The two day rally ended with a mixed close with the Nasdaq negative and the Dow and S&P right below resistance.

Market Statistics

The markets continued to move on European headlines but U.S. news events increased in frequency and stocks were back as a topic once again. The two big news items from Europe was more chatter over a financial stability pact under discussion by the stronger euro zone countries and the high interest rates on the Italian debt sale.

The EU finance ministers are meeting in Brussels and there are rumors France and Germany will announce a new financial union among eight of the strongest countries. In theory they would band together to help support the weaker nations while their financial stability pact would prevent their own debt yields from getting out of control. This is seen as a positive step but until something is actually announced it is just more talk. That has been the only real result from the last 15 meetings of the finance ministers.

They did agree to release the next tranche of eight billion euros to Greece to avoid a default by Dec 15th. They also talked again about scaling up the EFSF with some sort of leverage only now they are talking about only 2-3 times the remaining 250 billion euros instead of the 4-5 times initially suggested. They are having trouble coming up with a way to leverage it up since no investors want to invest in a vehicle that will loan money to Greece, Italy and Spain.

The next week will be a steady procession of meetings in Europe and while there may be progress in handling the problems nothing earth shaking is likely to be enacted. Most analysts already believe Europe has fallen into a recession that could last for some time and not just in the troubled countries. Most euro countries, even the ones not in the spotlight, are carrying excessive debt loads because of their socialist policies. It will take the better part of the decade for these countries to pay down their debt and it could be the end of the welfare state mentality in Europe. For those countries not in the spotlight they are also slashing spending and trying to reduce budgets so they don't end up like Italy or Spain. Bill Gross called the euro zone a big dysfunctional family with too many relatives depending on the others for support. Eventually the rich uncles, including Germany and France, will cut support for those who are not cutting spending fast enough.

Italy succeeded in selling 7.5 billion euros of debt on Tuesday with the 2014 notes yielding 7.89% and a record yield. It was a monster premium but Italy was able to sell the entire package of debt. There were willing buyers at those yields. New Prime Minister Mario Monti is planning on announcing the new measures to cut the debt before the EU summit next week.

The Italian bond auction may have succeeded but the ECB failed to fully sterilize its last batch of bond buys. When the ECB buys bonds in the market to suppress bond yields of troubled countries it sterilizes those purchases by drawing back a similar amount from European banks in the form of interest paying deposits. It was only able to claw back 194 billion euros of a 203.5 billion purchase of bonds. Even worse, a total of 192 banks took advantage of the new liquidity program and took a combined 265.5 billion euros in seven day loans from the ECB. That was more than the 247 billion from 178 banks in last week's funding and a new record high since the 2008 recession. They will also offer three month loans on Wednesday and Reuters expects banks to draw down another 50 billion.

The bank runs in Europe are becoming a problem. People are withdrawing funds because they are afraid the banks will fail. It has been a stealth run on the banks in prior months but it is accelerating and the ECB and the EU leaders need to do something quick or it could turn into a full scale panic. On Tuesday Moody's said it could downgrade the debt of 87 European banks across 15 countries on fears the governments will not be able to bail them out. A French newspaper reported S&P would likely cut France's AAA rating within days.

For the time being the market is watching the last plan to produce a plan in Europe. This is probably the 15th to 20th time they have announced a new plan was coming and they always seem to fall short or never materialize at all. That means the rally can also fall short at any moment on a European headline. Getting 17 countries in the common currency euro zone to agree on anything is a challenge. However, getting the eight strongest to agree on a plan is entirely possible because they will be doing it to protect themselves from the debt contagion.

In the U.S. the Consumer Confidence for November rocketed higher to 56.0 from 40.9, revised up from 39.8. That is the highest level since July and it confirms the rampant spending we saw over the Thanksgiving weekend. The present conditions component rose to 38.3 from 27.1 and the expectations component spiked to 67.8 from 50.0. This is a monster move in these numbers. It was the largest gain in the headline number since April 2003. The share of people finding jobs hard to get fell dramatically from 46.9% to 42.1% and the lowest level since January 2009. Those expecting their income to decline fell from 19.3% to 13.8%. Those expecting the stock market to rally rose from 19.5% to 24.9%. That is a huge change in confidence on all components.

Consumer Confidence Chart

Case Shiller home prices improved slightly to -3.6% year over year compares to -3.8% in the prior report. This was for the three month period ending on Sept 30th. As a severely lagging report it was ignored.

The corresponding FHFA Purchase-only House Price Index improved sharply from -4.0% to -2.2% and the highest level in over a year. Demand and supply are beginning to stabilize and this suggests prices will rise in 2012.

Moody's FHFA Chart

Wednesday is the really busy report day this week and it is chock full of important reports. The payroll reports, ISM and Beige Book are the ones to watch.

Economic Calendar

In stock news AMR, the parent of American Airlines, filed for bankruptcy. The company is seeking relief from the crushing debt caused by high fuel prices and expensive labor contracts. American's competitors filed for bankruptcy several years ago and got rid of unprofitable routes, gates, gas guzzling planes and expensive labor contracts. The AMR bankruptcy will allow American to do the same thing and compete on a level playing field. The airline said it would continue its normal business although it did cut its flight schedule "modestly" while it reorganizes. The company said most travelers will never know there has been a change and they will honor all tickets, reservations and the frequent flier program will be unaffected. CEO Gerald Arpey, a veteran of 30 years and CEO since 2003 retired and a new CEO was named in the bankruptcy announcement.

American has 78,000 employees and serves 240,000 passengers every day. The company said it had 29.6 billion in debt and $24.7 billion in assets. This will delay the spinoff of its regional airline American Eagle. American also said it wanted to push ahead with its plans to order 460 new planes from Boeing and Airbus and take delivery of 50 planes currently on order. They will save money on fuel and maintenance but the plan must be approved by the bankruptcy court.

AMR Chart

Bank of America (BAC) sank even lower today and closer to the $5 threshold where some funds can't own the stock. BAC, C, GS, JPM, MS and WFC were cut by S&P in what the company said was a change in criteria for rating banks. The new criteria incorporates shift in the industry and the role of government regulations in this new environment. BAC debt was cut to A from A+ and its Countrywide Financial and Merrill Lynch units were cut to A- from A.

This could be a challenge for BAC since there were already worries it may not have enough capital to weather the next stress test with extremely harsh conditions. BAC had already been restricted by the Fed from raising its dividend in order to retain capital. This could also hurt BAC because of trillions of derivatives it has outstanding. A cut in credit rating can force the bank to put up more collateral and with something in the $75 trillion range of derivatives on the books that could be a lot of collateral.

Bank of America Chart

Tiffany (TIF) reported earnings that beat the street but warned that a slowdown in sales in Europe would weigh on Q4 sales. The company said it had seen "recent sales weakness in Europe and the eastern part of the U.S." The CFO said Tiffany is "cognizant of the challenging economic conditions and uncertainties in a number of markets." The company said sales rose +17% in Q3 but that was below the +19% pace of the first three quarters combined. The slowdown was limited to the Americas and Europe but Tiffany gets 60% of its sales from those regions. Tiffany shares declined -9% on the news.

Tiffany Chart

Shares of Transocean Offshore (RIG) hit a 52-week low after it said it was selling 26 million shares in order to finance its acquisition of Aker Drilling. That acquisition was completed in October. Transocean is also in the process of paying a $1 billion dividend in four quarterly payments. Shares declined -9% on the news to a new seven-year low. There are also some worries that Transocean will be hit by new complaints from the government after Michael Bromwich, director of the Bureau of Safety and Environmental Enforcement said BP and two other companies would be served soon. Halliburton is the third most likely company in that group.

Transocean Chart

Oil prices edged over $100 intraday on new problems in Iran. The British embassy in Iran was stormed and taken over by protestors with cars burned and file cabinets of documents tossed out windows. The embassy was cleared by police about three hours later but the damage was done. There is going to be a vote later this week by European countries to halt imports of Iranian oil over the nuclear problem and that is what sparked the uprising.

Crude Oil Chart

Gold prices rose slightly to $1723 and eased back over the 100-day average as the dollar declined compared to the rising euro. If they ever did get a real plan implemented in Europe the dollar would decline and gold prices would rise. Today gold is neutral. It is not being considered a daily safe haven but more of a catastrophe haven. If Europe imploded it will probably rise along with the dollar just because the world financial system would be in shock. I don't see gold going below the current uptrend but I don't see a breakout in the next several weeks unless conditions in Europe decline significantly.

Gold Chart

The markets saw a huge short squeeze on Monday as a result of the plan to make a new plan in Europe. The concept they are proposing now has a chance of passing but what happens after that is unknown. Nobody knows how the mechanics of the new stability pact would really work when it came to funding the weaker countries. Time will tell "IF" they can get it passed. The main meetings of the EU finance ministers and the EU leaders are not until next week. That leaves a lot of dead time for the headlines to knock us around while we wait.

During that week we will have a dozen high profile economic events including the Nonfarm Payroll numbers and the FOMC meeting is only four days after the EU leaders meet. There is a very steep wall of worry with quite a few crisis points over the next two weeks.

The market looks like it wants to move higher on improving economics and confidence in the U.S. but this week's reports could make or break that premise. Resistance at 1200 is strong and although we penetrated it many times in Aug-Sept it held the market back for 60 days. We are at that level again and the market does have a memory.

However, if we were successful in moving over 1200 that would trigger some additional short covering. If the economics were positive and Europe has not hit quicksand in its discussions we could go higher.

I am not convinced and I think there is a better chance they try to patch the problem in Europe rather than overwhelm it. They have a history of failing to take the giant step to fix it. Until they decide to go "all in" whatever the cost there will always be risk and I think the market is anticipating that risk.

If we do move higher from here I would remain cautious unless there is a dominate headline from Europe that promises a better result.

Support from here is 1185 followed by 1160. More than 75% of the S&P components are oversold on their daily charts and this two day rally is the result of an oversold bounce on wishful headlines. Two days does not make a rally but every rally starts with a two day bounce.

S&P Chart

The Dow used 11,600 as strong support in early November and now that level is strong resistance. That is also the 100-day average and it should be a serious challenge as the market tries to digest the endless stream of headlines.

The rebound is shaky at best with the Dow giving up a triple digit intraday gain to end up only +32 points. The Dow was handicapped by techs and financials and the financial sector is not likely to improve soon.

Support is 11,450.

Dow Chart

The Nasdaq was the weakest link with an early gain evaporating and the index closing near the lows of the day. The biggest decliners were PCLN -10.50, GOOG -7, AMZN -6, CME -5, WYNN -5 and AAPL -4.

Tech stocks were not impressed with Intel's claims they were seeing no impact to PC demand from the Thailand floods. It would appear investors were not buying the claim.

The 2500 level appears to be the battleground for tech stocks and a dip below that level would likely see selling accelerate. Support is 2450.

Nasdaq Chart

Wednesday is month end but I don't expect any material market change from that calendar change. If anything there might have been some buying on Monday in order to settle in November.

December is normally a bullish month with the index up an average of 2% over the last 25 years. The S&P has risen 80% of the time. However, this is far from a "normal" December given Europe's accelerating slide into the abyss. Until Europe finds a plan that works and that could take month to know for sure, we may not see a normal market.

The downgrade of the financial sector by S&P and the warning of a downgrade of 87 banks in 15 countries by Moody's is not going to be a positive factor for the market for the rest of the week. The market can rally without the financial sector but it is a rare occasion when that happens.

I am neutral for the rest of the week and continue to believe we will be headline driven rather than movement based on techncials.

Annual Renewal Special

Every December we offer the best prices of the year on a renewal package of our top newsletters. If you have been a subscriber for several years you know this is the best price and the best deal of the year.

Please follow the link below to see for yourself the EOY subscription special for 2011. You will not be diasppointed!

Jim Brown

Send Jim an email