Europe, Ratings Agencies In Focus as Markets Zig-Zag

Editor's Note: Our regrets and apologies to readers for missing our regularly-scheduled post after the close on Monday. There were negotiations from which we could not extricate ourselves in a timely manner.

Stocks took a dive on Monday, but rebounded sharply on Turnaround Tuesday, raising the indices nicely, but not back to levels seen before Monday's decline.

In the news on Monday was Europe (remember them?), once again rearing its ugly, socialist head over stories emanating from Spain over alleged corruption in the government of Prime Minister Mariano Rajoy (no, really?), which the Spanish PM has denied. While there's little doubt that corruption exists in all levels of government worldwide, especially at the sovereign or federal level, proving such becomes a task not for the feint of heart, as there are vested interests which will defend their salaries, positions and perks like maddened pit bulls.

Italy was also in the news Monday, as fraud and conspiracy charges are being levied against the world's oldest bank, Banca Monte dei Paschi di Siena, and are slowly but surely finding their way to the top of government, eventually to land in the lap of Prime Minister Mario Monti.

National elections are slated for February 24-25, with former Premier Silvio Berlusconi, 76, gaining on front-runner Pier Luigi Bersani. Unemployment and rampant waves of criminality are among major issues in Italy.

On the US home front, the Justice Department finally found some level of damming evidence over which to bring charges against Standard & Poor's. The rating agency is alleged with fraud over their ratings of sub-prime loans in the 2004-06 period, helping bring about the 2008-09 market crash and financial panic. The government is seeking $5 billion in damages.

While the DoJ has reportedly combed through two million pages of emails and internal documents, the real reason for the agency to now bring charges is that - after four months of negotiations with the firm - it wants and needs the money that fines will bring to the federal coffers. Besides that, statues of limitations on fraud are expiring quickly, prompting action. It's a shame this is happening so late in the game and also that the banks which originated and packaged the faulty loans aren't being prosecuted as well.

There was a rush of earnings news, mostly positive, though YUM Brands (YUM) was hard hit on Tuesday even though the company beat on both the top and bottom lines. At the heart of the company's issues is KFC, and tainted chicken sold though their Chinese outlets. The government is continuing its probe of the company which guided forward flat earnings due to the issues arising from the problematic cluckers. KFC is highly profitable in China. More than 40% of YUM's profits come from China.

Dow 13,979.30, +99.22(0.71%)
NASDAQ 3,171.58, +40.41(1.29%)
S&P 500 1,511.29, +15.58(1.04%)
NYSE Composite 8,920.13, +67.31(0.76%)
NASDAQ Volume 2,150,602,500
NYSE Volume 3,859,714,750
Combined NYSE & NASDAQ Advance - Decline: 4674-1828
Combined NYSE & NASDAQ New highs - New lows: 386-22
WTI crude oil: 96.64, +0.47
Gold: 1,673.50, -2.90
Silver: 31.88, +0.159

Stocks Whacked as Italian Bonds Blow Out, Euro Dives

Today was all about Italy, in the aftermath of Tuesday's tumultuous parliamentary session, Italian Prime Minister Silvio Berlusconi announced that he would resign after parliament passes economic reforms demanded by the European Union. He also promised not to run in Italy's next election.

While the initial market response to Berlusconi's departure was mildly positive, in the belief that a new government might make a difference, the bond markets broadly disagreed, sending yields on Italy's 10-year note to over 7%, a level broadly believed to be one at which Italy would not be able to finance itself. The country has built up a mammoth debt load of €1.9 trillion, and financial experts agree that at 7% on the 10-year and an even higher rate on the five-year, Italy will be unable to avoid either default or a bailout by EU authorities.

With the bond markets were facing up to Italy's demise, the Euro traded lower against other currencies, including the US dollar, which, in turn caused a collapse in US equity prices, culminating in a mammoth decline on the Dow of nearly 400 points or 3.2%, with the other major indices dropping by even larger percentages.

The conditions in Europe continue to deteriorate by the day, and the Italian problems could bring on an even more calamitous situation than has prevailed prior to this most recent debt catastrophe because Italy is simply too large for a bailout. There simply is not enough money available to the ECB or the recently-enlarged EFSF.

All other economic data and financial news paled by comparison to the realization that Italy would follow Ireland, Greece and Portugal down the debt-hole.

Every market sector was lower, led by financial stocks, conglomerates and basic materials, each of which registered a decline of more than 4.5 percent.

It was a dismal day for stocks, but one the market had been anticipating, though hoping it would never come. A default by a country the size of Italy may cause the Euro to become vastly devalued (and maybe even doom it as a viable currency), pushing up the US dollar, exactly the opposite of what the Wall Street insiders prefer. It's another seminal moment in the financial crisis that will not end.

Dow 11,780.94, -389.24 (3.20%)
NASDAQ 2,621.65, -105.84 (3.88%)
S&P 500 1,229.11, -46.81 (3.67%)
NYSE Composite 7,357.91, -314.00 (4.09%)
NASDAQ Volume 2,107,168,250
NYSE Volume 4,639,047,500
Combined NYSE & NASDAQ Advance - Decline: 634-5048
Combined NYSE & NASDAQ New highs - New lows: 39-97
WTI crude oil: 95.74, -1.06
Gold: 1,791.60, -7.60
Silver: 34.36, -0.79

Stronger Euro, Oil, US Stocks Make Wall Street a Winner

Whatever it is these Wall Street geniuses are smoking, they should be encouraged to pass some along to the rest of America, because, as Main Street struggles with high unemployment, stagnant wages, underwater housing and simply making ends meet, stocks just continue to run higher, as they did today.

Besides Italian President Silvio Berlusconi preparing to step down amid his country's burgeoning debt crisis, there wasn't much news on the European front, and even less news here in the USA, but traders saw fit to add to positions, or at least goose stocks a touch higher though still in the same range that's persisted since the end of July.

Almost all asset classes were marked up as the Euro gathered strength, pushing down the value of the dollar. That's all you need to know. Wall Street has this game figured out, like it or not, and they're not deviating from the game plan. Stocks are king no matter what happens in the rest of the world, until they're not, and we all know what happens then.

Meanwhile, the next crisis looming comes from - you guessed it - Washington, where lawmakers (yeah, that's a good term, like they make any that matter) were busy fighting with each other, as they normally do, just two weeks from the November 23 deadline for the "Super-committee" to come up with something along the lines of $2-4 trillion in budget cuts. Time is running out on the paid monkeys in congress and progress has been slow to nil.

If a deal is not reached by the deadline, some supposedly automatic cuts will take place, though it's almost a certainty that the wily legislators will find their ways around that boondoggle as well, leaving America in just about the same shape it was in before all the nonsense began over the debt limit. The free-spenders (all of them except Ron Paul and few others) got what they wanted in August: more money, and they will allow the rest of the country to burn rather than reach consensus and compromise.

They should all be kicked out of office, or, barring that, mostly ignored. As John Bogle said last evening on CBS news, "America is losing the ability to govern itself." Maybe that will be a better outcome.

Dow 12,170.18, +101.79 (0.84%)
NASDAQ 2,727.49, +32.24 (1.20%)
S&P 500 1,275.92, +14.80 (1.17%)
NYSE Composite 7,671.91, +81.48 (1.07%)
NASDAQ Volume 1,862,988,625
NYSE Volume 3,908,488,000
Combined NYSE & NASDAQ Advance - Decline: 4134-1511
Combined NYSE & NASDAQ New highs - New lows: 124-66
WTI crude oil: 96.80, +1.28
Gold: 1,799.20, +8.20
Silver: 35.15, +0.33

Euro Leads Stocks Lower, Then Higher; Income Disparity Hits Young Hardest

There are plenty of correlation trades that make plenty of sense, but perhaps the only one worth watching - from a macro perspective - is the Euro-Dollar trade because of its unique correlation to the US stock market.

Today was a prime example of how that trade controls markets, from weak hands to strong, from dead to money to risk-be-damned, full speed ahead.

As trading opened for the week, the Euro was under a great deal of stress, not only from the continuing crisis, but by way of the dual southern European national plight being waged in Greece and Italy, where both leaders - George Papandreou of Greece and Silvio Berlusconi of Italy - were rumored to be ready to step down at the drop of a falafel or calzone, so precarious their countries' dilemmas.

While Papandreou finally agreed today to step down from his post as Prime Minister in an effort for the country to form a unity government (whatever that may mean in a nation on the brink of dissolution), Berlusconi seems locked into a similar fate, given the debt issues facing his country. Bond yields have risen dramatically on Italy's benchmark 10-year bonds over recent weeks and the spread between the Italian 10-year and the 10-year German Bund hit 490 basis points today.

Also weighing on the Euro was the nearly failed auction of Euro 3 billion in bonds by the EFSF, the entity created to save European banks from catastrophe. The auction was lightly subscribed and only 2.5 billion of the bonds were sold - at a price 171 basis points over the Bund - the rest going back to the issuers at a hefty premium. The EFSF does not have enough heft to buy Italy's bonds, putting Berlusconi and his government in a very precarious position.

As the Euro sagged in the morning so did stocks in the US, as every hedge fund manager worth his or her salt is short the US dollar, a trade that provides cheap dollar liquidity to US markets but is also inherently ruinous to the long-term survivability of the world's reserve currency. As the day wore on in Europe and issues began to straighten themselves out, especially in the case of Greece, the Euro began to rise, taking the dollar down and US stocks up. Simple, Easy. A piece of cake.

The real problem with this trade - as it has been all along - is that the US is probably in better shape than Europe, which has been on the brink of a currency collapse for months, making the premise for being short the US dollar somewhat specious, or perhaps totally false, a straw man trade designed only to make the impression that all's well in the USA and keeping stocks trending higher.

Therein lies the fatal deceit of the short dollar trade. If somehow the Euro must be kept propped up - when it's true value is somewhere closer to parity with the dollar than the current 1.38:1 ratio of dollars to Euros - then the inevitability of the failure of the Euro as a currency, the EU as a common trading bloc and a massive decline in US stocks must occur. This is, without a doubt, how tightly intertwined markets now are, dangerously so, and the heads of most US banking, trading and political entities are well aware of this situation.

When the Euro blows, which it almost certainly will, US stocks will follow, and isn't that a nice, pleasant note upon which to start off your week? Of course, it gets worse. Because when stocks drop, what the middle class is going to do will make the continuing "Occupy" protests look like a kindergarten cookies and milk party. Nothing riles up a people than having their wealth pulled out from under them, and, while the bankers and politicians have thus far succeeded in keeping complete collapse a fringe argument, Europe's failings could quickly become an American nightmare.

It was revealed today just how badly broken the American system has become. Pew Research Center reported that the wealth disparity between young and old has reached its highest level ever, with "Households headed by a person 65 or older have a median net worth 47 times greater than households headed by a person under 35."

Unarguable as that fact may be, it exposes the soft underbelly of American life, wherein the elderly, otherwise known as collectors of entitlements, such as Social Security are prospering at the expense of the young, who must work hard and pay bills, debt and support their elder countrymen. It's as unfair a situation as the top 1% holding 40% of the nation's wealth, and perhaps worth fixing, with means testing, rather than turning our nation into an armed camp of elderly versus youth.

In between are the Baby Boomer generation, the first post-WWII generation to begin reaching retirement age. Some have saved, others not so much, but, as a whole, the largest segment - those born between 1950 and 1960 - are still years away from collecting a Social Security check. If one were to take a bet on just how much a person 55 to 60 years old today should expect as a monthly stipend at age 65 or 67, it would probably be wise to cut that number down by 25-45% from current expectations.

If one is inclined to believe the situation is tough right now, imagine another 50 million expecting to receive Social Security checks in coming years. The math simply does not add up unless those paying into the system are going to be taxed at 80% of their wages. It's just the truth, we're headed for even harder times ahead.

Dow 12,068.39, +85.15 (0.71%)
NASDAQ 2,695.25, +9.10 (0.34%)
S&P 500 1,261.12, +7.89 (0.63%)
NYSE Composite 7,590.43, +38.20 (0.51%)
NASDAQ Volume 1,735,945,625.00
NYSE Volume 3,629,465,250
Combined NYSE & NASDAQ Advance - Decline: 2773-2795
Combined NYSE & NASDAQ New highs - New lows: 88-64
WTI crude oil: 95.52, +1.26
Gold: 1,791.10, +35.00
Silver: 34.83, +0.74

Greece, Italy Send Stocks Overboard Again

Doings on the Continent have been keeping traders on their toes for months, but today's antics bordered on the bizarre.

First Greek Prime Minister George Papandreou called for a public referendum on the latest bailout plan, just approved days ago in late-night negotiations by European leaders. Making matters even more confused, Papandreaou scheduled the referendum for some time early next year, which would hold global markets hostage for months while the Greeks decide their own fate.

A "NO" vote on the austerity plans tied to Greece receiving more funds from the EU and IMF, would scuttle months of planning and negotiations and would likely result in Greece being tossed from the European Union. Such an outcome would surely roil markets terribly, though the mere thought of waiting two to three months for what almost certainly would be a negative result sent shock waves through European bourses and US exchanges today.

Reacting to the news, German Chancellor Angela Merkel and French President Nicolas Sarkozy planned emergency talks with leaders of the EU and the IMF, though it was not clear whether Mr. Papandreou would be invited.

And, if Greece's gambit wasn't enough to turn investors away, there's a confidence vote set for Friday, in which Papandreou's Socialist Party could lose control of the government, which it holds by only two seats in the parliament. The situation in the Mediterranean nation have moved from bad to worse to bizarre over the past few months.

In Italy, despite the agreements worked out last week, bond yields continued to spike higher, with the 10-year Italian bond reaching upwards of 6.22%, a more than 400-basis point difference over the stable German Bund. The bond spread blowout added to fears that Italy might be in more danger than previously thought - which, in itself was already severe - as the Italian government has to roll over nearly $2 trillion in bonds over the next year, a hefty sum.

Under the leadership - if one can call it such - of Prime Minister Silvio Berlusconi, Italy has failed to act on measures set down by the EU in August and leaders of two main banking and business associations have called on the prime minister to act swiftly or step aside. For his part, Berlusconi has made promises to act quickly, though many doubt he has the emotional or political will to implement the harsh austerity measures called for by other European leaders. As can-kicking goes, Berlusconi is world class, a foot-dragger with a penchant for putting off the obvious, though most of the other leaders in the EU have displayed similar inability to act courageously or quickly.

Also nagging US markets was the early-in-the-day report on ISM Manufacturing Index, which showed a marked decline, from 51.6 in September to 50.8 in October, another sign that the US economy was in danger of falling into another recession.

Stocks were pounded right from the opening bell, though a late day rally was attempted and then scuttled as news from Greece suggested more of a guessing game than any kind of deliberate policy action.

Speaking of policy, the Federal Reserve is locked in meetings on rate policy, which will be announced at 12:30 pm Wednesday, a deviation from the usual 2:15 pm time. The policy decision will be followed by a press conference with Fed Chairman Ben Bernanke. While it is virtually assured that the Fed will not change the federal funds rate from levels approaching zero, some are betting that another round of QE will be announced in some form, though the effectiveness of such an undertaking - already tried twice since the 2008 financial crisis, without effect - is very much in doubt.

Prior to that, ADP will release its private payroll data for October, which serves as a proxy for the "official" non-farm payroll data release by the Labor Dept. on Friday.

Not surprisingly, some of the biggest losers on the day were the large banks, such as Wells-Fargo (WFC), Bank of America (BAC), JP Morgan Chase (JPM), Citigroup (C) and Goldman Sachs (GS), the usual culprits now caught between a sagging economy, exposure to Europe and the unwinding of MF Global, which filed for bankruptcy protection on Monday.

The silver lining for consumers came from a two-day rally in the dollar - mainly against the Yen and Euro - sending commodity prices lower across the entire complex.

Dow 11,657.96, -297.05 (2.48%)
NASDAQ 2,606.96, -77.45 (2.89%)
S&P 500 1,218.28, -35.02 (2.79%)
NYSE Composite 7,338.48, -226.55 (2.99%)
NASDAQ Volume 2,314,571,500
NYSE Volume 5,656,978,000
Combined NYSE & NASDAQ Advance - Decline: 859-4813
Combined NYSE & NASDAQ New highs - New lows: 24-89 (flipped)
WTI crude oil: 92.19, -1.00
Gold: 1,711.80, -13.40
Silver: 32.73, -1.62