Clash of the Titans

Continued selling on light volume.  Dow down 134.33 to close at 11771.26.  S&P down 20.69 to close at 1216.22.  Surprisingly strong support for the S&P at 1209.

European fears are growing.  The crisis is spinning out of control, and the politicians continue to be way behind finding any credible solutions.

Spanish 10-year bonds yielding 6.975% vs. 5.986 in July. 

Spain's finance minister Elena Salgado says that the ECB must keep on supporting government bonds by buying them until some other instrument is put in place.  Well, the problem is that the Germany has been adamant that the ECB doesn't want to be the lender of last resort.  France and Germany are clashing on the ECB's rescue role.  The IMF has already expressed that it doesn't want to be in this role as well.  So, I guess nobody's going to do it.  Merkel has already been reluctant to do Eurobonds, and these would take too much time to develop and implement.  The EFSF is nowhere in sight or sound.

Although we have new governments in Greece and Italy, protesters in both countries took the streets today to protest austerity measures, again. In New York, Occupy Wall Street (OWS) protestors took to the streets marching on the NYSE.  There was literally blood in the streets, as protestors clashed with police.  Protestors were injured, as well as the police.

In the US, there are rumors that the Super Committee is deadlocked again.  In France, there are rumors the actual downgrade of the AAA rating is imminent, for real this time.

So, the global economy is unraveling, and there are no credible solutions in the US or across the pond in Europe.  Politicians are scratching their heads while Rome burns.  It seems that the only time any real action will take place is when it's already too late and the situation has reached catastrophic proportions.

Europe Waking Up To Harsh Realities

Seems like the Europeans are now starting to wake up to the harsh realities.  The pressure they're feeling is causing them to pass on the pressure where they can:

Janus "two-faced" Merkel is saying that Germany is ready to cede some sovereignty to the EU.  Germans are not going to like this.  She is also saying the the ECB doesn't have the possibility of solving the euro problem.  What?!  What happened to the "grand plan?" Oh that.... There IS no plan.  Surprise, surprise.

So, as you might expect, countries might get "pushed" out of the euro.

Italy's biggest bank, Unicredit, is seeking broader ECB rules.  Who said there wasn't going to be another Lehman in Europe?  There are definitely failure concerns.

France's second-largest bank, Société Générale SA, plans to cut "several hundred" jobs in 2012.

Forget deflation, WTI crude oil hit 102 today. More pressure on the global economy.

George Karatzaferis, head of the LAOS party, and Antonis Samaras, head of the New Democracy conservatives, have both refused to sign pledges to implement harsh austerity measures.  Refusing to put signatures in writing is putting the Greek bailout at risk.  Seems like a pretty expensive risk, two signatures for 8 billion euros.

European leaders are playing with fire, and Rome, nay, the world, will burn...

Fitch in the last hour of trading says that the credit outlook U.S. Banks  could worsen if the European crisis is not resolved in a timely and orderly manner.  Dow plunged 190 points to close at 11905.97 at the close.  S&P down 20.29 to close at 1236.92.  Euro went down .51% to 1.347.  If the selling continues, tomorrow could be UGLY!

Monti's Cabinet - Pandora's Box?

Well, the market had another low volume melt-up day.  We lost some momentum going into the close, so the Dow closed up just 17.18 to 12096.16.  S&P up 6.03 to 1257.81.

Italian 10-year bond yields topped 7% again.  The market rallied on news that Monti is assembling his cabinet to reveal to President Napolitano tomorrow.   Let's just hope this cabinet is not Pandora's Box.

The EC is cracking down on ratings agencies, Moody's, S&P, and Fitch.  France's AAA rating is looking vulnerable (already trading like AA+), so I'm sure the EC wants to do what it can to gain influence over these agencies as well, for perception reasons.

The EUR/USD dropped to 1.3532, so euro confidence weakening.  VIX is at 31.22, so fear is still relatively high.

Feels like we're bracing for everyone to wake up one day and realize the truth that, "There is no spoon," or there is no short-term solution to the Eurozone problems.  These debt problems took a long time to build, and will take a long time to resolve.  In the meantime, there will be a lot of pain.  Implementing austerity measures is just the start, if the new Greece and Italy governments can actually execute.

Extremely Light Volume Day

Drifting lower on the lowest volume of the year.  More skeletons coming out of the closets.  Politicians big on talk, but little on any real action leading to any real solutions.  Europe continuing to destabilize:

Today, Merkel's CDU party voted to offer euro states a "voluntary" means of leaving the currency.  I guess she's finally realizing that Plan A wasn't working... here's another hope for a plan.  Not a good sign for the stability of the Eurozone or the euro.  EU Politicians are so behind the curve in getting in front of the issues.  Very reactive... not good for confidence.

Italy sold 3 billion euros of five-year bonds for 6.9%, the highest yield in 14 years!  Not a good auction.  Still unsustainable.

Spanish 10-year yields were up 25 basis points to 6.11%.  More signs of contagion spreading to Spain.

Monti and Papademos are in the honeymoon phase, but it doesn't look like things will look rosy afterwards.  Change in leadership, but not a change in problems.  There are still major uphill battles ahead to fix the austerity and growth problems in Europe. Markets appear to be stuck like a deer in the headlights not sure what to do.  Any major negative headline could kick off another cascading round of selling.

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!

Eurozone and UK At Risk of Recession

Don't shoot the messenger, but Mr. Rehn of the EU Commission says that the Eurozone and the UK are likely to go into recession.  The Growth forecast for 2012 was revised down from 1.5 percent to .5 percent.

So, if the Eurozone goes into recession, the US will likely double-dip.  In an interconnected global economy, no matter how "good" things appear to be in the US, a contraction in Europe will bring us back down into a double dip scenario.

There is also speculation of plans for countries to be allowed to leave the Eurozone,  and the ECB says it has no more ammo.  So, the question is, how long can they keep Italy afloat?

The Italian 10-Year dipped below 7% to 6.9%, but today, it paid a record 6.087% for the 1-Year Treasuries at the auction.  Just last month, it was only 3.57%.

6.1% for 1-Year Paper?!  Unsustainable.

Are you reading for the Armageddon scenario?  The UK Treasury is sure getting ready for 'economic Armageddon' if the euro falls apart, so it might be wise to get your portfolio ready, too.

The Great European Sell-Off Has Begun

Blood in the streets today.  LCH Clearnet raised the margin requirements for Italian bonds due in seven-to-10 years to 11.65% vs. 6.65% on October 7.   Italian 10-year bonds at 7.4%!  Rick Santelli said the yield could rise to 10% within a week.  Implausible?  Well, he called the US 10-year Treasury yield going under 2%, so I wouldn't call his call that farfetched.  This is a dream turned into a nightmare for BNP Paribas and Credit Agricole.

The first domino that sets off the Great European Sell-Off has fallen. We were looking for a catalyst, and I think we've found IT.

Who will step in and buy the Italian bonds?  ECB?  IMF?  The US???!!!  The US has its own problems with the supercommittee gridlock  over $1.2 trillion in proposed spending cuts and revenue increases over the next 10 years.

We are now past the point of no return.  The damage has already been done.  More selling likely to come...

We have now failed the 200 day moving average (SPX 1275)!

The SPX chart pattern looks eerily similar to May 2008, when we failed the 200 day moving average.  After that failure, the market crashed from 1425 to its low of 666, a ~53% plunge in 10 months.

Seems like a big unimaginable drop, but it has happened, so it's possible we could get a repeat.  This time, it's Sovereigns, so it's possible that it could get even worse...