MarketView for September 19

 

 

Summary  

 

During the first half of the trading day on Monday, stocks fell sharply as renewed fears of a Greek debt default prompted many on Wall Street to book some of last week's gains and turn to toward the safety of Treasury debt. The U.S. 30-year Treasury bond moved up in price, closing at $101.60 to yield 1.9465 percent. However, as the trading day wore on the major equity indexes recovered about half of the day’s losses.

 

At meetings on Saturday, European Union finance ministers broke no new ground in dealing with the crisis and made no decision on whether to give more firepower to the 440 billion euro ($607 billion) bailout fund, as suggested by Treasury Secretary Timothy Geithner.

 

Funds flowed into Treasuries after the Greek prime minister, George Papandreou, canceled a visit to the United States to instead chair a cabinet meeting on Sunday, a day before EU and International Monetary Fund inspectors hold a conference call with Finance Minister Evangelos Venizelos to hear how Greece will plug this year's budget shortfall.

 

However, a Greek finance ministry official said after talks on Monday with the European Union and International Monetary Fund that the country was near an agreement with international lenders to continue receiving money.

 

A regional election defeat for German Chancellor Angela Merkel on Sunday, her sixth election defeat this year, also kept investors on edge.

 

The end result was that by the closing bell energy and financial stocks were the day's top decliners. The S&P energy sector index was off 3.1 percent as oil prices tumbled. The financial sector index lost 2.6 percent following a steep decline in European banks on worries euro zone leaders won't be able to prevent a default by debt-stricken Greece.

 

However, Apple helped curb declines on the Nasdaq as shares hit an all-time high of $413.23 earlier before closing up 2.8 percent to $411.63. Morgan Stanley included Apple in a list of companies capable of increasing or initiating dividends.

 

Caterpillar) was one of the worst performers on the Dow, off 1.50 to $84.60 after Raymond James cut its rating on the world's largest construction equipment maker, citing slowing global economic growth.

 

Volume was light, with about 7.11 billion shares changing hands on the major equity exchanges, a number that was slightly below the daily average of 7.9 billion shares.

 

Home Builder Sentiment Falls

 

According to a report released by the National Association of Home Builders on Monday morning, sentiment in the home building industry fell during the month of September with an industry index mired in a low range as the housing market continues to struggle. Specifically, the NAHB/Wells Fargo Housing Market index slipped 1 point to 14 from the previous month’s reading of 15, the NAHB reported..

 

Readings below 50 mean more builders view market conditions as poor than favorable. The index has remained in a range of between 13 and 16 for the past six months and has not been above 50 since April 2006.

 

"Very little has changed in terms of housing market conditions so far this year," NAHB Chairman Bob Nielsen said in a statement. "Builders continue to confront the same challenges in accessing construction credit, obtaining accurate appraisal values for new homes, and competing against foreclosed properties that they have seen for some time."

 

The gauge of sales expectations in the next six months slipped to 17 from 19. The large inventory of unsold homes, combined with ongoing foreclosures and weak prices has had a numbing effect on the home building sector overall, as buyers remain on the sidelines, in no small part due to the enormous unemployment problem.

 

The Vise Tightens on Greece

 

The banking community told Greece on Monday it must reduce its public sector and improve tax collection to avoid default within weeks as bondholders, concerned over a variety of political setbacks in Europe, began to selloff what are viewed as risky euro zone assets.

 

Prior to a conference call between the Greek Finance Minister and senior officials of the European Union and the International Monetary Fund, the IMF representative in Greece announced steps Athens must take to secure a vital 8 billion euro rescue payment next month.

 

"The ball is in the Greek court. Implementation is of the essence," Bob Traa told an economic conference. Additional savings measures were needed to cut the public deficit to a sustainable level and reduce the public sector's claim on resources -- code for axing jobs and cutting pay and pensions -- while improving tax collection rather than adding further taxes, he said.

 

European stocks and the euro fell sharply on fears of an early Greek default, the failure of EU finance ministers to agree new steps to resolve Europe's debt crisis at weekend talks, and another regional election defeat for German Chancellor Angela Merkel.

 

In signs of mounting stress, the yields on Italian and Spanish bonds continued their upward trend despite six weeks of European Central Bank buying in an effort to hold them down. The cost of insuring peripheral euro zone debt against default also rose.

 

Prime Minister George Papandreou canceled a planned trip to Washington and the United Nations at the last minute and returned home on Saturday as the Greek media published a list of 15 austerity measures it said the troika was demanding the Socialist government implement to receive the next tranche of aid.

 

They included firing another 20,000 state workers, cutting or freezing state salaries and pensions, increasing heating oil tax, shutting down loss-making state organizations, cutting health spending and speeding up privatizations.

 

Although the IMF/EU bailout program lacked public support, Greece will be given time to adjustment program in a weaker than expected economy. Finance Minister Evangelos Venizelos said the economy was set to contract by 5.5 percent this year after 4 percent in 2010. Cutting spending would be a priority of the 2012 budget, he said.

 

Regarding the question of whether Greece would get the next installment crucial to pay salaries and pensions in October, Venizelos has indicated it would. Nonetheless, many economists believe Athens will have to default on its debt mountain -- more than 150 percent of gross national product -- within months.

 

Uncertainty over Greece was compounded by another political shock in Germany at the weekend. The sixth regional election defeat this year for Merkel's center-right coalition on Sunday raised questions about the stability of her government and her ability to push through more euro zone rescue measures.

 

Merkel’s Free Democratic (FDP) junior coalition partners in the Berlin regional assembly received just 1.8 percent of the vote, raising pressure from some party activists to take a more skeptical line. Although the Berlin regional vote ended a cycle of seven state elections this year, it appeared to leave the cautious Merkel with less room for maneuver to take bold action in defense of the euro.

 

Leaders of both the Bavarian Christian Social Union (CSU) and the FDP have raised the prospect of Greece defaulting and having to leave the 17-nation single currency area, ignoring rebukes from the chancellor for alarming markets.

 

Treasury Secretary Timothy Geithner pressed euro zone finance ministers, apparently in vain, to take stronger action to stop the sovereign debt crisis spreading. Larry Summers, one of Geithner’s predecessors, wrote on Sunday that all nations should pressure Europe to go beyond "grudging incrementalism" to recapitalize banks, and revive economic growth.

 

"In normal circumstances comity would require deference by others to European authorities on the resolution of European problems. Now when these problems have the potential to disrupt growth around the world all nations have an obligation to insist that Europe find a viable way forward," Summers wrote.

 

Current Political Tax and Budget Battle and Wall Street

 

President Barack Obama and the Republicans in Congress are hardening their debate over the budget and taxes. This is essentially leaving the congressional "super committee" in political no man's land. On one side is Obama vowing to defend social programs and proposing new taxes on the rich; on the other side are the Republicans opposing any new taxes and demanding deep social program cuts. So where does that leave super committee? Another question has to do with how will the financial markets react to all this political positioning and lack of actual work being done by Congress.

 

In the end, voters are the ones that will have to make the tough decisions about fiscal policy at the polls in November 2012. That is no surprise to skeptics who have long doubted the 12-member, bipartisan super committee's capacity for a fiscal policy breakthrough, yet it will disappoint some.

 

The bitter debate in Washington had moderated after Congress took its summer break. Lawmakers had gotten an earful from disgusted constituents back home and the mood on Capitol Hill seemed more respectful. Cooperation was in the air.

 

The super committee, known formally as the Joint Select Committee on Deficit Reduction, by November 23 is supposed to find at least $1.2 trillion in added budget savings over 10 years. Some had been hoping that it would do much more.

 

A chance of that remains, but political positioning is quickly overtaking the panel's agenda and an ideological standoff that prevailed through most of the year is returning -- a worry for financial markets keen for signs that the United States government is getting its fiscal house in order.

 

Obama released a plan on Monday morning at the White House calling for more than $3 trillion in deficit cuts over 10 years, with roughly half of the savings coming from higher taxes on the wealthy and big corporations. The president vowed in his talk to shield middle-class social insurance programs from large-scale cuts as part of a set of recommendations to go to the super committee.

 

The U.S. budget deficit in 2011 is expected to be about $1.3 trillion. The national debt stands at $14.7 trillion. Yes, some restructuring of social programs, such as the Medicare and Medicaid healthcare programs for the elderly and poor, is needed to reduce the deficit, along with basic tax reforms that bring in more revenues.

 

Democrats see unfairness in the present tax system that allows many of the well-to-do and large corporations to dodge taxes. Multibillionaire Buffett, for instance, has said that he pays a lower effective tax rate than many of his employees.

 

"The president's proposed 'Buffett rule' is right on target," said Representative Sander Levin, the top Democrat on the tax-writing House Ways and Means Committee. "The very wealthy in our country have seen their incomes skyrocket while middle class income has stalled and poverty has risen. We need an approach to deficit reduction that is balanced and a tax system that fairly represents today's reality," Levin said in a statement.

 

Two years ago, only 287,000 out of about 172 million taxpayers made 9.5 percent of all reported income, or nearly $727 billion. Of those highest earners, Internal Revenue Service data also showed that 1,470 owed no federal income taxes in 2009.

 

Today's top tax rate, 35 percent, is half what it was 30 years ago. The last time the tax code was thoroughly overhauled was in 1986, when President Ronald Reagan, a Republican, raised corporate taxes and cut the top tax rate.