For Monday, Nov 28, the market forecast is uncertian

We recommend selling your equity positions and holding cash, or otherwise moving to a risk-off position.  Avoid money market funds as a cash alternative due to exposure to European sovereign default risk.

Technical Comment:

The S&P 500 spent most of the day in slightly positive territory but ended closing down 0.3% on very light volume, below both Wednesday and the 30-day moving average volume.  Very light volume is typical following Thanksgiving holiday because US markets close early and most participants are still on vacation.

Subjective Comment:

The Eurozone crisis continues to dominate financial headlines.  Near the beginning of November there was a summit (one of many) of European politicians and bureaucrats where an announcement was made that Greek debt would be written-down by 50% and a €1 Trillion Euro bailout fund would be established to assist nations with too much debt.  We noted back on November 4th what was obvious, that the €1 Trillion Euro bailout fund was missing only one thing, the €1 Trillion Euros.  Yesterday the Financial Times reported the bailout fund will be unable to achieve the €1 Trillion Euros due to a deterioration in market conditions.  Oh, and the 50% default (write-down) on Greek debt now appears to be insufficient.  Greece is now negotiating directly with its creditors to get a 75% write-down.  Various European countries were downgraded.  S&P downgraded Belgium from AA+ to AA, and Hungary was downgraded to Junk (Bb1) by Moody’sItalian 5-year bond prices are dropping to record lows and Spain cancelled a 3-year bond auctionCredit Default Swaps, which are insurance against defaulting bonds, are going up in price as market participants believe Sovereign defaults are becoming more likely.

The European Central Bank is only intervening in the bond markets in a minimal way.  Almost all politicians across Europe want the ECB to print Euros to buy (bailout) the bonds of the broke countries, never mind the incredibly inflationary consequences of such an action.  Germany remains opposed to ECB money printing because they remember the Weimar hyperinflation of the 1920s.  There is plenty of speculation of what will happen.  Existing bonds are typically paid by issuing new bonds.  This is rolling the debt, and it is estimated about €1.7 Trillion Euros of debt must be rolled over from 2012 to 2014.  Sooner or later something has to give.  Either the ECB prints Euros to purchase new debt so old debt can be rolled over, or there will be defaults.  Austerity measures, new taxes, further political integration of the Eurozone and other plans will be debated and maybe some things implemented, but all of that is a side-show to the raw math of the problem.  The Eurozone is at the precipice of the business cycle.  Their boom is over and a crash is necessary.  Money printing can only delay the crash.  All of this is explained by the Austrian Business Cycle Theory.  (A good collection of essays on ABCT is available for purchase from mises.org, or you can download a pdf version for free here.)

The S&P 500 market data continues to show patterns of weakness.  We think the Eurozone crisis is continuing to put downward pressure on US markets.  We previously thought the expanding US money supply would provide on-going upward pressure on US markets.  The US money supply growth that occurred this past summer was a burst of bank lending.  US banks certainly have sufficient excess reserves ($1.5 Trillion Dollars) to continue lending, but it has been estimated they could have up to $1 Trillion Dollars of exposure to European debt.  We think US bank exposure to European debt has caused lending to slow after the summer burst.  This resulted in a slowed growth rate of the US money supply (US M2 seasonally adjusted).  With the slowing of lending and US Dollar supply growth, the upward pressure on US markets is easing while downward pressure from Europe is intensifying.  We don’t know how long the current situation might persist, but it certainly seems now is no longer a good time to invest in US equity markets.  However, the situation could turn quickly depending on what US banks and the US Federal Reserve do.  The burst of bank lending this past summer has caused economic indicators and business results to improve, although most of this news is lost in the fear surrounding Europe.  If (when?) the Fed and US banks begin expanding the Dollar supply again, the US economy and stock market could respond with growth quickly.  We advise holding a cash position and being ready to move back into leveraged index funds when conditions change.

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