Daily Investment Interpretations

November 9, 2011

2011-11-9: (Wednesday Night): Stock market indices were clawed and bitten by the bear today, with the Dow down almost 400 points: Stocks drop more than 3%, Stocks Crushed Over Euro Zone Turmoil, Stocks get hammered by Italy fears. The NASDAQ Composite shed 105.84 points (-3.88%) to close at 2,621.65. The Dow free-fell  389.24 points (-3.2%) to 11,780.94; the S&P 500 plummeted 46.82  points (-3.67%) to settle at 1,229.10. Oil rose to 97.00; gold slipped to 1,787: Gold and the Dot.coms: Comparing the Bubbles, Gold futures gain but fail to close above $1,800. The VIX catapulted 8.68 points to 36.16.
    Today's angst is about Italy's soaring interest rates on government bonds, and about an intimation by Germany's Chancellor Angela Merkel that major changes in the Eurozone Treaty were imminent. Last night I included the Marketwatch article: "Is 7% Italy's tipping point? This article asks whether a Ĺ % rise in 10-year bond interest rates will be enough to trigger a Grecian-style meltdown. To quote from the article: 'If rates IT:10YR_ITA get above 7%, 'the markets will perceive that the story for Italy will become like the story for Greece. There has to be some change there and the problem is that unlike Greece, Italy is huge. Thereís no real fix for Italy.'  Barach continued: 'Greece is to the EU like Chicago is to the United States. Italy is probably like California and New York combined. The EU has to stop dithering and take some decisive action, but it looks like they just canít get their act together. By the time they decide to make a decision it might be too late to put out the fire.'Ē
   The best interpretation available to me is Paul Krugman's: Permanent Link to This Is The Way The Euro Ends, with particular attention on the two articles he quotes, one by Martin Wolf in the UK's Financial Times: Thinking through the Unthinkable, and John Quiggins in the U. S.' New York Times: Europe's Crisis Enabler: The Central Bank. In his article, Dr. Krugman says, 
    "I believe that the ECB rate hike earlier this year will go down in history as a classic example of policy idiocy. We would probably still be in this mess even if the ECB hadnít raised rates, but the sheer stupidity of obsessing over inflation when the euro was obviously at risk boggles the mind.
    "I still find it hard to believe that the euro will fail; but it seems equally hard to believe that Europe will do whatís needed to avoid that failure. Irresistible force, meet immovable object ó and watch the explosion.
    Thinking through the Unthinkable examines four scenarios proffered by New York University's Stern-School-of-Business Professor Nouriel Roubini for dealing with the current "Eurocrisis".
    Europe's Crisis Enabler: The Central Bank  This article, by Johns Hopkins' John Quiggins, echoes Paul Krugman's theme that the European Central Bank must be the lender of last resort. Professor Quiggins attributes the intransigence of the ECB to Jean-Claude Trishet. 
    Drawing on years as a NASA employee, Mr. Trichet sounds to me like the bureaucrat's bureaucrat. During my 22 years with NASA, I encountered a few powerful men at NASA Headquarters who were more  concerned with the rules of the game and their own careers than the welfare of their program areas. They were lackies... toadies... rather than independent agents. 
    Unlike the U. S. Federal Reserve, which has a dual mandate of fighting inflation while also curbing unemployment, the ECB has only one mandate: fighting inflation. And hey! that's easy if you don't care about destroying Europe! Just raise interest rates high enough to strangle European economies and you can bring inflation to zero while simultaneously destroying them.  
    The Wikipedia article on Mr. Trichet says, "Trichet has been criticised for the ECB's response to the Great Recession, which emphasised price stability over recovery and growth.[4]" Reference $ points to "An Impeccable Disaster", in the September 11 issue of the New York Times. 
    Five reasons Italy is not Greece  
    Significant as Italian interest rates are to the long-term picture, the actual cause of today's debacle may have been that Angela Merkel's Talk of Changes to Eurozone Treaty Puts Default Risk Back on the Table. Presumably, this was leaked on purpose in order to prepare Europeans and non-Europeans for allowing European peripheral countries that are in financial trouble to exit the use of the common currency without necessarily quitting the European Union. This has spooked investors, and means the "risk trade" is back on. 
One fact is clear: Italy's bond rates are a huge problem, and something other than maintaining the status quo will be required to solve it.
    Is this Europe's 'Lehman Brothers' moment?    
    Mark Hulbert writes: Might Santa Claus come early this year?          
    Supercommittee's risk of failure put at 15% by analyst.  
    Robert Powell writes: Supercommittee could hit your investments.  
    Inventories a red flag for GDP  
    Chinese inflation cools  

    State of the Markets articles include:
    Bond Yields in Italy Skyrocket In Response to Margin Increase    
    Merkel Says It's Time to Change EU Treaty  
    Investor's Intelligence: Bullish Sentiment Continues To Rise  
    NAAIM Survey Shows Active Managers Gaining Confidence  
    Wholesale Inventories Fall in September  
    Market futures are neutral tonight.