QEinfinity

Things went from bad to worse this morning:

So there was a major repricing of geopolitical risk today in the markets. Specifically in Europe, Italian markets, both stocks and bonds, were pricing in the increased risk of an anti-austerity regime led by former PM (and owner of AC Milan for those soccer fans) Silvio Berlusconi. The FTSE MIB Index (the main index of Italian stocks) plunged 4.5 percent and the breadth of that market was really ugly. Unicredit, one of the country's largest banks, fell 8.29%, and most other banks fell more than 5%. Only one stock on the index traded positively on the day, and it happened to be one that plunged over 20% last week...

Italian bonds were just as ugly. 10-year yields rose 14 basis points to 4.47%, just shy of the highs of the session. Further, 2 year bond yields rose 7.85% to 1.73%, also closing just 1 basis point shy of the intra-day high. Further, the spread over German bonds widened significantly.

Moving to Spain, the Spanish Ibex Index fell 3.77% with only one stock trading positive in the index. Industrials and financials were the hardest hit, with Banco Santander falling 5.7%. Also, Spain's 10-year government bond yields rose 23 basis points on the day to 5.44%, the highest since December. 2-year bond yields rose 28 basis points to 2.88%; that is a gain of 10.85%, not pretty.

All in all, Europe had a bad day. The euro was weak, stocks were weak, and everything bad that could happen, did happen.

Keep an eye out. If this market continues to reprice European sovereign and geopolitical risk, we just made an near-term top in risk markets - stocks, currencies, and peripheral bonds.

Two things this am moving markets:

My Greece thesis may be coming together here: "DJ FX Trader
: Greece's 2012 Primary Budget Surplus EUR434 Mln Vs Deficit EUR3.5 Bln"
-Greece has actually run a primary surplus in 2012 and has met all of the bailout conditions.

Also, Italian banks are getting hammered today, FTSE MIB down 3+%, Unicredit down almost 6%, Monte dei Paschi down almost 5%, Finmecannica down more than 5.3%

Just keep a heads up on Italian and Spanish politics right now. Italian elections are coming up soon and Spanish Prime Minister Mariano Rajoy is being investigated for taking bribes: stocks in both countries down hard, euro dropping with them, US stock futures down in tandem. Things can go from pretty nice to pretty ugly over a weekend, and that is exactly what has happened today.

GDP dropped massively in the fourth quarter to a contraction of 0.1% from the massive growth in the third quarter.

Reason?

Well, after Q3, I noted that inventories rose demonstrably in the quarter and that there would be a significant drawdown later in the fourth quarter and potentially in the first.

Well, it happened. I was right. Move along...

Straight from the Bureau of Economic Analysis' GDP press release: "Real final sales of domestic product -- GDP less change in private inventories -- increased 1.9
percent in the third quarter, compared with an increase of 1.7 percent in the second." So what was that 2.7% growth? Just a jump in inventories boosting growth, which has to offset in the future.

With the yen getting whacked overnight, I thought this was appropriate:

http://blogs.wsj.com/marketbeat/2012/02/14/green-eggs-and-yen-after-boj-move-trader-turns-to-dr-seuss/

Green Eggs and Yen: After BOJ Move, Trader Turns to Dr. Seuss As foreign exchange traders swapped opinions on the significance of the surprise increase in the Bank of Japan’s government bond purchases Tuesday, one member of Nomura Securities’ team instead drew his inspiration from classic children’s book author Dr. Seuss.

Anyone else just realize that we made it through October, historically the worst month for stocks, without a market crash!!! WOOHOO QE3!!!! QEinfinity!!!!

German manufacturing orders fell 3.3 percent last month... pop goes the Kraut...

Another round of uncertainty: ISM Non-manufacturing misses estimates slightly, employment sub-index strongest since march, new orders fell off of a cliff. Still way too much uncertainty in the economy which only makes the election more crucial and brings the fiscal cliff further to the front of issues.

Meanwhile, the Chinese bottoming may only be temporary. New conflicts arising inside the leading party over who will take the seats on the Politboro this week could result in an outcome that negatively impacts the economy. Investors should hope for pro-investment and pro-growth politicians; however, the pure Maoists and anti-globalists seem to be gaining steam. Worrisome indeed...

Twitter / Stephanie_Link: JPM Strategist Tom Lee expects ... Instantly connect to what's most important to you. Follow your friends, experts, favorite celebrities, and breaking news.

China bottom thesis continues...

By 2016, Japan's net debt per capita will reach approximately $140,000. That is about 3.5 times current GDP per capita and about 3 times the expected GDP per capita in 2016. Also, the U.S. is not much different. Unless we curb our deficits, the balance sheet of the federal government will resemble the average citizen's balance sheet circa 2007: $135,000 of debt, $48,000 of income.

Basically, the debt super-cycle has broken since rates can't go lower. Now what...