U.S. stocks began yesterday in negative territory but held to slight losses until weakening in the afternoon and sliding to its worst levels with about 45 minutes left in the session.  There wasn’t an economic release to trade on, but there wasn’t exactly any good news out either, just comments out of Europe touching on the latest bailout talks for Greece.

All of the 10 major industry groups closed down but consumer staples and utility shares were the outperformers.  Financial, energy and basic materials took brunt of the beating. 

It’s hardly taken much, while the broad market is flat since late January it’s only 6% below the recent high, for the financial markets to start talking about QE3 (by whatever form it may take, recall the June 1 letter) before QE2 is even done.  But this market has become addicted to stimulus and when it must eventually end, it’ll make for an ugly scene I’m afraid.   

The CRB Index closed down for the first day in three as 13 of its 19 components saw prices decline.  Crude ended the session at $98.68/bbl, down $1.55, and wholesale gasoline closed at $2.95/gal., down five cents. 

The latest on the Greek bailout is not really all that new as it involves the re-scheduling (or more euphemistically “re-profiling” as politicians continue to invent new financial terms in hopes of cushioning the blow) we’ve been talking about and has been reported in certain places for some time.  This means that Greek will have entered a technical default as the request will be for current bondholders to exchange their debt that will very soon be maturing for paper that will extend the maturity date for seven years – since   This all has to pass legislative hurdles in the various EU member countries, which shouldn’t be much of hurdle at all.  The opposition will come from the ECB (EU central bank) as the EU banking system would be forced to face the music – same interest rate with a longer maturity means a lower value for these securities; hence they’ll have to be marked down, unless regulators come out and state that the banks won’t have to mark these securities. 

In any event, the banks will be stuck with these bad assets for an even longer timeframe and that’s where one begins to worry about a Japanese-like scenario – two decades of lost growth, and counting. 

Market Activity for June 6, 2011

Sector Activity for June 6, 2011

This Week

We were without an economic release yesterday and it won’t be one of the bigger weeks in terms of data, but there are a couple of important readings we’ll receive – jobless claims, the trade figures and import prices will be the ones to watch. 

Initial jobless claims have bounced back above the 400K mark, averaging 429,000 over the past eight weeks – and there’s been no sign over the past two reports that the level is trending lower.  That’s what we’ll be watching for, clues we’re trending back down below the 400K mark rather than stuck here near 430K.  And while the continuing claims figures improved over the past several weeks, based on the new layoffs that the initial claims number shows is occurring, it suggests that the long-term unemployed are losing benefits without finding a job instead of the other way around. 

The trade figure for April will also be an important number to watch as trade has weighed on GDP for four of the past five quarters.  In this very weak economic situation, policymakers yearn for export growth to outpace that of imports and contribute to GDP.  Unfortunately, based upon the environment we’re in, we’re likely to see trade begin to help GDP, but it will be fleeting.  It looks like consumer activity will continue to weaken and import activity will follow.  This will cause trade to temporarily help growth, but the combination of Asian tightening and even weaker U.S activity will cause export growth to wane over the ensuing couple of quarters and unless something changes for the better then both figures will be on the decline.  Of course, even when both are declining, so long as exports are falling at a slower rate, trade will help GDP.  However, declining exports and imports also cause other aspects of GDP to falter. 

Finally, import prices have soared over the past six months, rising at 24% at an annual rate.  The year-over-year number has jumped to 11.2% from 3.9% back in October as a result.  It’s a dollar thing.  Weaker import growth will force import-price inflation lower again, but this is hardly the optimal way to get lower prices.  

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