And Now a Word From Our Nattering Nabob of Negativism

Here are some random tidbits that I have seen this morning and which I thought I would share:

• Germany conducted an auction of 2-year notes today. It sold about €4.2 billion at a 0.29% yield. Germany was looking to sell as much as €5.0 billion. The bid to cover ratio fell to about 1.4 from the 2.0  at the previous 2-year note auction.
  
• UK unemployment rose to a 17 year high for the 3-month period ending October. The unemployment rate rose to 8.3% from the previous period rate of 7.9%.
  
• The IFO Institute has come out with a revised GDP estimate for Germany for 2012. It now sees GDP growing by a paltry 0.4% for the year. This compares to the 3.0% GDP growth rate estimated for 2011 and the 3.7% GDP growth which Germany had in 2010.
  
• Italy also held a debt auction today. The Italian government was required to pay 6.47% on the €3.0 billion of 5-year notes it sold today. This was up from the 6.29% yield set at the previous auction of 5-year paper and was a Euro-era record high rate. In fact, it was the highest rate paid since 1997.
  
• Following the Italian auction Italy's 5-year notes were trading at about 6.68% and its 10-year bond yield was at about 7.11%.This is at least the 3rd consecutive day that the rate on Italian 10-year bonds has been over the key 7.00% level. So much for last week's EU summit.
  
• The EUR/USD currency pair has dropped below the 1.3000 level this morning. It is bouncing around that level as it attempts to hold support. If it significantly breaks the 1.30 line, next stop???? Remember that the "Dollar Carry Risk Trade Switch" will be put into the "OFF" position if the Euro is declining and the U.S. Dollar is rising. This means that those playing the Dollar Carry Risk Trade may be buying in U.S. Dollars and selling various "Risk Assets" as they unwind positions that are now moving against them.

Then there are these recent news items:

• It seems MF Global may have committed fraud and the investigation may be expanding. This may not hurt markets but it could. In my opinion it certainly won't help.
  
• Greece has recently reported that through the 11 months ending November its budget gap has widened 5.1% compared to 2010. Wasn't it supposed to shrink? Well it seems that Greece's revenues are shrinking instead of expanding with its net tax receipts falling by 3.1% for the first 11 months of the current year. On the other hand its expenses, excluding interest payments, have risen by 3.0% for the same period.
  
• Greece also reported that it sees the Greek economy contracting by at least 5.5% for 2011 and sees 5 consecutive years of recession. OUCH!
  
• U.S. retail sales for November rose 0.2% versus the consensus expectation of a 0.6% expansion.
  
• Here's a little gem from the National Association of Realtors. It seems that there's a small problem with their reported sales data. "All the sales and inventory data that have been reported since January 2007 are being downwardly revised. Sales were weaker than people thought," NAR spokesman Walter Malony told Reuters. OOPS!
  
• Let's talk about payrolls. As reported by the Bureau of Labor Statistics the year-over-year change in payroll earnings has continued at a basically constant positive level. The problem starts with the fact that the BLS figures are derived from data samples that are significantly modeled and often meaningfully revised much later. Another way to look at payrolls would be Treasury Department figures regarding receipts of federal withholding taxes. Basically, these two sources should roughly run parallel. Unfortunately, since October and running to early December, figures show the growth rate of tax receipts dropping sharply. This is not consistent with the BLS's more pleasant employment picture. It may be consistent however with the disappointing retail sales report. If average earnings aren't really growing as expected then perhaps folks don't have as much to spend as was thought and thus retail sales disappoint.
  
• Let's next talk about the U.S. GDP figures for this year. GDP growth was originally reported at an annualized +2.50% for Q3 and has now been revised down to +2.0%. The Q2 GDP growth rate is now estimated to be an annualized +1.33%. Not nearly as widely reported (almost not at all actually) are the G.D.I. (Gross Domestic Income) figures. The GDI and the GDP figures should theoretically be exactly equal as they are simply "two sides of the same coin". GDI is the income-side equivalent of the consumption-side GDP. Now here's the shocking news. GDI growth for the third quarter was reported as +0.36% annualized (+0.09% quarter-over-quarter). Worse, the Q2 GDI growth rate was revised down to 0.19% annualized (that's only 0.048% Q/Q). So for the 2-quarter period the GDI actually grew (not annualized) at 0.138%. That means that, based upon the less massaged and more reliable GDI figures, the U.S. economy is growing at a less than 0.3% annual rate. And in case you were wondering, the reported GDP figures have historically been revised toward the GDI numbers, not the other way around. But those revisions take at least many months and often years to report. Any guesses as to why it takes so long?

Finally, I couldn't help but pile on with one more negative item.

Greek bank deposits are rapidly running out of the country, or at least out of the Greek banks. Latest reports show that Greek Household and Corporate Deposits shrank by €6.8 billion in October. This was on the heels of a €5.5 billion outflow in September.

Over the past 22 months deposits have fallen by over €61 billion from about €237 billion to about €176 billion. For this year (10 months) the shrinkage so far amounts to roughly €33 billion with over one-third (€12.3 billion) occurring in just the past 2 months.

I guess we could call this a national "run" on Greece.

Imagine the impact on U.S. banks if one-fourth of their deposits disappeared over less than 2 years. Worse, think of the impact if people pulled out almost 7% in just 60 days. And what if November's figures show a continued acceleration?

To steal a phrase from Zero Hedge, "The first domino may just about be ready to fall."

While there are some positives for the equity markets such as seasonality, the above is an incomplete but representative review of the reasons for my bearish leanings.

Happy Holidays from Nervous Norvus, your Nattering Nabob of Negativism.

Curtis Bergquist
Options Manager: Daily Decision-PRO

P.S. Here's an unabashed pitch for Daily Decision-PRO Service - It's beaten the market handily for five months running now.

P.