The Contagion Has Spread To Spain

Today, the market cheered the swearing in of Papademos as the head of Greece's new unity government and Italy's passing of the austerity package the Senate.  A little uncertainty was removed today, but only a little, as most of this was news we already knew.  However, we'll give the markets a cheer for one good day of seemingly positive relief.  Papandreou can probably sleep better tonight and have more peaceful days ahead.

The ECB has been active buying Italian bonds, bringing the 10-year down to 6.4%.  Although this is good news for today, major questions still remain as to where the funds will come for the EFSF and how long the ECB can keep Italy and other European countries afloat.  Bottom line is that Italy is too big to fail and too big to bailout.  This could have major repercussions on credit and equity markets around the world.  At the same time the ECB is buying, major European banks are planning to dump 300 billion euros of Italian government debt.

The ECB is also losing credibility as the Portugal PM says that the ECB should not print money to pay for the debts of undisciplined countries.  The Slovak PM is saying the same, that the ECB should not be focusing on buying bonds of distressed euro countries (the German "wise men" call heavily indebted euro zone states).

Italy might be saved for today, but now there are reports that the economic recovery in Spain has ground to a complete halt and might slip into recession as soon as the current fourth quarter.

Today's positive action on the upside, however, was on extremely light volume, over 30% below average, and the lightest since July, so odds still favor a move downward.  The line in the sand is still around 1275 for the S&P.  If we can't break convincingly above 1275 next week, we're on our way downward, probably in a major way over the next year.  If we can break above 1275 convincingly next week, we might have to switch our stance to be more bullish and reevaluate the double-dip scenario.

Overall, significant risks still remain about

• the new government in Greece (waking up to the realities after the initial transition ceremony honeymoon is over-- hey, today was after all 11-11-11, also a good day for wedding ceremonies in Vegas), 
• what the new government in Italy will look like and if Berlusconi will really leave, 
• both new governments' ability to deal with the EU bailout plans (Greece and Italy), 
• where the EFSF money will come from and how it will be used, 
• bank recapitalizations and the effects on capital investments in Emerging Markets, 
• how long the ECB can keep buying Italian bonds (auction next week), 
• speculation of plans for countries to leave the Eurozone and the euro, 
• the supercommittee hopes in the US, and now, 
• the contagion in the rest of Europe, particularly Spain.

Also, just in time for Thanksgiving and Christmas, MF Global fired 1066 employees today from the broker-dealer.  Rosenberg refers to MF Global as the canary in the coalmine, merely the 2011 version of Bear Stearns as there is "never just one cockroach."  Clients are fuming mad the frozen accounts and positions and not having access to them, as well they should be.  Now, former employees can join the bandwagon.  What a mess!