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Freaky Friday Potpourri: Oh Domino!

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Why Europe matters to you.

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While much of the world awoke to headlines such as "Markets Routed As Worry Grows on Europe Debt" (NYT) and "Global Markets Shudder" (WSJ), Minyans were well warned. We touched on the potential for European Disunion in our Ten Themes for 2010 on January 6th when we noted:

"The European Union is committed to the regional and economic integration of 27 member states, with sixteen countries sharing a common currency. That was a fine idea when it was first founded but the economic fallout of the financial crisis will put loyalties to the test.

"Look for the Union to adopt more stringent guidelines in the coming year, including but not limited to distancing itself from the weaker links such as Greece and Ireland. Sovereign defaults, as a whole, should jockey for mind-share. This could conceivably spark a rally in the US Dollar, which could have ominous implications for the crowded carry trade."


Now, to be fair -- and honest -- I eyed a litany of potential flash points, including but not limited to social mood (sparking social unrest and pointing to geopolitical conflict), state budget shortfalls, pension tension and strategic defaults. I was (am) early on some of those themes and own that; we must each make our own decisions and take full responsibility for those choices.

But here we are, with our voiced concerns front page news and a complex dynamic drilled down to a very simple question: Will we see contagion, as we did with Fannie Mae (FNM), Freddie Mac (FRE), AIG (AIG), Bear Stearns, Lehman Brothers, and Merrill Lynch (BAC), or will this somehow be contained as a burp in the context of a much broader digestion?

Hoofy will offer that corrections must feel like something sinister if they're to be truly effective. He's right, of course, but I will again draw your attention to the savvy insight of Professor Peter Atwater, who made an incredibly salient point months ago. If sovereign lifeguards saved corporations from drowning in the first phase of the financial crisis, who is left to save the lifeguards?

A quick sniff around the world finds significant widening in credit spreads, including Hong Kong (+26%), Switzerland (+19.87%), Indonesia (+14.16%), Malaysia (+10.46%) and New Zealand (+9.99%) and global equity markets are off anywhere from 2-4%, (on top of yesterday's drubbings).

Not to be forgotten -- and it mustn't for it's a huge ingredient in this salty stew -- is the US Dollar. As I told Steve Forbes late last year, those "hoping" for a stronger greenback should be careful for what they wish, much like the "lower crude will be equity positive" crowd learned in 2008. With the dollar index up 8% from the December low, the crowded carry trade unwind may be upon us; should the greenback traction continue, asset class supply would likely follow suit.

The morning economic data was a confusing bag; the (stated) unemployment rate came in at 9.7% vs. expectations of 10% (those "underemployed" is closer to 20%) while nonfarm payrolls were slightly worse than expected and the prior month saw a significant downward revision.

Just as the better earnings we've recently seen didn't "matter"-and we again learned a lot just by watching (the price action)-I wouldn't read too much into any one economic report. With the weekend looming, social mood thickening and risk appetites abating, the forward focus of the market will fixate on our one simple question: is it real; or will it be contained?

Risk management over reward chasing as we together find our way.

Random Thoughts:

And Finally, Different Strokes for Different Folks!

Do you have a prostate the size of a honeydew and a head full of bad memories? Shake it off, friend; we're a few hours away from our requisite respite, one that will be chock full of championship pigskin and, quite hopefully, a semblance of balance. The purpose of the journey is the journey itself; let's make it count.

R.P.
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