This morning, retail sales came in much better than expected. Sales rose .8% and the National Federation of Retailers raised their forecast. This positive news more than offset negative earnings from Best Buy. A loss in market share (not overall electronics demand) is to blame for the poor performance. Business inventories were "market friendly" and sales rose 1.3%. The PPI came in "hot" at .8%. Normally, this might have sparked concern, but the Fed wants prices to rise. They believe disinflation/deflation is a greater foe but once prices really start rising that Pandora may be tough to put back.
Spain and Portugal will hold bond auctions this week. Expect the ECB to actively participate and that should stabilize PIIGS interest rates. The ECB disclosed yesterday that it purchased €2.7 billion worth of bonds last week and that was up from €2 billion the week before. They are increasing their participation to prop up prices. European credit concerns will be an issue early in 2011, but they won't interfere with this year-end rally.
The problems in Europe are festering. The Italian Prime Minister (Berlusconi) narrowly escaped a no-confidence vote. Their debt is enormous and interest rates are moving higher. The country will be faced with tough decisions and this vote (314/311) shows that it will be tough for him to cut deficit spending. Belgium's bond rating was lowered by Standard & Poor's--now they are officially on the sovereign debt radar. The ECB is aware of the warning signs around them and it wants to increase the bailout slush fund. It will ask EU members for more money in the near future.
The opposing market forces will lead to a nice orderly rally into year end. Excellent earnings, strong balance sheets, low interest rates, improving economic conditions, growth in China and QE2 are providing the strength. Rising interest rates and credit concerns in Europe will keep the rally in check. If rates throughout Europe suddenly spike in many countries at the same time, a massive stock market correction will immediately follow. It appears that the ECB will try to bailout every country until member countries stop contributing to the bailout fund. We probably will not see a sovereign bankruptcy--instead they will march closer to the edge of the cliff together.
Play the rally while you can but be prepared for a debt driven/rising interest rate crash--when it happens it will happen fast. Come to this Thursday's debt crisis webinar for your best defensive and profit producing strategies: https://www2.gotomeeting.com/register/734666107
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