The possibility of a collapse is not zero

Outlook:

So far going into the holiday week we are seeing some mild and sporadic profit-taking and not the bigger correction that was expected as the fiscal cliff talks fail. Again we have to complain that markets have an unfounded belief that Washington will do the right thing and refusing to price in the failure that was thick on the ground yesterday. In a way, it’s like the market treated Greece and Grexit—although the Greek economy is, objectively, minor in the grand scheme of things European, whereas the US economy is not.

And today we get the third estimate of US Q3 GDP, right out of the gate at 8:30 am ET. Market News reports the estimate is 2.8% after 2.7% in the second estimate (and 1.3% for Q2). The forecast range is 2.6% to 3%. Today’s number is a so-what moment because what counts is next year’s GDP. The doom-and-gloom crowd say it could be a contraction of as much as 5% if the fiscal cliff is never fixed all year. Nobody really expects that, with a fix likely early in Q1 if not by year-end, but the idea looms over everything, or should.

We still feel that conditions are awful and it’s astonishing that equities and commodities are not falling out of bed. But maybe the endless foot-dragging in Europe has inured us all to atrocious behavior by politicians and so the US doesn’t look any worse than the Europeans. All the same, the possibility of a collapse (and dollar rally on safe-haven sentiment) is not zero.

Today we also get existing home sales, the usual jobless claims, the Philly Fed, the FHFA Oct housing price index, and two biggies, and final Q3 Q3 corporate profits. Thursday will be chock-full of market-moving material but Friday is even bigger, with the final University of Michigan consumer sentiment survey for Dec, the Chicago Fed, personal income and spending, and as Wall Street guru Sandi reminds us, quadruple options expiration and S&P & NASDAQ rebalancing. By noon tomorrow you should be out of everything and hunkered down.

Eurozone Sanity Check:  European Commission Pres Barroso proposed at end-November a process that could last as long as 5 years to create a true Treasury in the eurozone with taxing and borrowing authority. It is proposals like this that keep the magic in the euro, despite the eurozone economy diverging from the US and sliding into recession. Countries in recession “should” see their currencies fall.

The EMU sanity check:

• The eurozone is officially in recession, with Q3 GDP down 0.1% after -0.2% in Q2. The IMF predicts a 80% probability of eurozone recession in 2013. The European Commission say 2012 growth will be 0.4% and cut its eurozone growth forecast to 0.1% in 2013 from 1% in May. German growth was cut in half to 0.8% from 1.7%. France will contract by 1.4%. The OECD forecasts 2014 as a second full year of recession. On Dec 6, ECB chief Draghi said growth will be 0.3% in 2013 at best and -0.9% at worst.

• S&P cut Spain's rating two notches to triple-B-minus, one step over junk; Moody’s cut France’s rating by one notch to Aa1, leaving Finland as the only eurozone country with a Triple A rating. The Economist Magazine names France the ‘time-bomb at the heart of Europe” on labor market rigidity and loss of competitiveness.

• The EU banking supervisor will be established by year-end as planned, with the target banks now defined, but the EC communiqué of Dec 14 removes mention of a eurozone reform budget and economic reform contracts, putting them off to the June summit.

• Greece got a €20 billion debt swap and Bailout Two of €34.3 billion, avoiding “default” and thus an S&P ratings upgrade. PM Samaras says the crisis is over and “Grexit is dead.” Stay tuned.

• The European Commission said yesterday the baseline projection for total eurozone debt is a modest drop from 92.8% this year to 88.6% in 2020 and 86.3% in 2030. The WSJ says “Having been at 85.5% in 2010, such an outcome would mean that euro-zone debt would have spent two full decades above the 60% threshold mandated by the European Union's Maastricht Treaty.”

	SPOT	CURRENT POSITION	SIGNAL STRENGHT	OPEN DATE	OPEN RATE	POSITION GAIN/LOSS
USD/JPY	84.00	LONG USD	STRONG	10 /17/12	78.71	6.30%
GBP/USD	1.6275	LONG GBP	STRONG	11/26/12	1.6022	1.58%
EURO/USD	1.3261	LONG EURO	STRONG	11/26/12	1.2970	2.24%
EURO/JPY	111.39	LONG EURO	STRONG	11 /21/12	105.38	5.70%
EURO/GBP	0.8147	LONG EURO	STRONG	11/26/12	0.8095	0.64%
GBP/JPY	136.72	LONG GBP	STRONG	11/21/12	131.02	4.35%
USD/CHF	0.9109	SHORT USD	STRONG	11/26/12	0.9284	1.92%
USD/CAD	0.9887	SHORT USD	WEAK	11/26/12	0.9932	0.46%
AUD/USD	1.0496	LONG AUD	WEAK	11/07/12	1.0453	0.41%
AUD/JPY	88.13	LONG AUD	STRONG	10/17/12	81.19	8.55%
USD/MXN	12.7717	SHORT USD	STRONG	11/26/12	12.9780	1.62%