Post Holiday Review

This post was originally published in the Washington Business Journal’s WBJBizBeat Blog. | Washington Business Journal

It was a “turkey” of a week, with the S&P down 4.7%, its worst Thanksgiving trading week since 1932. Global equity markets continued to show weakness.  The Dow is at its lowest level in six weeks.  Stocks fell for a tenth day, the longest losing streak since July 2008, and the euro extended losses as the burden of government debt grew around the world.

Like the “tryptophan” post-Thanksgiving dinner blues, huge debt and spending levels in countries like Greece and Italy have come home to roost as the party ends.  The euro zone crisis continued to escalate.  Bond yields for Euro countries are at unsustainable levels with Italian and Spanish borrowing costs rising above 7% (Italy borrowed 2 year money at 7.82% and six month debt is at 6.52%, nearly double borrowing costs from one month prior.)  Additionally, last week we saw a chink in the armor as Germany was able to sell 60% of 10 year Bunds it issued at auction.  The fear is that contagion continues to spread and is now infecting even German borrowing capabilities.  However, German borrowing rates were still very low (1.98%), and may have contributed to lack of interest in the auction.  The cost of insuring European sovereign bonds against default rose to a record.  Flight to quality intensified and US borrowing rates fell; despite our own problems, US Treasuries are still seen as a safe haven and 10 year Treasury rates fell to 1.95% (up to 2.07% Monday morning based on equity strength.)  Interestingly, the yield on German 10 year Bunds rose above 10 year US Treasuries for the first time in two years.  There is now significant discussion about the possibility of an end of the “Euro.”   The Euro slid for a fourth week, the longest losing streak against the US dollar in 18 months.  The Euro now trades at $1.32, a seven week low.  Merkel has rejected calls for joint Euro area borrowing and an expanded role for the ECB.  There is a widespread belief that Euro officials may not be able to act uniformly and handle the mounting crisis.

“Black Friday” Early estimates show “Black Friday” sales up 6.6% from 2010 to a record $11.4 billion.  It will be interesting to see how sales trends continue and whether expanded sales hours were the sole contributor to gains.

Still “Hungary” after a huge debt indulgence?  Moody’s Investors Service cut Hungary’s debt to junk.  Hungary lost its investment-grade rating as Moody’s cited risks to budget-deficit and public debt targets. The foreign and local currency bond ratings were cut one step to Ba1 from Baa3.

The Economy

Orders for durable goods (equipment meant to last 3 years) fell .7% in October after falling 1.5% in September (twice the originally reported number.)  Demand for aircraft and business equipment slowed as the declining global economy threatens purchases of US goods.

US Ratings- The “supercommittee” wasn’t so “super,” but S.&P reaffirmed that it would keep the US credit rating at AA+.  The panel’s inability to agree on $1.2 trillion in budget cuts has also stoked doubts about U.S. lawmakers’ ability to overcome partisan gridlock and safeguard the nation’s fiscal health. Moody’s reaffirmed its AAA rating with a negative outlook and Fitch Ratings said in August that a supercommittee failure would probably result in a “negative rating action,” likely a revision of its outlook to negative.

US GDP– We are still very focused on US growth trends and our ability to weather the Euro assault.  In an initial sign of some of the Euro drag, the US economy showed real GDP growth for the 3rd Q revised down to 2% from an initial estimate of 2.5%.  Inventories fell in the quarter and were not fully restocked, capital expenditures were also revised lower.  However, gains in retail sales, manufacturing and housing, combined with the mentioned lean inventories, raise the odds that 4th Q and early 2012 GDP may have some tailwinds.

Previously owned home sales unexpectedly rose in October by 1.4% to a nearly 5 million annual rate.  Falling prices may be luring buyers into the market.  The median price of a house fell by 4.7% and the number of homes on the market was the lowest for any October since 2005.  Borrowing costs near record lows are also helping homebuyers.

Munis- low rates are helping municipal issuers.  Many states and municipalities are saving significant money by repaying higher cost debt.   About 43% of sales in 2011 have been to refund previously issued debt.

The week ahead- This week we will be watching EU leaders at a White House summit, October new home sales, Conference Board Consumer Confidence index, the Fed Beige Book and Friday’s unemployment number for November.

Read more:  Post Holiday Market Review