Greek Prime Minister George Papandreou waited until after the EU leaders announced their hard fought solution and then supplied a knockout punch when they were not looking.

Market Statistics

The Greek prime minister shocked not only his own party, those in opposition to his party but EU leaders all across Europe and financial markets all around the world when he announced he was putting the austerity measures to a citizen vote. Rewind to the numerous pictures over the last two years of riots in the street, massive strikes and work slowdowns still occurring on a weekly basis and soldiers in riot gear protecting public buildings. There is almost no chance of Greek citizens approving the austerity measures. Also, the vote would not be held until January.

By Papandreou calling a special election he has singlehandedly crashed the entire EU bailout program. There has not been a referendum in Greece since 1974 when the Greek people voted to abolish the monarchy. The vote would not only delay implementation of the EU plan but could scuttle it completely. If the vote failed Greece would default on all its debt and be forced to leave the EU.

EU leaders expressed outrage over this act of "total irresponsibility" and talks immediately shifted back to consideration of kicking Greece out of the Euro zone without waiting for the vote. Headlines on all the news services were full of comments from EU leaders slamming Papandreou. Those leaders have bent over backwards and incurred significant hostility from their own citizens because of their plans to bail out Greece and now the Greek PM has effectively killed all their efforts.

Lastly there was a confidence vote called on Papandreou's government to be held at midnight on Friday. With some high profile party defections after the call for a referendum it is thought he only has a two vote margin in the 300 seat parliament. He could easily lose his position and the government of Greece be thrown even further into disarray.

You have to wonder if Papandreou had this trick up his sleeve all the time. He waited until Greece got the last tranche of EU/IMF bailout funds. Now by opening the austerity plan to a public vote that is sure to fail the country and officially default "by the will of the people" and Greece can erase its debt and start over. They would have to leave the Euro but that has been speculated for many months. They would not be able to borrow money but they would be free of 400 billion in debts. They would be free, independent and broke. Papandreou would have shifted the responsibility for the country's failure onto the people and off his administration. Of course that assumes he would still be in power. There is a strong feeling he won't last the week.

A Greek rejection of the austerity and bailout could cause bank failures in Europe and probably a new recession.

New fears arose of further contagion to Italy and Spain as interest rates spiked on their debt. If Greece was to default as a result of a no vote it could literally tear the banking system apart. Once one domino falls the fears would grow that Italy and Spain, both much bigger economies, would follow suit because the interest on their debt would spike to the point they could no longer pay. A failure of either Italy or Spain in addition to Greece would mean the end of the euro zone and a massive European recession.

While nobody really believed the European debt crisis was over nobody expected it to blow up in such a spectacular fashion. The EU deal last week was long on promises and short on details. It was basically a plan to draw up a plan. Everybody realized that but were hopeful they were on the right track. That plan was derailed by Papandreou and there is no visible solution. If his government fails this week it would take weeks or months to elect a new government and Greece would run out of money before it could happen. Any new government would have to immediately sign on to the same austerity measures or worse now that EU leader confidence has been shaken to the core. That assumes a new PM would want to go against the people in his first major decision. It also assumes a new PM would not be anti austerity. There are so many ways this could collapse the odds of successfully producing a positive result are nearly zero.

Not only was the market knocked back because of Greece but bad news was flowing from all directions. China's Purchasing Managers Index (PMI) for October fell to 50.4 from 51.2. That is the lowest rate of growth since early 2009. Expectations had been for an increase to as high as 52.0. Anything over 50 represents economic expansion. New orders fell to 50.5 from 51.3. The government said the decline in the PMI was due to weakness in export orders to the U.S. and Europe. New export orders declined to 486 from 50.9. Worries over a hard landing in China immediately returned to haunt the market.

Offsetting the surprise from the government PMI numbers was a private sector PMI report from Markit and HSBC that rose to 51.0 from 49.9. The government version gathers data from the country's biggest manufacturers. The HSBC data focuses on the small and medium sized businesses that provide roughly 75% of the jobs in China.

The PMI for the U.K. declined to 47.4 from 51.1 so it appears the economic activity in the European nations is already slipping.

In the U.S. the national ISM for October declined to 50.8 from 51.6. Expectations were for a rise to 52.0. This is another hiccup in the outlook for improving economics and could increase the worries over a drop back into a recession here at home.

However, the new orders component rose to 52.4 from 49.6 and backorders rose to 47.5 from 41.5. The new orders component rose to levels not seen since April so that is also positive. They had been in contraction territory under 50 for the prior three months. While the backorders are still in contraction mode they did improve significantly. The prices paid component declined to 41.0 from 56.0 and that is a big positive suggesting inflation pressures are moderating. That is the first time under 50 since early 2009.

As you can see on the chart the trend does not look good. Analysts still expect a rebound into 2012 but the constant cloud of worry over the market and economy is not providing a positive business environment.

ISM Chart

Vehicle sales for October were nearly flat but they did climb from 13.07 million to 13.23 million. That may not sound like much on an annualized basis but that is an increase of 160,000 vehicles. It was also the highest rate of sales since February and the earthquake related decline over the summer. There are still some shortages in the supply chain for parts but consumers are still buying cars and that suggests we are not yet headed for a recession.

The reports due out tomorrow include the ADP Payroll and the Challenger Employment report. This is the preliminary data ahead of Friday's Nonfarm Payrolls. The ADP report is expected to show a gain of 90,000 jobs and the Nonfarm Payroll report is expected to show a gain of 100,000 jobs.

The big event for Wednesday is the Fed announcement at 12:30 and the Bernanke press conference at 2:15. With Europe melting down the Fed will probably try and talk up the economy but they are not likely to announce any new stimulus programs. They will want to save their bullets to use if the situation in Europe does not improve. They would rather announce a new program when it will have the most impact rather than do it now and then have nothing left to add if the situation turns worse.

Economic Calendar

Earnings were completely ignored thanks to the Greek headlines and the meltdown of MF Global. Sirius (SIRI) posted a strong quarter with earnings of 2-cents on a +6% increase in revenue to $763 million. That was a penny above analyst estimates. Sirius added 334,000 new subscribers but that was below the estimates for 400,000. Their guidance for the full year is for 1.6 million net new subscribers and they have added 1.16 million year to date. CEO Mel Karmazin said they were still on track for that guidance and it would require adding 440,000 new subs in Q4.

SIRI shares dropped sharply intraday, rebounded back to positive territory but then ended down -3% at $1.75.

SIRI Chart

CME reported earnings of $4.74 and beating the street estimates of $4.64 but that was significantly higher than the $3.66 it earned in the year ago quarter. Income rose +29.4% to 4316.1 million. Revenue rose +19.2%. Average daily volume surged more than 27% to 14.7 million contracts. During the quarter the CME bought back 5.9 million shares for $155 million and bringing the total of shares repurchased in 2011 to 8.0 million. Shares of CME declined -8% but it was related to the MF Global news not the earnings.

CME Chart

Pfizer (PFE) reported earnings of 62-cents, up from 11-cents in the comparison quarter. Analysts were expecting 55-cents. Revenue rose +7% to $17.2 billion. Pfizer is facing a stiff headwind when Lipitor goes off patent at the end of next month. Lipitor accounts for $11 billion or 23% of its total revenue. Pfizer said it was working with the pharmacy benefit plans on ways to incentivize the continued use of Lipitor instead of a generic. The company also said it was considering selling an over the counter version of Lipitor. Pfizer increased its plans to buy back another $2 billion in stock in 2011 pushing the total to $9 billion. Pfizer shares finished positive for the day but only fractionally.

Pfizer Chart

Open Table (OPEN) reported adjusted earnings after the close of 30-cents and that was in line with estimates. However, the company projected a decline in reservations and revenue per diner will decline. Shares of OPEN declined to $36.88 in after hours.

Open Table Chart

JDS Uniphase (JDSU) reported earnings of 18-cents compared to estimates of 13-cents. This would have been a great report but they warned the floods in Thailand would knock up to $45 million off the current quarter. They also warned they were seeing macroeconomic challenges. Shares of JDSU rose slightly after the close.

JDSU Chart

Outside of Greece the main topic was the implosion of MF Global. The exchanges are moving to delist the stock, which should be no surprise. Account holders at MF are still struggling to get their trades closed and accounts freed so they can move them to another broker. MF was the fifth largest managed commodity broker and there were billions in outstanding trades.

There were conflicting headlines all day suggesting the company may have used millions in account holder funds in an attempt to stave off bankruptcy. The FBI, CFTC and SEC said they was investigating how some $600 million of MF customers money had gone missing. The CME said it had determined MF Global had broken government and CME rules requiring it to keep customer funds separate from company funds. Late in the day a lawyer for MF said the company had accounted for all the customer money and none was missing. The lawyer told the bankruptcy judge late Tuesday, "To the best knowledge of management, there is no shortfall." It remains to be seen if management was in possession of all the facts. The missing money is what killed the sale of MF to Interactive Brokers over the weekend. All MF funds were frozen until the details and money flow could be tracked.

Part of the volatility in the futures markets and the equity markets was related to the panic at MF and the resulting lockdown of the accounts. Volume on the futures exchanges declined to 50% of normal, which reduced liquidity and prompted higher volatility. The Securities Investor Protection Corp (SIPC) has appointed a trustee to liquidate the assets in the broker. All CME brokers and traders were barred from the trading floors. MF had assets of $41 billion when it filed bankruptcy and that makes it the eighth largest U.S. bankruptcy.

With Greece imploding and the fifth largest commodities broker in lockdown the odds of profit taking, after a +19.5% rebound in the S&P from the October lows, were about 100%. We saw serious declines in the sectors which had seen serious rallies in the days leading up to month end and the end of the fiscal year for mutual funds. They tried to keep the window dressing in place on Monday but the headline news was simply too strong.

I warned last week about the potential for headline risk once November arrived. When investors want to take a profit they will seize on whatever headline is available as a reason to do so. This week has been especially fertile in headlines. Nothing scares investors more than to see a big broker fail and fail in spectacular fashion. They immediately begin rethinking their account locations and their open trades. Nobody wants to get locked out of their accounts with open trades at risk.

I remember times during the Internet bubble when my Internet broker had some equipment challenges and there were sometimes hours when we could not trade. When stocks were moving $100 a day that was sheer terror. That is the same feeling commodities traders had this week when they did not know if the other side of their commodities trade might have been frozen at MF or when a spike related to MF could cause limit moves in their positions.

The S&P has corrected -5% from Thursday's close. That is a major drop but when compared to the +19.5% rebound in October it is just a start of a normal bout of profit taking. The S&P closed at 1218 and back below the 100-day average at 1230. In theory this would be a minor sell signal but given the consolidation pattern from the last two weeks I think the real number to watch is 1200. If we break below 1200 I would worry. I see that as the line in the sand where aggressive traders should buy the dip.

S&P Chart

The Dow has declined -664 points from the Thursday high at 12,284. Support at 11,600 came very close to being tested and another day like today could knock us back to 11,400. This is a dramatic decline but given the +1,880 point rebound from the October lows it only represents a -30% retracement. Under normal conditions that should be the point where aggressive traders start bargain hunting. Unfortunately the headlines are so ugly nobody showed up at the close with cash in hand. Critical support is now 11,400.

Dow Chart

The Nasdaq gapped down to 2600 at the open and then held that level all day despite repeated tests. This was a headline event and only the strong technical support at 2600 kept the Nasdaq from an even larger loss. There were downgrades to multiple tech stocks headlined by Nvidia but the decline was not fundamental. It was a headline event only. Even the news Apple would release the iPhone 4s in 15 more countries in November failed to support Apple stock. That brings the total to 44 countries and suggests Q4 sales should be huge.

The Nasdaq 2600 level is critical support and any further decline could trigger some strong technical selling.

Nasdaq Chart - Intraday

Nasdaq Chart

Volume was strong at 10.2 billion shares after a relatively light 7.4 billion on Monday. It was a 10:1 day in favor of declining volume. Futures are positive late Tuesday so at least there was no continued selling after the close. Early Wednesday morning in Greece Papandreou was still firm on his decision to hold the referendum on austerity. After a 7-hour cabinet meeting his ministers expressed "total support for the initiatives taken by the prime minister" and confirmed the referendum would be held as soon as possible. That suggests we could see more uneasiness on Wednesday as the details are dribbled out to the press.

If you have to be in the market I would be a dip buyer to S&P 1200 with a stop at 1185. I would suggest waiting in cash on the sidelines until this mess is sorted out and the Fed completes its meeting and Bernanke press conference. There will be a point at which the markets shrug off this Greek story but obviously nobody knows when that will happen.

Definitely, sell too soon or at least tighten your stops to protect profits.

Jim Brown

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