As the nation prepares for the Thanksgiving holiday weekend, the financial markets are digesting yet another round of European financial instability. Ireland, Greece and Spain are on the cusp of requiring more monetary funds to prevent their respective governments and banking systems from failing. Without the financial assistance of the EU, each of these countries will be facing grave consequences for their lack of fiscal responsibility. Again, we see the EU signaling they will come to the rescue, and of course the global financial community will cheer with ebullition, and kick the can down the road once again.
Closer to home the California municipal bond market has given back nearly all of its principal gains in 2010, falling nearly 40% in the last two weeks. On the other hand, The financial markets yawn at the prospect of yet another bailout by the US Federal government for CA. Whatever the reason behind this complete meltdown of what is traditionally a safe bet for investors has yet again burned the average investor seeking safety. Moreover, the financial media has barely even mention the news.
On a brighter note, the Philly Fed Index reported an excellent month of manufacturing activity, registering 22.5 in October, well above expectation of 5.0. Each component of the report points to brighter economic activity in the months ahead. Unfortunately, offsetting this excellent report, the Empire State Index of economic activity disappointed with a -11.4 reading after surging in September to 15.7. Its seems everytime there is a positive regional economic report it is offset with weakness elsewhere. This begs the question, Will it be possible for the US economy to get on stable footing before this expansionary cycle is over?.
China has announced it will slowly apply the brakes to its current economic expainsion. Contrary to the US, China reported inflation growth at nearly 5.0% the last quarter, and its real estate market is once again booming. With serveral monetary and fiscal tools available, the Chinese should be able to contain growth and inflation without disrupting its normal business cycle. (Note: the Chinese are now increasing the velocity of selling yuan denominated government bonds to establish a yield curve that will compete directly with the US dollar as the world's currency).
Our main concern going into the first part of next year is not so much the US economy, but what is happening abroad. First, China is raising short-term interest rates to slow domestic economic activity. This should result in an overall contraction in global economic activity. Secondly, concerns over sovereign debt issue in Europe, will continue to put downward pressure on investors' confidence. These events will cause more uncertainty of future economic expansion, and could derail a fragile US economy. In addition, increasing corporate asset valuations and the current headwinds abroad, could cause a correction in the stock market through the end of the year.
The stock market was flat last week and overall bullishness subsided. The NYSE high/low index dropped nearly 20 points to 72 from a its highest recorded level of 98. As the overall market sentiment contracts, we should see asset prices come down resulting in more attractive buying opportunities. We remain cautious going into next year, but hopeful that the current headwinds will diminish.
