WHAT MATTERS

Overnight Spain saw their second credit rating downgraded from the S&P Credit rating agency for 2012, now joining Italy with a solid, but very soft BBB rating which is just a few notches above "Junk" status. The bad news for Spain, which has been battered all week (this has been the country we have been focussed on) just wouldn't end. Retail Sales fell again making it 21 declines of the last 21 reports. Then unemployment skyrocketed to 24.44%; for historical reference, this is the same as the unemployment during the height of the Great Depression in the US! For comparison purposes, at the end of December it stood at 22.85% and consensus for this period was 23.8% so this was a huge miss as 1/4 of the country is unemployed. Considering the fudge factor or political deception (for instance, in the US we use seasonal adjustments to make unemployment look lower than it is or the 99 week unemployment benefits cliff to lower the number. We also use the U-3 data as headline unemployment, but if you work 1 hour a week you r are considered employed, even if you need to work 40-this data can be found on our seldom seen U-6 number, which by the way is the same way unemployment was counted during the Great Recession, so US unemployment is much higher than reported), real unemployment in Spain is likely far greater than even the abysmal number reported. For young people in Spain, 25 years old or below, unemployment is 52%, this must be doing wonders for their crime rate and has long term social implications for the country, perhaps even generational. You need to use that mind or lose it!

Spain is now solidly locked in its second recession over the last three years. The Spanish Foreign Minister , after seeing the UE number said, "Spain is in a crisis of huge proportions", how's that for political theater for public consumption!

Italy for its part sold some 5 and 10 year debt, which the market seemed to like, even though they missed their target amount by nearly 20%, the bid to cover ratio dropped like a rock and yields of course went up.

Here's what ES looked like after the Spanish downgrade and in to the European open with the Italian auction.

 ES selling off after Spain, a positive divergence in to the European open, likely because Spain was able to sell debt outside of the 3 year LTRO window, even though it is unsustainable debt with higher yields.

From there to the open, the positive divergence in ES lifted the market until a negative divergence kicked in at 9 a.m.

Politically the EU is now turning on Germany, their financial savior/ and task master. This is an important development as Germany is now being seen as the bully that Greece has long said it was. Most dramatically, the once super-BFFs, "Mer-Kozy" (the alliance between France and Germany), is as we have been noting, shifting with France joining the PIIGS side of the table as Sarkozy looks to be defeated. Even once strong PIIGS allies are turning on Germany's vision for the EU.

Monti has turned on Germany today, from the FT...

Mario Monti, Italy’s prime minister, has added his weight to criticisms of austerity-led reform efforts in the eurozone, saying the policies were shrinking Europe’s economy and could deepen a double-dip recession."
And Monti is a technocrat that was installed by the German led Troika!


France's probable next president, Hollande, also struck out...


From Bloomberg:

Hollande Says Germany Can’t Make Europe’s Decisions Alone

The intensifying war of words between the French presidential race frontrunner and Merkel is putting the two politicians from Europe’s two largest economies on a collision course over ending the region’s sovereign debt crisis.


As Europe accelerates in to the abyss, whatever political consensus there was to form a road map out of harm's way is now crumbling, which may be a good thing as everything the Troika has done has been an absolute failure, most notably the ridiculous ESFS super-failure.


Back in the US, GDP was today's main event and it came in a a stunner of a miss at 2.2 with consensus of 2.5, but the whisper number on Wall Street was much more optimistic, making the miss that much more important, they were looking for 3%!


Probably starting today, economists will start lowering their Q2 GDP guidance, which was already uglier than Q1 as Q1 had several benefits that were supposed to make it a strong quarter, like the increase in inventories, which will stagnate inventory growth in Q2 as Q1 inventories remain on the shelf.


This now puts official US Debt to GDP at 100.8% (not only is it increasing, but think of Greece in which all that was done was in hope of lowering their ratio to 120% over the next decade). It is obvious decoupling of the US from the rest of the world is a myth, we just managed to hide it and kick the can down the road better than the others, but it is now emerging for the brainy-econmists, the argument over decoupling and lagging is clearly leaning toward lagging, meaning tougher times are ahead.


With the SPX now at our target zone of $1400, things could get interesting very fast. Be ready.


Market update coming...