U.S. stocks spent most of Monday’s session in negative territory as European debt/banking concerns continued to grip the market.  However, a rally in the final minutes pushed the major indices to meaningful gains on rumors ranging from an imminent announcement of more QE to China planning on buying large amounts of Italian bonds.  I’ll touch on this hearsay below the jump.

Tech, financials and consumer discretionary shares led the late-session rally.  Basic material, industrials and staples were the losers.  The materials group (the stock market’s main commodity proxy) was the only sector to actually close in negative territory, which means the market didn’t put much credence in that imminent QE announcement.

Still, even as most of the commodity complex traded lower, the prices of corn, crude, coffee and cattle all rose – how do you like that, everything consumers use the most of in their daily lives. Three of these four important commodities remain at or near all-time highs.

And the one that doesn’t -- crude -- continues to hang around that $90/bbl level, closing at $88.72 yesterday.   The price of West Texas Intermediate (WTI) should be below $50 based upon economic reality.  Even if China is buying much more oil these days, that economy is 40% the size of the U.S. (and surely actually much less when factoring in their “tertiary” component of GDP, which is totally made up, but that’s for another discussion); one can’t justify $90 crude in this environment.  If monetary policy were not so aggressively easy, this would not be the case.

Well, here comes October 1 right around the corner and we don’t have agreement on the fiscal year 2012 budget.  It’s only been six weeks since the debt-ceiling battle raged and the government faced a shutdown and now with no deal on the budget it will take another CR (continuing resolution) to fund the government for another few weeks.

And with just six weeks passed, here is the President attempting to engage in another $450 billion in deficit spending – driving Social Security further in the hole and zero reductions in spending.  What we need is to slash non-defense spending, and drive tax rates on income and capital much lower while eliminating the bevy of loopholes and deductions.   What we need is a pro-growth energy policy that doesn’t just unlock our production capabilities, but creates millions in high-paying manufacturing jobs in the meantime.  What we need is serious regulatory reform that offers global businesses to headquarter and increase their industrial presence right here in the U.S.  Instead, we do the opposite.

Market Activity for September 12, 2011

Sector Activity for September 12, 2011

Rumors

Touching on those two rumors:

Don’t know what we’ll get from the Fed next week as their September 20-21 meeting comes to a close – they’ll surely announce some kind of move but I don’t’ think we’ll get another round of QE just yet.  While the rumor appeared to suggest that something was imminent, as if an announcement were coming today, it was pretty ridiculous with a meeting just next week.

On the rumor that actually appeared to spark the late-session rally in stocks, there was talk that the Chinese were thinking about buying massive amounts of Italian bonds.  The market ran with this hearsay even as Italian Finance Minister Tremonti stated that Asians are reluctant to buy their bonds until the ECB begins to buy more (providing some insurance to the near-term value of those bonds at least).  What actually occurred was the Italians were attempting to persuade the Chinese to buy their bonds, not the other way around.  And this morning as the Italian bond auctions didn’t go so well (weak demand and higher yields even as the ECB is in there buying) we see that the rumor was unfounded.

Tell me lies, tell me sweet little lies.  This is what the market seems to go on these days as traders are willing to send stocks higher on evidence that is hardly credible.  Wall Street money managers are certainly in desperate hope mode.

Man Up and Just Get to It

In general, the EU continues to kick this can down the road, but they’re running out of pavement.  Bondholders and EU banks are going to feel acute stress from a Greek default and restructuring, but delaying it will do no good.  They need to get to it now.

Look on the bright side, Greece will have a much easier debt burden to deal with after a restructuring, giving it a least a chance at decent growth.  And after a period of a couple of months, they (the EU) may even be able to minimize the domino effect that Spain and Italy will follow – in the meantime the ECB will be buying enough bonds to hold off a run on the bonds of those governments.  Eventually though, the EU will need to be throw Greece out of the eurozone as they’ve shown zero semblance of fiscal order.   Then again, you can say this about many governments within Europe, and unfortunately beyond.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900