U.S. stocks bounced between gain and loss on several occasions again yesterday as traders paid close attention to the vote going on in Slovakia (all 17 countries must ratify the July 21 proposal to expand the EFSF and Slovakia’s the last to vote).  Never mind that the July 21 expansion of the bailout fund is so yesterday as EU policymakers have moved on to propose an even bigger (more indebted) bailout fund, but to get there the first proposal must be enacted.

The Slovaks ended up rejecting the proposal as they refuse to take on more debt to bail out the profligate governments, while the leadership.  But have no fear bailout fans, it’s only a matter of time until the larger countries get the Slovakian president on the line to convince him that a yea vote is in their “best interest.”  And indeed we now know they’ll hold more votes until they get it “right,” which is why European bourses are higher this morning as are our futures.

When the world watches Slovakia so closely (an $89 billion economy), it’s just one more sign that markets are fragile – of course the erratic market activity of the past few months is the ultimate sign.  There was more news out of Europe to talk about, I’ll save it for below.

The broad market managed a fractional gain in the end, but not all major indices were able to close higher yesterday as the Dow Industrials stumbled in the final minutes.   Activity was quiet though as volume came in 25% below the average of the previous week.

The Treasury market continues to sell off (yield on the 10-year back to 2.21% from the 1.75% just eight sessions back) as that market catches up to the risk-on trade that’s been evident in stocks over the past week – bonds were closed Monday as the broad stock market rallied 3.4%.

Market Activity for October 11, 2011

Sector Activity for October 11, 2011

$11 Billion More to the Dead Man of Europe

The troika (EU/ECB/IMF) gave the impression that Greece will get the sixth tranche of the bailout funds that that country needs to keep paying their bills.  They also stated that the 2011 fiscal austerity target is no longer within reach (but everyone knew this already) and they’re “noting” (whatever the heck that means) that Greece’s deficit/GDP ratio has been revised 50% larger than previously believed.

This last point is the important one.  Greece has made zero progress in getting its budget in a position that will allow it to stand on its own – under their current debt burden they of course cannot stand on their own, it will take serious restructuring of that debt to even give the county a chance to get things in order again.  But it is this lack of action, while freely accepting more bailout funds, that is currently incensing the German populace and it’s only a matter of time before the ultimate backstop says: No more.  At that point, we’ll see the mark on Greek government bonds get chopped to at least a 50% loss (currently the banks have supposedly prepared for just a 21% reduction) and the European banking system will then be fully nationalized as their capital positions erode further.

NFIB Small Business Optimism

The National Federation of Independent Business reported that its gauge of small-business sentiment improved marginally but remains in deep recession territory.

The measure rose 0.8 point to 88.9 for September from the 88.1 in August.  For perspective, a level of 90 or below is solidly 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 and in fact this is the longest stretch of time below 95 in the measure’s 37-year history.

Six of the 11 components of the survey improved during September, but they were all of the measures that had slid to especially deep levels in August.  The components that I view as most important – plans to hire, increased capital spending, and positive earnings trends all declined for the month.  It was basically the expectations readings that improved, but again, they remain at low levels as the improvement was from deep marks in August.

So the overall survey remains at levels that have accompanied periods of economic contraction in the past, but we’re not in technical recession right now as the GDP figures continue to print positive readings.  But give it time.  Think about the fact that we’ve slipped back to sub-1.00% growth over the previous two quarters and for the past year (even assuming we get a 2.0% print for Q3 GDP) economic growth has slowed to a 1.4% rate even as the Fed is more aggressive that at any time in its history.  The Fed can hold off technical recession for a while, but they cannot help the environment for small business when households have neither the ability nor the desire to expand credit.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900