U.S. stocks halted a three-session winning streak even as the EU moved a little closer to agreeing to the July 21 expansion of the EFSF (EU bailout fund) – and have all but made it official this morning with the German vote.

So why did stocks sell off?  Well, no one cares about the July 21 proposal any longer because the market had moved onto hoping that something much bigger and better would ensue – a plan that would leverage the EFSF to the hilt and able to make all of the eurozone’s troubles magically disappear.  But after German Finance Minister Schauble called the plan (supposedly devised by U.S. Treasury Secretary Geithner) to massively leverage the EFSF a “stupid” idea, it pretty much put  to bed what the market had rallied on over the previous couple of sessions.

Telecoms, utilities and tech outperformed the broad market – although even these groups lost ground too.  Basic materials, energy and financials led the market lower.

The CRB Index retreated for the eighth session in 11, sending this measure of commodity prices back to the 303 mark – down 17% from the April multi-year peak.  This isn’t a scientific analysis, but I watch to see of the CRB holds that 300 level.  If it does, it means the risk trade probably has some intermittent life.  If it slides down to 275, it probably means traders will run from risk for an extended period…until of course the Fed comes back with more QE, at which points commodities will rally again.  (And that may not take too long as Bernanke gave a speech last night in which he hinted the Fed is willing to move deeper into the domain of unconventional policy action.)

More beyond the link…

Market Activity for September 28, 2011

Sector Activity for September 28, 2011

But back to Europe as that is what everyone is focused upon.  The eurozone’s magical mystery tour appears to be coming to an end as rumors give way to reality.  This morning the German parliament passed yesterday’s bailout plan (the July 21 proposal to expand the EFSF so that it can buy bonds on the secondary market and extend credit lines to banks).  But the plan only expands the fund to €440 billion when over a trillion euros are needed – and even that wouldn’t solve the problem, just delay its shelf life.  And it appears that the EU really didn’t have a big-bang plan in place, which is what the market had rallied on over the previous few days.

What will be interesting to watch is how the German people respond to this latest vote.  It’s been reported that 75% of Germans are against bailing out the PIIGS, specifically because it means they’ll pay the cost in terms of a lower credit rating and future taxes.

In fact, it’s being reported that at least seven of the 17 euro-zone countries are demanding more private sector involvement – meaning those holding Greek debt will have to take a larger haircut.  This of course is the way things used to work when an entity could no longer pay its bills (debts restructured at deep discounts) until we began to suspend reality with this culture of nonstop bailouts.  But reality will indeed prevail again, and that means Greek will ultimately default and those holding their junk paper will take deep losses.

And speaking of the PIIGS, Spain and Italy have extended the ban on shorting financial stocks, which was supposed to end this month.  Not that that short-selling ban stopped European financials from falling off a cliff as these names have gotten torched over the past two months.  Short selling can’t stop investors from outright capitulation.

Mortgage Apps

The Mortgage Bankers Association reported that their applications index jumped for a third-straight week, but continues to get most of its boost from refis.

The overall index rose 9.3% last week, which follows a 10% increase in the prior week and a 6.3% rise the week before that.  Apps to refinance a mortgage rallied 11.2% as the average contract rate on the 30-year mortgage fell back to 4.24% (the all-time low of 4.17% was hit two weeks ago).  However, apps to purchase a home rose just 2.6% despite the ultra-cheap cost of borrowing.  These apps remain at a 14-year low.

Durable Goods Orders

The Commerce Department reported a durable goods report for August that was mixed as overall orders fell 0.1%, ex-transportation orders also fell 0.1%, but the capital-equipment spending proxy showed a 1.1% gain – and the July number was revised better to show a 0.2% decline rather than the 1.5% slide initially reported last month.

Durable goods orders continue to trend higher, but at a very low rate.  Ex-transportation orders (which is a more important number to watch than the headline figure because it excludes the extremely volatile commercial aircraft component) are up just 2.7% thus far this year on an annualized basis.   This reflects the weak state of demand for equipment/appliances that are meant to last at least three years.

And while the business-equipment spending proxy (technically known as non-defense capital goods ex-aircraft) looks better, it has cooled substantially from what was a strong bounce a year ago as it was recovering from the deep lows of the financial crisis.  These orders are up just 5.5% at an annual rate this year, which is insufficient to offset other weaknesses within the economy.

Corporations have lots of cash they could deploy, but they need relative certainty and they need to see strong growth in order to put this cash to work.  Business spending will boom again, and it will help drive the economy out of this funk, but policymakers need to get a clue and implement the policies that incentivize businesses to spend.  (And even more important, move to a regulatory stance of common sense that no longer strangles small business, which is where most of the job creation will be generated, but that’s beyond the specific topic.)  As more spending on plant and equipment occurs, we’ll see substantial job growth ensue and that will allow for substantial repair within household balance sheets.  Alas, it appears we have a ways to go before we get there.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900