October, Monday 03, 2011

DOW – 258 = 10,655
SPX – 32 = 1,099
NAS – 79 = 2335
10 YR YLD = 1.78%
OIL – 1.09 = 76.52
DEC GOLD + 7.70 = 1665.40
DEC SILVER + .71 = 30.83

Stocks closed at the lowest levels in a year.

Let’s start with some economic news here in the USA.  A report from the Institute for Supply Management showed stronger growth in. The index went from 50.6 in August to 51.6 points in September, showing expansion — a reading over 50 — for the 26th consecutive month; so a half year of expansion in manufacturing. But the index was still lower than a year ago and new orders contracted slightly, hinting at continued troubles ahead.

Construction spending increased 1.4 percent in August, driven largely by gains in the public sector – mainly state and local government building projects.

General Motors, Ford and Chrysler reported increases in sales of new vehicles last month, one of few areas of sharp growth in the domestic economy.
GM - .45 = 19.73
F - .30 = 9.37

Airlines were clobbered today. Some airline analysts came out with a fairly obvious observation; if the economy slows, then we might see a cutback in flying and the airlines might struggle. AMR, the parent for American dropped -.98 = 1.98; losing about one-third of its value today and looking like a candidate for bankruptcy.  UAL Continental – 2.27 = 17.11; US Airways - .87 = 4.63 (almost a 16% drop).

So the economic news was decent, certainly not terrible, yet the markets were dropping. What happened?

Well, part of it is that third quarter window dressing is finished.

And then we look around and …, oh yeah, Greece is going to default – not today, but it looks inevitable.

The Euro Stoxx 50 index, a barometer of euro zone blue chips, closed down 1.9 percent, while the FTSE 100 index in London gave up 1.0 percent. The DAX in Frankfurt fell 2.3 percent.

Finance ministers from the 17 euro zone countries are pressuring Greece to implement tough austerity measures in exchange for further aid. The Greek government admitted it probably would miss its financial targets this year and next. Greece has experienced an economic downturn. Basically, they’re saying you can’t get blood out of a turnip.

So, what is the big aid package that is causing the world equity markets to convulse and hemorrhage?

Well, back in May 2010, the EU finance ministers agreed to a 110 billion euro rescue plan for Greece, to be doled out as Greece tried to clean up its debt problems. The next payment is about $10 billion dollars; Greece needs that money to keep going or they will default in the next couple of weeks.

If Greece defaults, then there is a fear that the contagion could spread to Italy, Portugal, Greece, major European banks, jump across the Atlantic, and destroy American banks, ultimately resulting in the destruction of your 401k and my IRA, and then the annihilation of civilization as we know it. In other words, everything is pretty much the same as it was last week.

So, why don’t they just toss $10 billion dollars to the Greek government and end all the fear mongering?

Well, they probably will, but they will take their time and play a game of extend and pretend and hope the problems get worked out somehow. And even if they do toss a few billion to Greece, the problem is actually much larger – if you haven’t figured it out yet, the Euro economy is headed for a downturn; the US economy is headed for a downturn; the European banks have made some bad investments; the US banks have made some bad investments. The world is preparing for default, and trying to make it look a little less ugly than it is. If the sovereign European countries rush in to bail out the banks, they will encounter some push-back from their citizens, who are catching on to this little game of bailouts. You know: the American model of privatized profits and socialized losses.

US banks are just looking real ugly:

Bank of America has taken "proactive" measures to manage  traffic  on their website. The bank issued a statement saying customers could experience slowness or temporarily have to deal with access issues. There are new government rules that limit the amount banks can collect on swipe fees. The new limits went into effect Saturday. Bank of America and all the other banks have been collecting fees from merchants – through the back door. Now that the consumer protection laws changed that practice, BofA said No problem – we’ll just gouge customers through the front door.

This idea of charging customers for debit card purchases is resulting in a little flack. Shares of Bank of America have solidly taken out the "Warren Buffett is Buying" spike.

Warren Buffett did not actually buy Bank of America shares, he got a sweet deal to buy debt that came with a free option to buy shares. The move was at least in part designed to put a floor on the share price. It did not work.

BofA - .59 = 5.53

Five-year credit-default swaps tied to Bank of America’s senior debt added 31 basis points to 455, according to Phoenix prices. Contracts on American International Group increased 70 to 540, the highest in 17 months.

The cost to protect Morgan Stanley’s debt has risen from 305 basis points on Sept. 15 and is now at 565 basis points, the highest level since October 2008, the month after Lehman Brothers Holdings Inc. filed for bankruptcy. It reached as high as 1,300 on Oct. 10 three years ago.

AIG – 1.49 = 20,46
MS – 1.04 = 12.47
C – 2.50 = 23.11 (we’re still pretending that Citigroup would be a penny stock without its reverse stock split)
WFC - .94 = 23.18

The problem with Morgan Stanley is that everybody's saying they're more exposed to Europe than all the other banks. Who knows if it's true or not, but everybody pounces on things like this because there's always smoke where there's fire. Figures on Morgan Stanley's exposure to European banks and countries are outdated and possibly misleading. But the lack of more solid information regarding potential credit losses has led to a sell first/ask questions later mentality.  People are primed for bad news. They’re quick to believe the worst about the banks – and the reason they are primed for bad news is because the banks are betting against each other. And even if Morgan Stanley comes out and says, “Hey we lowered our exposure to Europe. No problem here, We got it under control.” Guess what? Nobody is going to believe them. And that is the real problem facing banks today – you just can’t trust them. If banks lose their trust – what have they got?

A 78 percent majority of Germans don’t trust the government’s assertions that another EFSF expansion won’t be necessary.

The euro fell more than 2% versus the yen, having reached its lowest point against the yen since June 2001 and more than 1% versus the dollar. The euro plummeted to $1.3175. 

Remember last week I was telling you about Occupy Wall Street – I told you that the idea started with the cyberhacker group Anonymous. Apparently Anonymous has issued another post on the internet.