Morning Report - Initial Read on Holiday Sales

Vital Statistics:

	Last	Change	Percent
S&P Futures	1398.6	-6.7	-0.48%
Eurostoxx Index	2541.1	-15.9	-0.62%
Oil (WTI)	87.88	-0.4	-0.45%
LIBOR	0.312	0.000	0.00%
US Dollar Index (DXY)	80.24	0.052	0.06%
10 Year Govt Bond Yield	1.65%	-0.04%
RPX Composite Real Estate Index	190.8	-0.3

Markets are lower after last week's furious rally. Friday's rally took the S&P 500.  Friday was a shortened low-volume day, so take the result with a grain of salt. Today feels a bit like a "risk off" day with bonds and MBS rallying.

The Chicago Fed National Activity Index slowed in October, and has been consistently saying the economy is running at below-trend for 8 months in a row. Put an asterisk next to this one, though - Lower industrial production was the main driver of the index and that was affected by Hurricane Sandy.

The initial read on holiday sales looks promising - weekend and Black Friday sales were up 13% over last year.  The National Retail Federation is forecasting a 4.1% rise in holiday sales this year, with the caveat that the fiscal cliff is the wildcard. The consumer confidence numbers lately have been reasonably strong. Of course, even if you have a benign resolution to the fiscal cliff, the posturing and finger-pointing prior to the deal may depress consumer spending anyway, especially if we have a similar dynamic to the debt ceiling crisis of 2011.

One reason for the increased consumer spending? HELOCs are back. The Mortgage Bankers Association is estimating house prices will gain 8% this year and increased equity means more spending.  Of course the banks still have yet to write off all of their worthless 2nd liens from the first go around.

The status of the fiscal cliff seems to be increase rates vs limit deductions.  Susan Collins is proposing some sort of carve-out for small businesses.  Raising the eligibility age for Medicare seems to have some bipartisan support as well.  Perhaps an increase in the top rate to something less than 39.6% and some limits on deductions will carry the day.

As part of the backdrop for Euro debt fears, watch closely what is happening in Argentina. Dissident investors from the last debt restructuring (including my old firm Elliott Management) sued to block Argentina from paying anyone until their claims are satisfied. The case is going through the appeals process.  Unlike the Greek situation, Argentina has the money to pay their creditors - they just don't want to. High commodity prices are helping their economy. If Argentina chooses to simply default and not pay anyone, the risk-off trade could come back in a hurry.