© 2012 ROHR International, Inc. All International rights reserved.

The full calendar is available through the link in the right hand column. There is also a bit more than usual of a fundamental factor review this week. That is due to the highly bifurcated (fancy legal metaphor for sharply split into two sections) politico-economic influences at this time. And you don't likely need us to tell you that this is due to better sentiment toward the US in the face of still seemingly intractable issues around the European Debt Crisis...

Especially Greece. More on that below.

Read more...

Looks like Helicopter Ben morphing into Gusher Ben didn’t help much… except to exacerbate what we all knew was going to be a disjointed week from the time we walked in. And the markets certainly did not disappoint in that regard. Pops and flops (equities and to a lesser degree risk assets like commodities), solid extensions of up trends (those strange bedfellows govvies and Gold), and significant reversals (back to the ‘risk-on’ US dollar “carry trade” in foreign exchange) were all apparent. And substantially due to the FOMC opting-in to a consensus the Federal Funds rate should remain effectively at zero for much longer than the middle of next year projected at their last meeting.

That summary view is all the reasonable response we anticipated in yesterday’s post on Gusher Ben attempting to push psychology upward from underneath hoping that the enthusiasm will pop like an oil ‘gusher’. This is nothing less than a mind game version of quantitative easing (i.e. de facto Q3.) All of the specific asset class analysis and the intermarket implications that came home to roost by yesterday’s Close spilled over into today were noted in yesterday’s analysis.

That said, the resilient equities have found a new/old cause for hope: fresh upbeat assessment of the potential for a Greek debt deal. EU Finance Minister Olli Rehn said this morning at Davos, “A Private Sector Involvement deal is imminent; if not today then likely over the weekend.” We shall see. Certainly everyone hopes he is right.  Yet there are several grounds for skepticism which even go beyond whether a deal can be crafted. There is now some concern whether the Greeks will sign on to something as modest as “reform” (forget “austerity”), and other issues remain.

There is all of the still convoluted conditionality surrounding Germany’s drive to complete the insanely austere new European Union fiscal pact into next Tuesday’s EU Summit. The rest of Europe has signaled it finds this at the very least distasteful, and the UK’s Cameron will certainly refuse to sign on to anything including a financial services transaction tax (which he just reasserted today is “madness”). And all of that does not even include the degree to which part of the basis for Standard & Poors’ recent downgrades of various European sovereign debt is that austerity alone does not seem to be working.

Even Chancellor Merkel herself allowed on Wednesday prior to her opening remarks at the World Economic Forum annual meeting in Davos that the combined massive monetary infusions and sheer austerity did not seem to be working in Greece. This is something we (among many others of course) were already warning of when the initial results from the Greek austerity measures were apparent back in late 2010. But the Germans are stuck on a concept here that somehow the Teutonic parsimony that worked so well in their own country must surely be the formula that will ‘help’ everyone else. Or they just haven’t been willing to discuss a more nuanced solution, like the labor market changes that have also been a part of their renewed success.

Speaking of Davos, no annual meeting would be complete without World Economic Forum’s annual Global Risks assessment. We refer to this one as the ‘LOW’ report, for Litany of Woes. It makes interesting reading with its online PDF, and especially the interactive ‘Data Explorer’ graphics. For those of you who have never played around with the latter, it’s actually quite an amusing little shop of horrors that displays the interconnections between all the problems.

Enjoy. Or whatever it is you call looking at how infrastructure collapse, disease, extreme currency volatility, food shortages, major technology failure and sovereign debt defaults might interact with each other. Of course, it’s necessary to allow that the WEF neither predicts any of this will actually occur, nor that any of the major failures will occur in conjunction with each other. It is probably better fodder for someone scripting a doomsday movie than any particular market strategy. That said, it’s good to take a thorough look at what’s out there from time to time.

And part of that most certainly includes the seemingly improved US economic landscape. On a short-term view there is no doubt that the Fed action-related drubbing of the dollar plays well for the equities on two fronts: the economic bump from more export competitiveness, which works hand in glove with the higher corporate profits in US dollar terms that can be repatriated from overseas sales. Yet there are also no small number of problems which are not going away soon.

That much was highlighted by the weaker than expected first look at fourth quarter US Gross Domestic Product.While the actual downside miss was only 0.2%, the weakness of both consumer activity and especially business investment supports our basic views. Regardless of what Washington DC would have anyone believe about their commitment to assisting business, the landscape remains daunting.  Aside from the impact of the ‘Taxulationism’ (combined negative effect of high taxes, regulation and at least a modicum of protectionism) we have explored extensively in the past, there is also the less than constructive bank financing aspect.

And that was highlighted during a CNBC interview of JP Morgan chief Jamie Dimon. He is still one of the very smartest guys in the room. And that is not just sheer intelligence, but also on his broad awareness of the overall context and balanced view that he tends to take on both his industry and the economy at large. All of which was rolled into his comments (which we will attempt to concisely and accurately summarize) on the problems facing the banks and the economy.

He reaffirmed once again that all of the happy talk out of Washington about encouraging banks to make loans flies in the face of what is still significantly stringent regulator oversight, which makes only the most very solid borrowers candidates for loans. That all fits in with the very disjointed macro-prudential regulatory regime run amok, which includes Basel III, Dodd-Frank, and multiple consumer protection regimes (including Washington DC’s latest creation.)

These multiple efforts are all focused on “more” regulation, rather than the cumulative impact. As an aside, that is a key point which Mr. Dimon pointedly raised with the Fed Chairman at one of his previous press conferences. The good Chairman had no answer to whether anyone was able to assess that combined impact of all the new rules and regulations. And this morning Mr. Dimon made very clear that someone should take a consolidated view and ask, “What’s smarter, better, more efficient?“

President Obama’s reference in the State of the Union address to elimination of confusing or contradictory regulation was pure politics, and bordered upon a significant dose of fantasy. While Mr. Dimon did not mention it today, this is something which has been plaguing America, and specifically its business competitiveness, for some time. Elected representatives who are interested in populist prescriptions to prevent the last problem have been in a “crisis” legislation mode for many years now. And the patchwork which has flowed from that is making it harder and harder for businesses to deal with overlapping and often contradictory regulations.

That is aside from the fact many of the governmental “protection” organizations like the EPA, NLRB, OSHA, and the banking and securities regulators (at least of late in the case of the latter) have been given the ‘green light’ by the current administration to implement more aggressive enforcement. And as the final note that relates back to the financial services industry and the systemic and consumer protections which have been put in place, any overkill in the oversight of financial businesses will cause many of them to (in Mr. Dimon’s words) “un-bank”.

And by creating incentives which encourage financial services firms to abandon their banking charters, the politicians and regulators are once again encouraging the creation of a large, unregulated financial services arena.And rather than reduce risk, that will exacerbate it. While it certainly applies amply to all of the official encouragement that was given to financial services, housing and other areas prior to the 2007-2008 combined US Credit and Housing Crises, the full about-face on financial oversight by various governments also deserves the cautionary cliché that Mr. Dimon cited again this morning:

“The path to hell is paved with good intentions.” Kind of scary when one of the smartest guys in the room has to remind the government regulators about the risks of extremes; whether lassitude or excessive vigilance.

General Market Observations and EXTENDED TREND IMPLICATIONS

All of these are fully the same as in yesterday’s post.

Thanks for your interest.

Looks like Helicopter Ben has morphed into Gusher Ben. Due to both the economics and current elevated fiscal focus, it is impolitic right now for the Fed to expand its balance sheet beyond already bloated levels. That would be the equivalent of dropping dollar bills from helicopters. So instead it seems to have opted-in to a consensus that the Federal Funds rate should remain effectively at zero for much longer than the middle of next year projected at their last meeting.

Aside from the fact that a prediction of where interest rates are going to be fully across the next several years seems quite an overreach in its own right, there are the other knock-on effects. By attempting to inspire confidence with free liquidity indefinitely guaranteed, Mr. Bernanke and the rest of the Fed is actually attempting to push psychology upward from underneath hoping that the enthusiasm will pop like an oil ‘gusher’. This is nothing less than a mind game version of quantitative easing (i.e. de facto Q3.)

Unfortunately for them, the first things that are shooting up once again are the prices of risk assets, as the return of the ‘risk-on’ trade assists everything except the US dollar. Is it just us, or does it feel an awful lot like spring of last year once again? In any event, the increase in commodity prices represents what now seems to be the next round of the Risk Asset Hot Potato game in a zero interest rate environment, which typically raises more questions than real economic activity.

As we have already alluded to the return of the ‘risk-on’ trade in the wake of the FOMC statement and Chairman Bernanke’s press conference, it seems only fair that we at least share our market observations right away (instead of the typical wait until the end of the discussion.) The most obvious, and somewhat perverse, tendencies are reverting back to those that were in place prior to the beginning of last week’s selloff in the government bond markets. In essence, with the notable and rightful exception of the US dollar, we have returned to “it’s all going up together“.

This would be less unusual it were not for the highly focused macro-technical structure of the intermarket indications we discussed late last week. There is not really much of a problem with the equities and govvies rallying together at various points for a limited amount of time. (We suggest you review last week’s posts if you’re not familiar with the reasons behind that.) However, in this case the March S&P 500 future was up against some very important technical resistance in the 1,310-15 area. If the push above it manages to maintain for Friday’s weekly Close, it would be back up in an entire higher range where a test of 1,340-50 resistance would appear to be the next step.

Beyond that, it might also be signaling that the entire top from the first half of last year is no longer viable; as in the market would be ready to push above the early May lead contract 1,367 exhaustion high. This would be similar to the second round of Fed quantitative, easing (QE2) fomenting the push through the 1,216 April 2010 high in the fall of that year. And in this case as well it would be overrunning the previous extreme high (i.e. tip of the head) of a Head & Shoulders Top at 1,367. If so, next resistance would not be until at least the interim 1,385 last seen in June 2008, with the more formidable 2007–2008 resistances not until the 1,425-40 range.

All possibly fine and good, except that the intermarket indications are quite a bit different, at least so far. Just as an aside (with a further discussion below) commodity prices are already more so significantly elevated than they were back in the summer of 2010. And beyond that, quite a few of the intermarket indications are going to be very strained as well unless something gives again in the relationship between the equities trend and that of the other asset classes. Allowing that it has all come around to being a significantly convoluted and perverse situation once again, there are certain technical trend points and conceptual references which deserve our attention.

The first of these is that the primary government bond markets rallying so strongly from the bottom of the recent selloff even as US equities push to a new high of their rally (followed by Europe this morning) is a bit odd. Even allowing further explicit quantitative easing through direct long-dated bond purchases remains a possibility, if the Fed’s latest unlimited cheap liquidity effort is really going to foment any economic strength, the govvies should be doing just the opposite. That’s one of the big differences between now and summer-fall of 2010, when the European govvies anticipated the effect of QE2 in 2010 by selling off as soon as it was hinted in August; followed by the US govvies beginning a significant slide right into the official announcement in early November 2010.

However, at present all of the primary govvies have rebounded sharply from tests of key lower supports around this week’s early lows. Unless levels like March T-note future 129-24, March Gilt future 115.00-114.85 and March Bund future 137.50 – 30 are broken, we must presume that govvies are still more so focused on the threats from the real world than the higher commodity prices the return to a ‘risk-on’ mentality will encourage. And the govvies rebound also reinstates the other perverse aspect which reflects general destruction of fiat currencies through inflation (even if that is not glaringly apparent at present): those strange bedfellows have gotten back together, as the govvies rally is occurring along with a significant rally in the Gold market.

The latter has seen February Gold future not only push back up above its significant DOWN Break and weekly MA-41 in the 1,615-30 range two weeks ago; it has now breached higher resistance in the 1,680-1,700 area that represents a fresh UP Break out of its September-November down trendline. Only a failure back below that area might represent a weak sign in a market that seems to have fundamental reasons once again for remaining strong. Yet, in the metals complexes as well there is a further inconsistent indication that we also highlighted last week: the trend of Copper has not yet returned to full strength even if back at elevated levels.

What we mean by that is the current push back up toward the 3.92 mid-September 2011 weekly Close (which the market gapped down from so viciously in the week ending September 23rd) only essentially fills that gap so far. That gap is also at the bottom of the much heavier early-mid 2011 congestion that ranges up to the 4.60 area, and the 4.00 lead contract Copper future major DOWN Break (from its up channel off of the very major 1.475 December 2008 low) still looms above the market.

Along with the still elevated prices of many other commodities, this is one of the issues surrounding the return of the ‘risk-on’ trade: while encouraging inflation anticipation buying, will the central bankers’ easy money policies (now seemingly including the ECB along with the Bank of England and the Fed) really be enough to stimulate “final demand” that will be able to absorb elevated commodity prices? One of the major components of the equities stalling out last year was the degree to which still weak consumers did not have the capacity to fuel that “final demand”, as the only time inflation can accompany economic growth for an extended period is if it is of the ‘demand-pull’ variety driven by higher wages.

Given the general austerity push in Europe with the US soon to follow, and any increase in commodity prices likely setting off alarms once again in the emerging economies and China, it’s a good question where the sort of consumer activity that will support economies and elevated equity prices is going to come from? Especially if the economic forecast of Europe heading into recession turns out to be accurate. Even though forecasts are always a bit problematic, the signs outside of Germany, and its continued insistence on major spending cuts as a condition for funding the sovereign debt rescue efforts (see previous posts on that), do not bode well. We shall see.

And all of that background about the ‘risk-on’ trade encouraging inflation through a game of short-term investment/trading with free money from the US certainly reinforces the return to weakness of the US dollar as the one outlier in the “it’s all going up together” scenario. There are quite a few aspects there that deserve review. In the first one on both a technical and psychological level is that any significant weakness of the US Dollar Index below its .7950 UP Break (out of its major down channel from the .8870 June 2010 high) is a significant failure.

That would not only point to a retest at the very least of the interim congestion back down in the .7700 area, but would also create a psychological condition very similar to last spring. And by that we mean a full return to a US dollar “carry trade” mentality. After all if there is really little risk of any higher interest rate that would incur a short-term loss, why would any reasonable speculator not be happy to borrow short-term in US dollars, and sell them to put the money to work in a higher return environment?

That is now showing up in various other currencies strengthening against the US dollar. The euro pushing up back up above EUR/USD 1.3050-1.3100 has established a base that may well see this weakest of the weak sisters at least retest its mid-upper 1.3300 resistance, even if there is more formidable resistance at higher levels. Of course, that is contingent upon it doing no worse than 1.3000-1.2950 (recent UP Break) over the near term.

No secrets as well that the commodity currencies are doing better on the potential for all that liquidity to turn into Uncle Ben’s Gusher, which will supposedly go well for US demand and a Chinese soft landing. AUD/USD has maintained its push above 1.03-1.04 Tolerance at 1.05, appearing on its merry way to at least the next significant congestion and oscillator resistance in the 1.0750-75 area. That said, the Canadian dollar has been the commodity currency laggard of late, with USD/CAD only down to the lower of its significant 1.01-1.00 supports. Even below that, weekly MA-41 in the previous hefty congestion and up breaks await in the .9900-.9800 support range.

However, the true testament to the weakness of the US dollar is the rebound of GDP/USD from its most recent test of major 1.5245-25 support all the way up to near its recently stubborn 1.5750 resistance. And that’s from a currency of a country that just this week confirmed that might be headed into recession. How the heck do you attract flows out of the ostensibly growing US to the currencies of countries headed into recession so definitive as in Europe and potentially likely like the UK unless this is all on pure short-term interest rate differentials and opportunistic commodity purchase trading?

And so we proceed once again into a “greater fool” international capital markets and trading environment. As long as assumptions about Europe being able to inoculate its banks against the Greek debt default, China achieving a soft landing (even if current commodity price escalation is going to set off monetary policy alarms), the US is growing well enough to maintain the sentiment that good corporate profits will fuel a recovery in spite of still-depressed job creation, we suppose that there will be a rush to be invested prior to the next individual getting there first.

Thanks for your interest.

© 2012 ROHR International, Inc. All International rights reserved.

Well, it seems to have finally happened… Germany’s Jerry Maguire Moment. At long last this week it is finally agreeing to “show (me) the money” to the rest of Europe hungering for greater funding for its sovereign debt bailout funds. However, that comes with significant strings attached, along the lines demanded previous on major moves toward closer integration of the European Union…

…and that is along much more stringent Teutonic fiscal lines. Those are at the very least distasteful to much of Europe, and completely unacceptable to the UK. That much was clear from Mr. Cameron’s rejection of the push for such an agreement at the previous EU Summit. As such, if Frau Merkel made her assertion during her meeting last week with French president Sarkozy that everyone should relax on the sovereign debt dilemma because the entire EU treaty was going to be ready for next week’s follow-on EU Summit, it appears as specious as we suggested when they announced it.

In fact, it only reinforces our view that might’ve seemed a bit extreme when we noted it one week ago: the bombastic, bi-polar nature of the leadership in Europe right now. As noted then, the vacillations are almost as troubling as the lack of real progress. If the rest of Europe is not going to go along (and there are others who disagree as well) with the extreme strictures in the German proposals for closer integration, then the only inference that can be taken is that Germany is not going to agree to greater funding of the rescue operations.

So maybe it is not a huge surprise she has also at least partially thrown Greece under the bus this morning by noting the bailout may not be working. What is interesting about that is she allows that the combination of the requisite billions of euros along with austerity does not seem to be getting the job done. And that last bit is the most interesting part.

That is because severe austerity measures without some method for also stimulating the indebted European southern sisters was never going to work. We have noted from the beginning that it would not be possible to purely shrink their way out of the massive debt loads they were carrying; least of all for a smaller country like Greece that lacks a major manufacturing base. And as an indication for the dysfunctional process in the US, those who are calling for fiscal reform through pure cost-cutting may be misguided here as well.

Of course, we won’t know that unless and until there is enough political cooperation to actually develop a plan that will pass Congress. What we do know is that, along with many of the rest of Europe, Standard & Poors also agrees that the pure austerity approach is a poor substitute for reforms in other areas necessary for overall restoration of fiscal balance. Even ECB President Draghi made mention of one of the key factors at the last ECB press conference: job creation is a priority. That’s just the sort of de facto dual mandate indication more typical of the Fed, which would’ve been totally unacceptable to previous ECB President Jean-Claude “single needle compass” Trichet.

While it all sounds good on paper to have far more stringent fiscal restraints, the fact that the rest of Europe is not likely to agree leaves both tighter European integration and expanded German funding for bailout funds in serious doubt. Along with the breakdown of the Greek Debt Deal negotiations into an intractable confrontation between the ‘public’ holders and Private Sector Involvement (see yesterday’s post), it represents a real risk not just for Europe but the global economy.

Speaking of things which sound good on paper, President Obama’s State of the Union address yesterday evening was a highly predictable catchall of upbeat assertions that have little to do with the political or economic reality. That “let’s all get together, and we can do this for an America Built to Last” was striking in nothing quite so much as the degree to which it is a prescription for greater spending and higher deficits at a time when that isn’t going to fly with the other party.

From a completely non-partisan viewpoint, there were a lot of good ideas on training and restoring America’s manufacturing base. Kudos to him for that. On the other hand, what we all know is that the incentives for business must go beyond some new program or administration “team” (at least you and suggest there would be any new czar appointed) into the real fabric of the business environment. And would require that the various organizations which business feels are out of control at present, such as the EPA, NLRB, OSHA, etc. be significantly reined in.

However, what the recent failure to approve the Keystone pipeline has taught us is that the administration is now fully playing to its left-wing environmental and social market economy base, likely for the duration into November’s general election. Just to demonstrate the degree to which the rhetoric from Washington DC is out of touch with reality, what we have seen in the US banking system for the past couple of years is the continued stringent restraints on anything but extremely high-quality loans by the banks. That belies the Washington DC rhetoric on encouraging banks to make loans. So, much as the inference to be drawn from the German Chancellor’s recent remarks is not very positive, it is unlikely anything beyond the current painstakingly weak recovery in the US was changed by what Mr. Obama had to say yesterday evening.

Flying in the face of that weakness was the outstanding results in Apple’s fourth-quarter earnings announcement. Once again this innovative and creative firm knocked the cover off the ball, and provided atypically upbeat guidance for the future. As the details of all that are available from extensive other sources, we will demure. However, anyone looking for that to be a harbinger of greater economic strength in general might be a bit misguided.

As analyst Jason Schwarz posited recently, Apple has moved on from being a company into becoming its own ‘asset class’. Possibly a bit of a giggle there, if it were not for the fact that some other retail analyst warning that the extreme appetite for Apple products might be cannibalizing other retail spending. And lest anyone forget, prior to his tragically untimely death Steve Jobs made a great case to the Obama administration on why it just wasn’t possible to produce products as technologically advanced and innovative as the I-Phone and I-Pad in the United States. Interesting in light of the President’s assertions yesterday evening about what can be accomplished here.

And last but not least, something that is indeed no more that a bit of a giggle… the comparison between central bank powers in the US versus Hungary. Let’s allow in the first instance that these are vastly different systems in history, current context, public regard and current key individuals. That said, isn’t it interesting that beleaguered Hungarian Prime Minister Orban had managed to come closer to a deal for financial support from the EU by agreeing to NOT merge his central bank and markets regulator, because it raised issues over the independence of the central bank.

Fair enough. But isn’t accruing more regulatory oversight just the sort of thing that the US Federal Reserve insisted upon and received as a quid pro quo for the formalization of its expanded role as “lender of last resort”? Interesting juxtaposition to say the least, even with all the caveats.

General Market Observations and EXTENDED TREND IMPLICATIONS

All of these are fully the same as in yesterday’s post.

Thanks for your interest.

© 2012 ROHR International, Inc. All International rights reserved.

The good ship Greek Debt Negotiation has seemed to suffer the same fate as the Costa Concordia (with due respect for the latter being a human as well as a financial tragedy.) Both ran close to the shoals of disaster. The Concordia in the form of an actual shoal, and the debt negotiations in the even murkier shallows of financial canard. The difference is that the Concordia should reasonably have had a chance to avoid its fate through either high-tech instrumentation warnings or more conservative navigation by its captain. The Greek debt negotiation was already effectively aground before it started, after very early technical indications the country was drowning in more debt than it could possibly service were widely ignored.

More on that intractable situation below. The real question is how the equity markets are gliding along so well near the top of their recent rally in the wake of the indication at the top of this week those negotiations were truly failing. Is it possible that a Greek debt default on (or into) its major March 20th €14.4 billion bond maturation is already discounted? Is it possible this is something the equity markets can simply ignore? Or is it more so that this is yet to be discounted at some point in the future? Drawing the full implications of all that is nothing less than disturbing and fascinating.

First of all, for the edification of anyone who happens to have been in a coma for the past several months, there is the now crystallized reason why that negotiation is intractable. Until this weekend into Monday, the negotiations had danced gingerly around the extent of ‘haircuts’ Private Sector Involvement (PSI) would be willing to accommodate. While they started off quite a bit lower prior to even higher percentage write-downs being requested by the powers that be, the PSI position is that they refuse to take more than a 65%-70% reduction on the face value of their Greek debt holdings.

That runs contrary to the demands of the ‘public’ holders of Greek debt, such as the European Central Bank (ECB), European Financial Stability Facility (EFSF), and other public holders. Due to their position defending the public trust and purse, they partially relish and are partially stuck with the idea that the full face value of their 40% holding of the Greek debt under review for rescheduling is sacrosanct. Well, that combination really doesn’t leave enough forgiveness of Greek indebtedness to lower interest rates to a level that will allow the small nation to grow its way out of its Brobdingnagian debt load.

The PSI position of no more than a 65%-70% reduction in the value of its holdings seems pretty reasonable. Even allowing some sympathy for officialdom that is saddled with no ability to compromise even if they thought it might work out, what did they expect? Let’s leave aside for a moment that this entire exercise is substantially an extension of the authorities’ disdain for the Credit Default Swap (CDS) market, which we (among many others) warned was a mistake from the beginning. Telling someone you want them to lose more than two-thirds of the value of a bond on a ‘voluntary’ basis because that would not represent a ‘default’ (or “credit event” as it is officially known) is insane.

There is a well-founded perception that “the extreme tests the mean.” Making extreme assumptions can test the veracity or specious nature of a particular assertion. How much more forgiveness would the ‘public’ holders expect to still be voluntary, and thereby not be designated a credit event that would trigger the payout on the Greek debt CDS? 80%? 85%? 90%? Here’s a thought. Let’s have the PSI agree to 100% forgiveness of principal on those Greek bonds!

Evidently if this is voluntary, the vaporization of every scintilla of value is still not a default. Of course that is silly on the face of it, and illustrates how the public holders’ position has officially moved from the ridiculous to the fully sublime. After the initial mistakes of allowing Greece into the euro in the first place, and then ignoring its rampant borrowing spree just because the banks were happy to make AAA loans, there are only two possible conclusions to this affair.

The first is for the rest of Europe (and given the state of the rest of the southern sisters, that means Germany, France and other successful northern tier states) to pony up and cover the loss.The second is for Greece to default, and very possibly still foment more than a bit of a crisis among the banks holding its debt. Whatever may transpire, the recent actions by the ECB and others to bolster the banks will still need to be accelerated if the public purse of the successful northern tier doesn’t repair the breach in the hull of the good ship Greek Debt Negotiation.

As Europe is already headed into a recession, the outcome of that situation may be a reasonably influential determinant of whether it is a mild one or a deeper recession. In any event, given the export market that Europe is for the balance of the world (and especially China and the US), the upbeat economic sentiment which is buoying the equities right now seems a bit of mystery; even in light of recent better-than-expected economic data. The dilemma is that all of that data is either current or even more so “rearview mirror” data from previous months.

The equity market seems to not want to discount a more downbeat outlook based upon the European contraction and its potential depth due to what seems to be a looming default by Greece. Is it possible that growth in the US and a soft landing in Chinawill be strong enough that a truly disruptive event in Europe will not have that much of an impact?Or is it yet to be discounted, much like the failed US Debt negotiations last summer, only once the final impact is nearer? And that seems to be the question.

General Market Observations

It is certainly possible that this crowded event week is predisposing equities to maintain the bid in the short term. There are several key anticipatory factors which might be assisting them early this week, while weighing on the primary government bond markets and US dollar. The first of those is this evening’s State of the Union address by President Obama. Who really wants to be short in front of a guaranteed dose of “further economic stimulus” and “housing market relief” happy talk?

And we can anticipate a whole lot of that, given the this will undoubtedly be the formal kickoff speech for the US 2012 general election campaign. Then there will be tomorrow’s opening of the World Economic Forum in Davos, Switzerland. Once again expect some happy talk from opening keynote speaker, Chancellor Merkel of Germany. There will undoubtedly be a significant reference to how well everyone is communicating and cooperating, regardless of the real world lack of substance on almost all sides since the crisis first erupted in May of 2010. And then it’s on to tomorrow’s FOMC rate decision and statement that is followed by Chairman Bernanke’s press conference. Anyone want to bet against there being significant reference to “things improving, even if more slowly than we would like”?

Along with further scheduled and ad hoc pronouncements out of Davos suggesting solutions to the European problem in particular and global growth in general, there are more governmental and ministerial meetings right through the end of the week. These also hold the potential to provide further upbeat sentiment that may well assist the equities in holding up for now. The return to more stressful influences will likely need to wait until next week’s significant Italian bond auctions and an EU Summit that will highlight the degree to which all of the sound and fury this week have failed to accomplish anything if nothing substantive is agreed.

That said, equities may anticipate the positive or negative outcome of this week’s extensive machinations. That would be most clearly signaled either way by a March S&P 500 future push above key 1,310-15 trend resistance, or a failure at least back below the 1,300 area; even if the ultimate burden of proof on the bears is to foment a failure back below the 1,280-75 area. In either event, the market would likely proceed another $30 higher or lower if one of those key parameters violated. Of course, that would be with due influence back into the other asset classes.

EXTENDED TREND IMPLICATIONS

Of note is the macro-technical restoration of classical counterpoint on the equities strength weighing on primary government bond markets and the US dollar. March T-note finally dropped below the 130-16 area, yet along with the other primary bond markets managed to hold lower support into 129-24. March Gilt future similarly violated short-term support in the 116.50 area, and interim 115.50 support prior to holding important lower 115.00-114.85 support. March Bund future failed key short-term support at 139.30-.20 and interim 138.30-.00 support, yet has still managed to hold with only minor slippage below ultimate extended support in the 137.50-.30 area.

The point is that after the equities, govvies and US dollar all rallied together until early last week, classical intermarket tendencies have been restored. And further, it is all recalibrated to the major government bond markets being down at significant supports together. Yet, there is a final note on odd intermarket indications that bring the further potential strength of equities into question: if there is so much economic strength signaled by equity markets that indicate it is coming and will continue to feed off it, why are the short money forwards so very resilient? It all seems to be not much more than a curve steepening reaction to the equities strength so far.

The other very interesting development is that in spite of seemingly more constructive indications out of Europe, the euro is stalling once again into key resistance. Even though the US Dollar Index weakened off below its near-term .8050-30 support, it has managed to hold well into much more critical support in the .7950 area major channel UP Break. It is also the case EUR/USD rallied back above its major 1.2860 January 2011 low, yet has stalled so far on the current rally into more formidable resistance in the mid-upper 1.3000 area. That said, it did exhibit a 1.2925 UP Break out of its overall down channel (from the major October 1.4248 high), which will tend to reinforce the critical nature of the 1.2860 level once again as a natural Tolerance.

Thanks for your interest.