[dropcap]E[/dropcap]uphoria over last week’s European “agreement” ended swiftly. To make matters worse, Greek Prime Minister George Papandreou initially called for a national referendum to accept the agreement, then reversed course. The rest of Europe was not sympathetic. Numerous important leaders suggested Greece could leave the Euro and suffer its fate on its own if it so wished. Meanwhile, no significant new details emerged on how the EFSF would actually prop up Europe’s weaker countries. US economic news continued to be moderately positive, with the latest jobs report showing employers are adding jobs, albeit slowly, even in the face of European uncertainty.
- Monday – Futures broker MF Global files for bankruptcy amid concern that the firm used client money for proprietary speculation.
- Tuesday – Greek Prime Minister George Papandreou calls for a national referendum to approve the bailout and stay in the Euro. Stocks fall.
- Wednesday – The Fed meets but does not offer additional easing. It says there is still considerable downside risk to the economy due to Europe, and they may consider buying more mortgage backed securities in the future.
- Thursday – In a surprise move, the ECB cuts rates by 0.25%.
- Thursday – Italian Prime Minister Berlusconi arrived at the G20 with the announcement that he did not have any concrete plans for improving the Italian budget deficit.
- Thursday – Greece abandons its plan for a referendum.
- Friday – The US jobs report for October showed 80,000 additions, lowering the unemployment rate to 9.0%.
- Friday – The IMF gave signs it is less willing to participate in the European bailout than had been expected.
- Friday – Groupon IPOs, achieving a $15 billion market cap.
Last week’s European debt solution was incredibly vague, so it is not surprising that the market lost some enthusiasm. Papandreou is in an unwinnable situation. Things are going to get much worse for the Greek people before they get better no matter what. But his idea of the referendum is akin to giving someone a gun to shoot themselves with. Greece was lucky to get the deal they were offered. They should take it.
We continue to believe the real story is Italy (and maybe Spain), not Greece. Somewhat quietly, Italian bond yields continued to rise during the week (the 10 year is trading around 6.5%). This is very bearish. If yields approach 7% or higher, there will be no way Italy can climb out of its debt hole. This creates a death cycle which will require a significant bailout of Italy. It is yet to be seen if the EFSF has the firepower to do this or if Germany has the willpower. But no one can afford to let Italy sink into the abyss, so we would not be surprised to see the ECB simply announce it will buy unlimited amounts of Italian debt in exchange for some type of slap on the wrist. This would be effectively monetizing their debt at the expense of other more disciplined countries, but it may be the only solution. Technically, the ECB is not allowed to do this, but this doesn’t really mean it won’t.
We are amused by the Groupon IPO. While skeptical about the valuation, it serves as a nice reminder that the US continues to drive and reward innovation.