U.S. stocks slid yesterday as an Italian debt selloff sparked the decline – those bonds have been getting hit for a month now but the back up in yields that occurred yesterday was unsettling.  The market extended the losses in the afternoon as it became obvious the eurozone is crumbling.  Word is Merkozy are working on a dramatic change to the zone, ridding themselves of the troubled southern countries.   (Even with all the fantasizing, the belief that the financial crisis actually ended, I’m still amazed that the market has yet to price a euro collapse in, it’s been obvious for quite a while now.)

As one would expect, the areas of relative safety outperformed.  Telecoms, utilities and staples were the relative winner, but even these groups closed lower by 2%.  Basic materials, financials and energy were the hardest hit.  Declining stocks whipped advancers as just 50 of the 1,861 stocks in the NYSE Composite closed higher.

On a positive note, the fixed income side of the portfolio works well on days of fear.  This is the hedge; it’s more than just about the rate one earns on these securities.  

While Italian yields soared, they eased back a bit late in Europe’s session (they close at 10:30am STL time) as ECB President Draghi came to the rescue by announcing more bond-buying is on the way.  And it appeared that Italy got word the ECB would come in and do some buying as a headline flashed across my screen at 9:30am stating they’ll hold today’s scheduled bond auction – they’ve canceled a number of auctions heretofore based on much slighter backup in yields than what we saw yesterday.  I highly doubt today’s auction would be held if not for some signal from The Draghi.  And he didn’t fail to deliver as they bought enough bonds on the secondary market to get the Italian yield curve back to the 6% handle – all points of the curve were over 7% yesterday.

But can the ECB really save the eurozone?  More below…

Market Activity for November 9, 2011

Sector Activity for November 9, 2011

No more than Bernanke can save the U.S. from our debt problems.  But they sure can delay the hurt; the problem is it prohibits the market from forcing both governments and households from getting their fiscal situations in order.  What we get is a period of very slow growth (which we’ve been witnessing) – a level of growth that is neither enough to incite substantial job growth nor enough to withstand an exogenous shock.   I cannot emphasize this enough and it’s exactly the reason I’m opposed to all of this intervention.

But strictly back to Europe, I think it’s adios for Italy.  Not right away, but over time there is just no way the Italian people will choose the total economic restructuring that’s necessary to get that country growing again – keep in mind the generational hardship, the sacrifice that must be accepted to pave the way of a better future for subsequent generations.  I want to believe we still have this willingness here at home, but from all we’ve seen from Europe one cannot believe they do.  Instead, the troubled euro-zone countries will pull out of the zone and bring back their legacy currencies to devalue.  It’s a matter of time before the euro system is done, at least as we know it; Milton Freidman predicted such in 1999 when the euro was introduced.  If it’s not full collapse, then the zone will be much smaller, consisting of the northern and some eastern countries that at least have some semblance of common sense. 

Mortgage Apps

The Mortgage Bankers Association’s applications index rose 10.3% last week, which makes for the third-straight week of increase.  An average contract rate on the 30-year fixed mortgage of 4.22%, down nine basis points from the week prior, helped fuel activity. 

Both apps to purchase a home and refinance a mortgage rose as the former increased 4.8% and the latter by 12.1%.  Purchases have bounced nicely over the past four weeks after hitting a new 15-year low in the week of August 18.  But as the long-term chart below illustrates, there’s a long way to go. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900