U.S. stocks bounced for a second-straight session (just about recouping last week’s losses) after German Chancellor Merkel expressed confidence that the EU will find a solution to Finland’s objection to the Greek bailout plan and French bank executives dismissed concerns over their access to funding.  How many times have we heard that one over the past three years?  Bear Stearns and Lehman Bros. are the big ones that come to mind.

Industrials, basic materials and tech led the broad market higher.  Consumer staples, energy and utilities were the laggards but all of the major sectors did close in positive territory.

So while the prior day’s sweet little lie proved to be just that (apparently China had not agreed to buy Italian govies with one hand much less both), now we hear that the July 21 big bailout plan that would expand the EFSF (bailout fund) and save Greece from default is back in play.  We’ll see about that.

What Angela Merkel should probably concentrate on is persuading her own populace to accept the plan since the German’s can’t even ratify the proposal that expands EFSF.  And adding to the rumor mill yesterday was a Bloomberg report that mentioned Russia will use its international reserves to buy Eurobonds, if they get the EFSF expanded to issue such bonds.  Just chatter for now.  But imagine if the rumors of China and Russia “saving” Europe were true – the EU better be careful who they go begging to, as these two will undoubtedly seek demands that look nothing like the Pax Americana the Europeans have enjoyed for so long.  I’ll touch on a plan for the U.S. to bailout Italy out below.

Market Activity for September 13, 2011

Sector Activity for September 13, 2011

NFIB

The National Federation of Independent Business’s gauge of small business confidence fell for a sixth-straight month in August, declining further into territory that in the past has been accompanied by deep recession.  The gauge slipped to a reading of 88.1 from 89.9 in July – a level of 90 or below is a recessionary reading; the long-term average is 98.5; a reading over 100 is the norm for a recovery; we’ve never hit 95 during the current two-year recovery.

The internals were ugly as the expect a better economy, expect higher sales, and actual higher selling prices all tanked from already low levels.  Plans to increase inventories and positive earnings trends reading just ticked lower, but there were already at depressed levels for this point in an economic cycle.

The positives were the plans to hire and plans to increase capital spending readings both rose, but they too remain at low levels.  Until the actual earnings trend and expectations readings begin to turn around, the hiring and capital spending results won’t improve to the levels we need to boost this economy to escape velocity.

Import Prices

The Labor Department reported that import prices fell 0.4% in August (half of the 0.8% decline expected) but it was all due to the petroleum component as the price of crude slid as economic worries began to pop up again.  Excluding petroleum, import prices rose 0.3%.  On a year-over-year basis, import prices decelerated to 13.0% from 13.8% in July – this marks the first decline in the rate of import price growth since last year at this time.

There were other components that declined other than energy.  Import prices for food/beverages slipped 0.8% (+14.4% y/o/y); and paper imports were lower by 1.7% (+1.8%% y/o/y).  But finished and unfinished metals were up 1.7% and 2.3%, respectively (+12.9% y/o/y) and (+26.6% y/o/y); nonmetals materials up 0.3% (+7.5% y/o/y) and electrical equipment up 0.4% (+5.9% y/o/y).

I continue to believe that the overall inflation gauges (not so much real world inflation that consumers must contend with each day but the official gauges) will ease over the next few months even as there is evidence that price pressures remain sticky.  I just think the economic situation will deteriorate to the point that causes these gauges to decelerate in a meaningful manner.  However, the cost of food and energy remain too high and this will keep consumers in a tight spot due to the condition of the labor market.

Going Old School, and Makin’ Money

Here’s a proposal.  If I were in charge of things, I’d float a plan to issue $2 trillion in 10 and 30-year Treasury bonds (current yields are 2.02% and 3.36%) and offer Italy that we’ll buy all the 10 and 30-year bonds they would like to issue at a yields of 8% and 10%, respectively.  The Italian government would then be able to massively extend duration (their current problem is that the majority of their debt needs to be rolled over the next three years) and thus able to afford the higher interest payments.  In the process, the EU banking system would be saved from ever having to mark current bonds as they would be made whole on the current junk as it would immediately be refinanced.

But of course we’d need Italian land as collateral – I’ve never been to Italy but I here Liguria and Tuscany are nice.  The land collateral would be a requirement otherwise they may as well default because the interest rate that would be requirement to truly compensate us for the risk of lending to this fiscal mess would be well beyond their ability to finance.

This way we save Italy, in large part the EU banking system, and in the meantime create a massively positive interest-rate spread for ourselves.  Heck, we’ve been issuing trillions of dollars in debt over the past few years like it’s going out of style anyway, this may be the best $2 trillion we’ve spent in a long time.  While the terms come with an old school requirement of sovereign land as collateral, it would surely be much more pleasant for the Italians than what the Chinese and Russians would have in mind.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900