U.S. stocks sank yesterday on concerns that Greece is headed for default sometime over the next few months and economic forecasts continue to be revised lower.  Earlier losses were pared though in the final hour – the Dow Industrials were down 250 points at the day’s worst but closed off just 108 points --on word that Greece moved closer to meeting requirements of the EU, ECB and IMF in order for them to get the next tranche of bailout money.

That’s a hilarious.  Greece doesn’t have the ability to service its debt because its economy doesn’t have the ability to grow, much less at a level that provides the revenues to meet its obligations.  For stocks to rebound on that news makes zero sense to me.  However, this is a market that applauds delay, even if delaying an adverse outcome is just a few months.  Further, in a zero-interest rate environment, you’ll have traders willing to stick around and take on more risk than would otherwise be the case.

So I guess it shouldn’t surprise me that much, but with the European and U.S. economies on the verge of recession, smothered by debt and housing markets that are in shambles, and the financial sector still on life support three full years following Lehman, I continue to expect significant downward pressure on stock prices to occur.

Consumer discretionary and tech shares were the best-performing groups – strange group of leaders for an overall down session.  Financials are back to getting clocked again, by far the worst-performing group yesterday.  Energy and basic materials also lagged the broad market.

Energy prices did follow stocks lower as the economic scene diminishes demand expectations.  Crude fell $2.65 to $85.30/bbl (although I bet it would be closer to $50 in this environment if the Fed weren’t so aggressive and expected to become more so) and wholesale gasoline declined eight cents to $2.70/gal. (national retail average is $3.58).  It’s good to see energy prices come lower, but so long as weakness is the only factor that brings these prices down, it’s pretty ridiculous to believe that these lower prices alone will provide much benefit to the consumer.

Market Activity for September 19, 2011

Sector Activity for September 19, 2011

There’s Only One Way Out 

So Greek default concerns returned for the umpteenth time pushing stock prices back down and bond prices back up (yields down) as the meeting of EU finance ministers failed again to come up with a solution over the weekend.  What’s occurring right now is pressure on the Greek government to dramatically cut expenses, which means big cuts in government payrolls if they abide.  (And that’s what happened late in yesterday’s session, or late last night Athens’ time, Greek officials stated they’re getting closer to those demands.)  But we’ve seen this scene play out before and it always ends the same way because Greece is smothered by its debts.  The only solution is to default and restructure those debts, but no one wants to deal with the short-term ramifications; instead policymakers decide to give up longer-term growth prospects.

Bailout mania has a trapped in time, constantly revisiting the same old story.   Until we get on with it – restructure the debts that need to be restructured and accepting the time it takes to pay down those that can be repaid, developed economies are going nowhere.

NAHB Housing Market Index

The National Association of Home Builders gauge of market confidence slipped to a reading of 14 for September from 15 in August.

Just to put this number in perspective, a reading below 50 means that more respondents believe home-building conditions are “poor.” Thus, a number in teens means conditions remain dreadful.

The gauge of buyer traffic within the overall survey dropped two points to 11 in August, which is the lowest level this year.

The troubles within the new-home segment are the same that plague the economy as a whole – too much debt.  This has caused a huge supply of distressed properties within the previously-owned side of the market.  These distressed properties, arriving via the disposition of homes (foreclosure), are not only killing the new-home market by way of supply but through its byproduct of much lower prices – prices with which homebuilders cannot compete.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900