U.S. stocks began Monday’s session lower, but a mid-day rally ensued that extended throughout the afternoon resulting in a positive close.  It was a rally without conviction though as relative safe havens like health care and telecoms led the way, while a cyclical like industrials was the worst-performing sector – and all on light volume.

Continued concerns about Europe had us down in the morning session, but yet another rumor about changing the structure of the bailout fund induced the rally.  The latest talk was really nothing we haven’t heard before, creating a subsidiary of the EFSF that would attract external capital (basically by providing guarantees to investors).  The hope is this would beef up the fund to make it large enough to handle a crisis that has now engulfed Italy.  I wouldn’t go holding your breath on this one.

So even as stock prices ended higher, the correlation breakdown between stocks and crude oil remained evident in the morning session -- stocks were down but oil traded higher.  For the past week, we’ve discussed how the price of oil has continued to bounce even as stock prices pulled back -- an unusual development these days as the two have shown a very positive relationship over the past couple of years.  It appears renewed geopolitical risks are behind this latest move in crude as Israel discusses pre-emptive strikes on Iranian nuclear facilities – a discussion that appears to have credence as the IAEA is expected to report (tomorrow) that Iran is very close to nuclear weaponization.   Crude closed at $96/bbl yesterday.

Shifting to the circus zone, Greek PM Papandreou agreed to step down as the major parties agreed to form a national unity government, accept additional bailout funds and remain in the eurozone.   But this accomplished nothing in resolving uncertainty over the issue as an elected government will take over in February (that’s when elections are supposed to take place).  That new government may very well choose to leave the zone so the only thing that has occurred is kicking the issue down the road a couple more months.  More on Europe and the return of 666 below the click…

Market Activity for November 7, 2011

Sector Activity for November 7, 2011

And then we have the $2 trillion gorilla in the room:  Italy.  The eurozone bailout fund is not large enough to cover the zone’s third-largest economy, and with the Italian 10-year bond yield rising well-above the 6% level it’s evident the crisis has moved to Italy.

A rate of 6% for 10 years may not sound that rough, but for an economy that’s averaged just 0.8% annual growth since 1992, it’s a huge nut to manage, particularly since their debt/GDP ratio sits at 125%.  In fact, the nefarious 666 has made its return via this yield (Italian 10-year settled at 6.66% yesterday, a record wide against German bunds; you may recall the last time it presented itself was when the S&P 500 fell to that number on March 9, 2009).

This is the ultimate problem for Europe.  As a result, it is extremely likely the ECB will begin a more aggressive approach and buy Italian debt with both hands, which will bring about additional issues down the road.  You can’t stop the market from taking asset prices to levels that correspond with the reality on the ground without opening up all kinds of unintended consequences.  These consequences will have to be dealt with here at home too as our central bank has circumvented the U.S. bond market since 2009.

Consumer Credit

The Federal Reserve reported that consumer credit rose 3.6% at an annual rate in September, up $7.4 billion in dollar terms.  This follows a $9.7 billion decline in August.

So this report measures consumer borrowing, excluding mortgage debt, regarding both revolving (credit card) and non-revolving (largely auto and student) loans.  The non-revolving sort is what’s been driving credit higher since the overall measure began to increase again several months back – auto loans have been rising at a good clip and student loans are through the roof.   This student debt is going to come home to roost if we don’t get this job market turned around, but that’s another discussion.

Revolving debt continues to be on the wane as consumers have reduced credit-card balances for the better part of the past three years – declining 32 of the past 36 months.  That’s a good and necessary development, but much more is needed and in the meantime we feel the effect via weaker GDP readings.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900