Development by Belpointe Capital

United States of Europe? and Black Friday Deliver a One Two Punch

With pictures of German Chancellor Angela Merkel, French President Nicolas Sarkozy and Italian Prime Minister Mario Monti standing arm in arm in Strasbourg markets around the world are rejoicing. We have a monster opening here in the S&P 500 with every stock in the index up.

Europe Leaders

Yesterday we had news that the
IMF plans to backstop Italy and make available nearly $800 Billion (U.S.) in funds in case the debt crisis worsens. The excitement today revolves around efforts by Germany and France to negotiate a new pact for the Euro Zone’s 17 members.

It is interesting that this good news comes on the heels of warnings from the rating agencies. (From Bloomberg)
Moody’s Investors Service said today the “rapid escalation” of the crisis threatens all of the region’s sovereign ratings. “Skepticism has grown that euro-area policy makers can deal effectively with the key challenges they face,” Pier Carlo Padoan, the chief economist at the Paris-based Organization for Economic Cooperation and Development, said today as he cut forecasts for European and global growth. Serious downside risks remain, linked to “loss of confidence in sovereign-debt markets and the monetary union itself.”

With U.S. markets up well over 3% I have to wonder how long it will be before this good news is chopped up by program selling. While I am hopeful, investors are weary of good news out of Europe that seems to have no staying power. With governments even more dysfunctional than our own I have to take this all with a grain of salt.

Clearly Europe has entered a new stage of the crisis and perhaps now with their backs against the wall we may seem some progress.
Perhaps this is the first step in a move to form the United States of Europe. It is my belief that this is the only true path for Europe if they want to be bound economically and hold a common currency. None of the current efforts will work until members are willing to give up some of their sovereignty.

The second half of the one two punch against the bears comes from very strong
Black Friday Sales. (View my Fox News Interview Here on Holiday Sales) By early afternoon Friday some retailers were already calling this one of the best in recent history as 152 million shoppers flooded the stores.

The excitement is probably a bit overdone. The discounts were pretty extensive and in some cases probably once in a life time prices. One woman was arrested for
pepper spaying other shoppers so she could get a jump on the bargains. Nevertheless sales are being made. It will be interesting to view the next quarterly reports for retailers to see how much the discounting impacted margins. With the gates opening earlier each year, Black Friday appears to be morphing into Black Thursday. Pretty soon we will be having dinner at the mall so we can shop in between courses.

Alan Rifkin hardline retail analyst for Barclays and whom I remember from my days at Lehman points out that holiday sales started off very strong and tapered off at weekend’s end.
“The parking lots were full at Best Buy (BBY), Walmart (WMT) and numerous other retailers in the early hours.”
Black Friday generally represents 9% of Holiday sales. A strong Black Friday sometimes pulls forward sales that would have happened anyway later in the season. The next important day for Retail will be Saturday December 10th. Perhaps then we will have a better read on the Holiday Season.

In any event it isn’t retail sales that have been holding us back. We still have 3 items to contend with.
  • Frightening Headlines out of Europe continue to hold the market hostage. - When I wake up in the morning I don’t even bother looking at the futures. I just look at Europe for the direction of the day.
  • A nearly dysfunctional government here in the U.S. – I expect very little from government as we head into the election season. The battle lines have been drawn and it looks like no one is going to step across to make the first move. Very little will be done until after the election next year.
  • Still no job growth – Item 3 isn’t likely until we see movement in item # 2. Maybe we will get some better news Friday.

The economy may be flying close to stall speed but the plane is still in the air. Quarterly reports were descent with many companies showing top and bottom line growth. For now the U.S. Market is probably the best house in a bad neighborhood. I suspect the S&P would be at least 15% higher if we could just get one of the headlines off the front page.