Market Talk

With all the compelling news coming out of Libya, the Arabian peninsula and Japan, it’s been easy for investors to overlook the festering sovereign-debt crisis in Europe. But it may come back onto the radar this week, like tomorrow.

Our colleague Min Zeng penned the following missive:

The financial markets are shrugging off the turmoil in Portugal and Ireland today, yet Andrew Brenner, head of emerging markets at Guggenheim Securities, says these two could lead to more volatility in stocks and bonds Wednesday when Portugal’s legislators are scheduled to debate the budget plan. Brenner says Portugal’s main opposition party said they will not support budget cuts so if the budget isn’t passed, Portugal could be forced to ask for funding from the EU. In Ireland, the continued disagreement between Germany and Ireland over corporate tax rates continue to plague negotiation for possible interest rates reductions from the bailout funding for Ireland, he says.

The Journal has a story on Portugal’s budget dilemma. There were reports earlier this week that Portugal’s going to seek a bailout no matter what happens with this vote, but if the measures are rejected, it would force the nation to seek a bailout within a few weeks.

As an indication of how jittery European debt markets are, Ireland’s debt (junior debt, mind you) tanked after after a rumor went through debt markets that Allied Irish Bank missed a coupon payment. The rumors were denied, and the market calmed down, but Ireland’s 10-year bond yield was pushed up to 9.658%. They later fell to 9.278%, for whatever that’s worth.

It’s a good thing the Europeans agreed to that new, permanent bailout fund. They’re gonna need it.

I wonder how many more times in my life I’m going to have to say, “that’s the worst thing I’ve ever seen.”

“The time to look for the emergency aisles and where the exits are located is before takeoff, not after the wings fall off the plane,” Barry Ritholtz writes this morning at The Big Picture. He points to a Doug Kass list of calamities over just the past ten years, like the Sept. 11 attacks, Katrina, Haiti’s earthquake, and notes that these so-called “black swan” events occur much more often than we think, and it’s only common sense to be prepared for them.

But have we ever had so many all at once? The Japanese are suffering through three distinct disasters at the same time, the earthquake, tsunami and nuclear crisis. It is going to take them God only knows how long to get back to where they were Thursday, and anybody who blithely suggests the rebuilding will be a good thing because it will spur economic activity isn’t really watching what’s going on, and has a poor grasp of economics.

I don’t know about you, but to me, it feels like the world’s on fire these days.

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You are going to see the words “income” and “surge” put together today like ham and cheese on a sandwich. Don’t be fooled. It’s more like ham hocks.

Yes, personal income rose 1% in January from February, as reported by the Bureau of Economic Analysis. But this was almost wholly due to the payroll tax cut that went into effect the first of the year. Wages and salaries were up only 0.3% and transfer payments it seems were actually down a bit.

Meanwhile, spending was weak. Yes, it rose, but not nearly as much as expected. Also, keep in mind that these are January numbers. They don’t reflect any effects from this latest oil spike. The bottom line is the consumer is not spending money at any kind of pace that’s going to spark a self-sustaining recovery.

There is no way, no way, that this rise in oil prices doesn’t bite the economy. Absolutely no way. The place where I get gas two Friday’s ago was charging $2.95/gallon. That was up to $3.13 on Saturday morning, when I put some gas in the tank. It was up to $3.15 Saturday afternoon, when I happened to drive by again. It’s not just the squeeze on the consumer’s wallet. Rising oil prices affects businesses big and small at absolutely every step of their operations.

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Now we’re going to see what happens when a strategy of kicking the can down the road, or two cans, or a hundred cans, runs into a road that’s being blown up.

The level of violence in Libya continues to rise, the level of uncertainty across the Middle East continues to rise, crude oil prices across the globe continue to rise, and people are starting to get nervous out there. The rhetorical questions are becoming less rhetorical and more practical by the day.

On the most basic level, there has been a slight disruption to global oil supplies given the civil war in Libya (and that’s what it is,) one that can easily be made up by other producers, as well as existing stockpiles. That isn’t what’s driving crude-0il futures higher. This is: the thought that the Jasmine Revolution might reach Saudi Arabia. It was wild talk a week ago; it isn’t today. The royal family is taking it seriously: they literally threw $37 billion at their people, in an outright attempt to buy off revolution.

If Saudi oil goes offline, you will see crude prices spike to new records, and then all bets on the global recovery are off. How much “disruption” will it take to tilt Europe? To tilt the United States? This is what everybody’s starting to calculate. Banks in Europe and the U.S. are still carrying tens of billions in loans that could easily go sour if the economies were to fall back into recession.

The response from governments in the U.S. and Europe was the just underwrite everything, prop the system up, and hope that the markets would slowly, almost imperceptibly, work through the bad loans, work off the excesses. The Fed made it clear it’s main goal was to reflate, to inflate.

The Fed may be successful in driving prices higher, in creating inflation, and slam that headlong into a crumbling economy.

East Shore Partners’ Joan McCullough frames it up:

Needs to be said: Those who do not venture outside the metropolitan areas and I can only speak for the NY metropolitan area … have absolutely no clue as to how desperate many Americans are at this moment. Insufficient wages, no jobs, no market for their homes, aggressively higher food costs and now energy is exploding as the Middle East erupts.

My biggest fear right now is that we are on a course where all the negatives converge to a point where even the spinmeisters will be rendered speechless. As the international scene and the national economic underpinnings implode at the same time.

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Japan comes out says it will buy European debt. The market sighs in relief. Stocks rise.

Um, why?

Why would anybody consider it a good thing that Japan, one of if not the industrialized world’s most indebted countries, is the latest sovereign to jump into the European debt market? First China, now Japan. Is this not a sign, another in a long, long string of signs, that Europe’s problems are beyond its control? It’s comical at this point to hear yet another government official, in this case Portugal’s prime minister Jose Socrates, avow as that their country doesn’t need “help.”

It’s not that Japan is buying European debt. We’re fairly certain this isn’t the first time they have. But the fact that not only are they buying bonds for the bailout fund, but that they’re making such a big deal about it (and buying such a big chunk of it.) Sure, they’re trying to help keep the yen down. But they’re also looking at a major market that’s on the edge of something very dark.

This is a bad thing. It should actually terrify people that the Japanese have stepped in. We all know the U.S., though the auspices of the Fed and its open swap lines, has been up to its elbows in helping to prop up Europe. Last week, the Chinese made a big public show of getting involved. Now the Japanese are. What’s driving the world’s three largest economies to take very public stances in support of Europe?

Fear.

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Premarket complexion for US stocks has flipped vs yesterday’s early picture, with the euro hopping higher, European stocks rallying as the ever-transient sovereign-debt concerns relax after flexing Monday.

Improvement in Europe comes after Japan said it would buy a stake in one of Europe’s bailout funds to bolster confidence. ECB also said to be stepping in to buy government bonds, helping to boost the euro. Here in the US, Alcoa shares slightly lower premarket despite what looks like solid 4Q results. November wholesale trade inventories due at 10:00 a.m. ET.

Commodities bouncing as US dollar gives back some ground. S&P futures up 6.00, DJIA futures up 49. Ten-year note flat, yield at 3.30%.

Here’s your pop quiz for the day. Consider the following statement:

“Portugal will not need a bailout, ” Spanish finance minister Elena Salgado said Monday (subscription required for link, incidentally.)

Where did Ms. Salgado make this statement? Was it:

- A: in an interview on Spanish radio station Cadena Ser.

- B: open mic night at Chesterfield’s.

Okay, fine, it was A. But the line would’ve gone over better if she’d said it a comedy club. Because that line’s a laugh riot.

How many times have we heard that one? The housing market won’t collapse. Lehman won’t fail. Greece won’t need a bailout. Ireland won’t need a bailout. Do you see a certain progression here?

What makes Ms. Salgado’s statement all the more ironic is at the same time as it’s making the rounds, Der Spiegel is reporting that France and Germany are pushing Portugal to accept a bailout.

What Ms. Salgado is perhaps actually thinking about is the fact that if and when Portugal’s domino falls, the next in line is Spain’s, and that’s when it gets really interesting. Because Greece, Ireland and Portugal are relatively small economics. What makes them dangerous is this whole globalized, interlinked economic system. But Spain is the world’s seventh largest economy. If it needs a bailout, especially coming after three previous sovereign bailouts, it will seriously test the steel of Europe. As Satyajit Das writes over at naked capitalism:

In order to restore solvency, overburdened borrowers must stabilise debt and begin to reduce the level of borrowing. This requires GDP growth exceeding interest rates, a budget surplus (through spending cuts and/or tax cuts) or a combination of these.

EU/IMF assistance to Ireland was designed to address the high yields on Irish bonds, which curtailed the State’s ability to borrow. But the 5.80% cost of the bailout debt requires an equivalent growth rate and a balanced budget simply to stabilise debt at current very high levels.

Based on the IMF’s best estimates, there is little prospect of many European countries returning to balanced budgets any time soon. Given the toxic conjunction of high cost of funding, low growth and high starting level of debt, it is near impossible for these countries to contain the spiral to a restructuring of their debt or default.

Asian markets were weaker overnight, and European stocks are currently sliding after the latest flare of debt concerns — this time Moody’s said it may downgrade Spain’s government debt.

These issues aren’t going away, folks, despite all the wishful thinking. Concerns seem to be easing a bit as the US market open approaches, with the euro recovering all its overnight losses, though USD index still holding a decent gain.

November CPI and NY Fed’s December Empire State manufacturing index set for 8:30 a.m. ET; November industrial production and capacity utilization due at 9:15 a.m.; and home-builders December sentiment index at 10:00 a.m.

S&P futures down 2.50, DJ futures down 19. Ten-year note higher, yield at 3.42%.

This morning’s smart rally is already showing some signs of flagging. Gold, up sharply earlier, has slipped into the red. Stocks are higher, but have given away some strength. Treasurys continue to sell-off, though. The fact is, this rally may have a short shelf-life, because in the end it’s not about much.

For the record, I’m pegging today’s rally as just another first-day affair, whereas new money comes into the market at the beginning of the month. I’d also say some of is a rebound after a couple of weak weeks.

But the bottom line is, nothing’s changed from yesterday to today.