Market Commentary

In my view there is a tug of war between strong economic data
May 17, 2010

In my view there is a tug of war between strong economic data and sovereign debt issues.  Commenting about the later, as widely publicized France threaten to pull out of the Euro 10 days ago if Germany did not support the bailout.

France denied the rumor but the visceral reaction emphasizes that everything—including consistently strong economic data-- is being overshadowed by the sovereign debt crisis.  All are extremely nervous fearing the return to the environment of fall 2008/winter 2009.

Reiterating my view held since the inception of the Euro, I doubt its staying power given the diversity of its members and the lack of common law and fiscal policy.  I wrote in early 2000 the currency may not survive its first major crisis under the simple guise that there is no interest like self interest.

I think within the intermediate future there will be the return of single country currency that will compete with the Euro.  Contrary to conventional wisdom, I think the fallout should be minimal; the weakest countries however could potentially be slaughtered. 

The markets will be volatile as change is always uncertain but in the aggregate this $13 trillion economic block, second in size to only that of the United States, will re emerge stronger with greater transparency.

A major difference between today’s possible contagion and 2007-2009 is that the US, the world’s largest economy by almost a factor of three representing almost 30% of global output, is accelerating.  While I do have some fears a volatile Europe can impact growth domestically, as stated above the stronger countries reverting back to their respected currency should mute some of the negative outcomes.

History is littered with examples of regions surviving debt crisis in the manner suggested above.  The weakest countries are decimated; the strongest survive emerging more dominant.

Stocks were crushed again on Friday, partially because few wanted to be long over the weekend.  All remember how the financial system underwent radical change almost every weekend during the fall of 2008.  The inability to act or the lack of liquidity is only a shallow memory.

What will happen this week?  Inflation, housing, the LEI  and several regional manufacturing surveys are released.

Last night the foreign markets were mixed.  London was up 1.08%, Paris up 0.71%  and Frankfurt up 1.37%.  Japan was down 2.17% and Hang Sang down 2.14%.

The Dow should open slightly higher on mergers and acquisition optimism.  The 10-year is off 3/32 to  yield 3.46%.