs report and no help out of the G20 for Europe, but they slowly improved their position as the day progressed. It was not enough to finish in the green but the looming Greek confidence vote was weighing heavy at the close.

The Nonfarm Payroll report for October was a little lighter than expected but it was still decent. The headline number showed a gain of +80,000 jobs compared to estimates of 95,000. However, the prior two months were revised higher by +102,000 jobs. August was revised up from 57,000 to 104,000 and September rose from 103,000 to 158,000. Private sector jobs rose by +104,000 but that was down from an upwardly revised 191,000 in September.

The unemployment rate declined by -0.1% to an even 9.0% rate. This was due to a gain of 277,000 jobs in the separate Household Employment Survey.

The positive employment components in several of the regional economic reports suggests the economy will continue to add jobs but at a very slow pace. Moody's is expecting an average of +100,000 jobs per month for the next four quarters. That is on the bearish side of most forecasts. Most believe jobs will improve in early 2012 after some seasonal weakness in the next four months. You need +200,000 jobs per month to reduce unemployment because 150,000 new workers enter the job market each month. The Fed said they expect the unemployment rate to decline to 8.5% to 8.7% by Q4-2012. That is not a very big decline and that suggests the economy and unemployment is going to be THE big battleground for the 2012 elections.

Payroll Chart

There were no other material economic reports on Friday. Next week will also be an economic wasteland with a lack of material reports all week. Stocks will be on their own and at the mercy of a trickle of earnings and European headlines. The EU Finance Ministers will have a two day meeting on Mon/Tue on implementing changes to the EFSF. On Thursday the EU releases its semi-annual economic forecast and that is likely to be negative given the recent events.

Economic Calendar

After the close on Friday the Greek prime minister, George Papandreou, survived his vote of confidence and the Greek government is still intact. The vote was 153 to 145. He calmed a revolt in his socialist party by pledging to step aside if need be and seek a cross-party government lasting for four months to safeguard the new debt agreement. The finance minister said the new provisional government would last until the end of February. The opposition party leader, Antonis Samaras rejected the plan and called for snap elections. However, that call is not likely to proceed now that a compromise has been reached that assures a majority vote on maters in parliament. Expect several more days of political maneuvering.

By surviving the confidence vote and remaining in office Papandreou appears to have escaped the chaos he created last week with the call for a general election to vote on austerity and staying in the euro zone. When the EU said they were going to withhold euro 8 billion in bailout funds until after the election in December that killed the process since Greece cannot exist without the funds. For the next few days Greece should be off the table as a market mover and the successful confidence vote should allow the markets to rise on Monday, assuming some new government crisis does not appear.

Unfortunately there is a new development in Italy. Prime minister Berlusconi agreed to allow the IMF to oversee its books and financial dealings in insure the country is fulfilling its promises under the bailout agreements. Throughout this process Berlusconi has seen his support weaken and as of Friday it appears he has lost a majority. If a confidence vote were held today he would likely lose. Opposition leaders are rumored to be planning a move to launch a vote next week. The Greek PM is out of the fire but the Italian PM is about to be roasted over his own problems. He has multiple charges and suits pending against him for everything under the sun including prostitution. His days appear to be numbered.

The problem for our markets is that Italy is the third largest economy in Europe. If the Greek contagion successfully migrates to Italy it would be a disaster. Italy has 1.9 trillion euros in debt compared to 369 billion euros for Greece. The interest rate on the benchmark 10-year Italian bond rose to 6.39% on Friday and a new record high. A year ago it was only 4% and that was after a year of headlines about Greece. It is also after the ECB has been buying Italian bonds and unsuccessfully trying to force the rates lower. Italy cannot pay 6.4% on its debt and should Berlusconi be removed from office the rates could go a lot higher. The bond vigilantes are smelling blood and the situation in Italy is growing worse. Basically Italy is becoming the new Greece. Welcome to 2012.

The G20 meeting ended with a thud. While Germany, France and the U.S. tried to elicit additional support for the EFSF it was not forthcoming. Merkel confirmed that late Friday when she said "very few G20 nations are interested in lending to the EFSF." I would say that was an understatement. Would you want to loan money to a fund that plans to leverage itself up 4-5 times and lend to countries already in financial trouble with no hope of escape? Even the IMF went on record at the meeting saying it would not loan to the EFSF. That removed any implied security blanket that might have made it easier for some countries to participate. Basically the G20 was a bust. After the Papandreou referendum fiasco last week nobody trusts Greece to continue in a trustworthy fashion and the clouds building over Italy are producing additional worries of a bigger problem down the road.

In stock news Groupon closed right at the low of the Day at $26 after pricing at $20 and trading as high as $31 at the open. The IPO was only 35 million shares but more than 50 million traded. Groupon only sold about 5% of the company in the IPO in order to artificially produce an opening day spike on short supply. That happened at the open but the afternoon was ugly. What happens next week when the spotlight moves on to other things is likely to be a disappointment to anyone holding shares. Employees have a six month lockup period so they will get to watch their dollars bleed away if the Groupon undercurrent does not fade. I can't remember an IPO where the company had so much negative press before the sale. If Groupon disappoints on their next earnings report it could be a disaster.

Groupon Chart

Berkshire Hathaway (BRK-A) posted earnings for Q3 of $3.8 billion or $2,309 per class A share. That was a +37% improvement over the same quarter in 2010. Berkshire also said its derivative losses spiked to $1.6 billion from $95 million in the year ago period. Buffett sold billions in index puts several years ago and Berkshire has to mark those to market every quarter. I believe they had a 20-year expiration date and will probably not expire until after the 81 year old Buffett has ceased to be Chairman. In the past Buffet has called derivatives "weapons of mass destruction." The paper loss was due to the markets declining to lows for the year at the end of September.

The Berkshire insurance businesses reported $1.1 billion in income compared to $199 million a year ago. The non insurance businesses reported operating earnings of $2 billion, up from $1.7 billion. Berkshire bought back $18 million in stock in the quarter using both the A and B shares. That is a rare occurrence but Buffett said he likes to buy things cheap and his stock was cheap. It was a token buyback. $18 million is pocket change for Berkshire. Cash on hand at the end of the quarter was $34.78 billion, down from $47.89 billion at the end of Q2. During the quarter Berkshire funded the purchase of Lubrizol and bought $5 billion in Bank of America shares.

Berkshire B Shares Chart

Jefferies Group (JEF) has been under pressure of late on worries they have similar exposure to Europe as MF Global. The shares declined from more than $15 last week to trade briefly under $10 on Thursday despite the firm repeatedly claiming it had no material exposure to Europe. Finally on Friday the company undertook an unprecedented action and actually disclosed all its positions. The revelation revealed a net $9 million short position on $2.4 billion in bonds from five countries. The company had $97 million in cash on hand and billions more in other positions. The president said "These are fragile times in the financial market and we decided the only way to conclusively dispel rumors, misinformation and misplaced concerns is with unprecedented transparency about internal information that is rarely, if ever, publicly disclosed." Also, "As is clear from this information, Jefferies has no meaningful credit risk in respect of the sovereign debt of these nations, and an insignificant risk related to interest rate movements."

Despite the revelations Sean Egan, managing director of Egan Jones, cut its ratings on Jefferies saying the company did not identify the counterparties on the short positions therefore the quality of the positions could not be determined. On Thursday Jefferies biggest shareholder bought another one million shares of Jefferies stock. Leucadia (LUK), a conglomerate that many compare to Berkshire only smaller, said the sell off was ridiculous and represented a significant buying opportunity. In response to the purchase Leucadia shares were knocked for more than a 10% loss but then recovered.

The financial moth, Meredith Whitney, always one to inject herself wherever a financial event can get her some press, said Jefferies management was conservative, the company takes few risks and it was being unfairly tarred with the MF Global brush. It was enough to get her some air time on CNBC.

Jefferies Chart

Of course the event causing all of this volatility was the MF Global crash. On Friday CEO Jon Corzine, former governor of New Jersey and executive at Goldman Sachs, resigned from the company. He said he would not seek any of the $12 million in severance pay he would have been due. I seriously doubt the bankruptcy court would give it to him but at least it was a good sound bite.

The headline all week was the supposed disappearance of $659 million in customer funds from custodian accounts. The CME released a statement on Friday saying a compliance audit completed just a week earlier showed that MF was in compliance with obligations to safely segregate customer funds. "It now appears that the firm made subsequent transfers of customer segregated funds in a manner that may have been designed to avoid detection." Oops! Late Friday there was a rumor the funds had been found in an account at JP Morgan. The account reportedly held $658.8 million. There was no confirmation from JPM.

The alphabet cops, SEC, CFTC, SIPC and FBI along with the Federal Government have all launched investigations into the missing funds and practices at MF Global. Corzine better plan a couple of vacations quick because he could eventually end up a cell mate with Madoff if he authorized the money shuffle.

Managers at MF are trying to claim the money was inadvertently comingled as the company raced to close more than $27 billion in outstanding positions as margin calls overwhelmed the operations. The CME said it would complete the transfer of about 50,000 accounts worth $1.45 billion by the end of day on Friday although only 5,300 had been transferred by midday. The CME also temporarily lowered initial margin requirements on futures to ease the transition of accounts to new brokers.

Yahoo (YHOO) shares declined last week after news broke that Yahoo's founder Jerry Yang was trying to work a recapitalization deal with multiple private equity firms rather than orchestrate a sale. Shares declined -$2 to $14.70 before finding support. On Friday a major shareholder, Daniel Loeb, who owns a 5.2% stake in Yahoo through a fund called Third Point, sent a letter to the Yahoo board demanding seats on the board and the removal of Jerry Yang from the board. Loeb thinks Yang is more interested in keeping Yahoo in friendly hands and him in control rather than selling to the highest bidder in what would be more beneficial to shareholders. The letter list five private equity firms currently in discussions with Yang.

Yang only owns 3.6% of Yahoo and less than Loeb but Yang has a far bigger influence as a director and prior CEO. Loeb said he would finance a shareholder rebellion similar to the one Icahn accomplished two years ago if Yang did not step down. Loeb believes Yang is trying to sell a minority stake in Yahoo to a PE firm that would include Yang as a potential investor. Then that firm would try to force Yahoo to leverage up and buy back all its shares thereby turning their minority stake into a majority stake.

Yahoo Chart

Crude prices continued to buck the trend with oil closing at $94.42 after trading within 7-cents of $95. The volatility has been strong but it refuses to roll over despite the economic worries in Europe. The declining distillate inventories and the failure of Libya to restart any materials quantities of crude appears to be providing support. Also helping is the sudden increase in news headlines about the IAEA and revelations about nuclear weapon efforts in Iran. Repotedly eleven nations, including Britain, Israel, France and the USA are considering preemptive military action. I don't believe that because they would not telegraph their actions in advance. Why warn Iran they are coming unless they are trying to push Iran back to the negotiating table with the rumors.

Oil is just under the 200-day average and a break over $95 could easily run to $100. Crude has been consolidating in the $92-$94 range for two weeks and a breakout could be imminent.

Crude Oil Chart

The S&P ended with a losing week but that would have been a sure bet if you had asked any ten traders last week. The +19% rebound in October was sure to see some serious profit taking once fund managers moved into their new fiscal year on November 1st. Even without the Oct-31st fiscal year end scenario any 19% gain over four weeks would have been due for a rest.

The S&P did decline -5% to the lows on Tuesday and then recovered to neutral territory at 1250 at the close on Friday. That was well off support at 1225 and well below resistance at 1285. This was neutral ground to wait for the results of the Greek confidence vote. I am positive for the markets for next week. As long as Italy's PM is not evicted over the next couple days we should have a week of relative calm.

Many analysts are calling the October gains a bear market rally and we will retest the lows. I don't see that at all. I believe the macroeconomic picture is too strong for another serious decline. Earnings have been good despite a few high profile disappointments. Those will happen in any earnings cycle.

The proof as they say will be in the pudding. As long as the S&P does not close below 1225 the bullish case has validity. A move over 1300 will find some short covering but 1350 remains strong resistance and it may take more than wishful thinking to actually move to new highs. Personally I would be thrilled to just move up to 1350 and hold there until year end. That would get us past the super committee mess and hopefully to a new stage in Europe.

This is one of those market setups that does not require any in-depth analysis. A move below 1225 is bearish and a continued more over 1250 is bullish. Even the E*Trade baby could trade this.

S&P Chart

The Dow gave us a solid bounce off the 100-day average for the second time in the last two weeks. Friday's close was technically over the 200-day average at 11,974 but only by nine points so we really can't count it. The closing high last week was 12,231 so we are only one good day away from retesting that level. If the Greek confidence vote is perceived as positive and the conditions leading up to it as a step in the right direction then we could test that high on Monday. The banks should rally on any chance of a resolution and that will lift the indexes.

Dow 11,650 appears to be support with 12,230 as resistance.

Dow Chart

The Nasdaq was pressing upside resistance at 2700 on both Thursday and Friday despite the events in Europe. If the clouds clear and blue sky appears on Monday we could easily move over that resistance and test the recent highs at 2750.

I think Friday's minimal 12 point decline was a draw. It was a fitting end to a week of profit taking and appears to be perfectly positioned for a breakout on good news. Now all we need is good news.

Nasdaq Chart - 60 min

Nasdaq Chart - Daily

Still no signs or clues from the Russell. Until the Russell 2000 becomes the index leader we are just passing time.

Russell 2000 Chart

I am cautiously bullish for next week but we are still facing headline risk from Europe. If those headlines slow then we can expect the super committee headlines to appear so either way there is headline risk. However, assuming there is no disaster I think the markets will want to move higher. Watch for a continued move over S&P 1250 or a break below 1225 for directional signals.

If your reading this on Saturday night don't forget to set your clocks back an hour.

Jim Brown

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"I try to take one day at a time, but sometimes several days attack me at once."
Ashleigh Brilliant