Washington failed to produce an alternative budget plan so today marks the first day of sequestration—automatic spending cuts of $85 billion over the next seven months (the government’s fiscal year ends September 30th). Just as Nero fiddled while Rome burned, the market continues to rally while Washington becomes ever more dysfunctional. Speaking of Rome burning, the Italian elections last weekend failed to produce a single political party winning a clear path to a majority.

US Equity Markets Down More Than 2%

Over this past weekend the Spanish government secured $125 billion in bailout funds (Prime Minister Mariano Rajoy prefers to call it a line of credit) to secure the Spanish banks. The goal was to “ring fence” the banks from any further runs, particularly in light of this Sunday’s Greek elections which could determine the fate of Greece’s future in the euro. The immediate reaction by the markets was quite positive. S&P 500 futures contracts were up 1.5% when the Japanese market opened last night; Asian and European markets were up roughly 2%.

Much has happened this quarter and we’re barely past the midpoint. France elected a Socialist; Greece can’t elect anyone; JPMorgan, the most vocal opponent of the Volcker Rule, had a massive trading error; and, Facebook, the social media giant, came to market with a $16 billion initial public offering that left a bad taste in the mouth’s of individual investors as it appears (ironically, since we are talking about a social media company) that certain information wasn’t shared with them (mostly Facebook users) that was shared with some institutional investors.

It’s done! It’s done? It’s done. We aren’t quite sure how to best characterize the completion of the Greek debt restructuring, but we’re relieved that it is at least temporarily over. In present value terms existing holders of Greek debt took approximately 75% losses on their bonds. The goal was to get bondholders to agree to the losses in the hopes of avoiding a technical default. Unfortunately, the International Swaps and Derivatives Association has deemed this to be an actual default.

The combination of better-than-expected domestic economic news and the coordinated efforts of six central banks to ease the liquidity needs of European banks ignited a massive global equity market rally yesterday.  The S&P 500’s return of 4.33% was its 4th largest last day of the month rally in 1000 observations dating back to 1928.  Let’s hope the market fares better in December than it did in the month following the three month-ends that were larger than yesterday:  on 9/30/08 the market was up 5.42%--the following month it was down 16.94%; on 10/31/29 the market was up

Even with yesterday’s late afternoon selloff, the market has had quite a run over the past six weeks—the S&P 500 is up nearly 13% over that stretch.  That move has gotten it back to essentially unchanged year-to-date.  Of course, we much prefer to see the market up rather than down, but we do find ourselves wondering about the sustainability of this rally.  Domestically, the economic news has been quite positive:  consumer spending is up, unemployment has stabilized and 70% of companies reporting earnings this past quarter met or exceeded analysts’ expectations.&nbsp

EU-phoria, that’s what the market is feeling today.  The European Union announced a three-pronged solution to the sovereign debt crisis that had been threatening the global economy:  1) they convinced European banks and insurance companies to take a 50% loss on their Greek bonds, 2) they are mandating that European banks increase their reserves to 9% by June 2012, and 3) they committed to leverage the size of the European Financial Stability Facility (EFSF)—the blocs rescue fund, from approximately $600 billion to $1.4 trillion.  And the investment crowd went wild!  As o

The domestic stock market has been on quite a run over the past month—the S&P 500 is up 8.6% since the last week of August.  We’re struggling to understand what all the euphoria is about.  There is no question that the market was way oversold in the weeks that followed the debt ceiling debacle and the downgrading of the US credit rating from AAA to AA+; but, those conditions warranted a little bounce.  What we’ve witnessed is a rally in the absence of any good news.  In fact, one could argue that the news over the past month has been decidedly bad.  Among the va