Market Talk

Okay, let’s have a show of hands: who thought Europe’s sovereign-debt crisis was over? Anybody? Bueller? Bueller? Who’s that with your hand up? In the back?

Oh, it’s you, Mr. Market. Mr. Market, tsk tsk.

Today’s sell-off is being pegged in some part on Moody’s downgrade of Spain, which “reignited” fears of that Europe’s sovereign-debt problems are still, well, problematic. You can almost forgive the market for taking its eyes off this particular ball. After all, the Fed’s been buying the drinks since August, and the market is never one to look that gift horse in the mouth.

Then, too, the news this past month or so has been dominated by the Jasmine Revolution spreading across North Africa, and there’s been a recovery here in the U.S., the sustainability of which is a constant source of obsession (and rightly so.) And the Charlie Sheen thing’s been going on for years. At least, it feels like it’s been going on for years.

But it’s hard to believe that the market was really shocked by the Spanish downgrade. The fact is the U.S. stock market is due, overdue, for a correction, and even despite the central bank’s best efforts, one is going to come. Call it gravity. The news, the trigger for the sell-off, it’s just an excuse.

To be sure, there was a notable confluence of bad news today. Besides the Spanish downgrade, there was a surprising jump in jobless claims, and a surprising widening of the trade gap. These two combined to take the enthusiasm over the economy recovery down a few notches (no surprise to regular readers of this blog, to be sure.)

But the fact is, stocks are and have been overbought for some time now, and the recent reappearance of that particular species, the retail investor, that seems to come out the most at market tops only made the market even more top heavy. Woe be to the last one into a crowded trade.

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Big sell-off today, and it’s pretty much across markets (of course, the traditional safe havens, Treasurys and the dollar, are having a good day) and we dig into it in today’s Markets Hub.

Keep an eye on both 12000 on the DJIA and 1300 on the S&P 500 today. Those two numbers sit roughly on the uptrend line from August, and if they’re broken, a bigger sell-off could be in the cards. Both levels have been pierced, but are currently holding.

Asian markets were weaker overnight, and European stocks are currently sliding after the latest flare of debt concerns — this time Moody’s said it may downgrade Spain’s government debt.

These issues aren’t going away, folks, despite all the wishful thinking. Concerns seem to be easing a bit as the US market open approaches, with the euro recovering all its overnight losses, though USD index still holding a decent gain.

November CPI and NY Fed’s December Empire State manufacturing index set for 8:30 a.m. ET; November industrial production and capacity utilization due at 9:15 a.m.; and home-builders December sentiment index at 10:00 a.m.

S&P futures down 2.50, DJ futures down 19. Ten-year note higher, yield at 3.42%.

So the market closed down, as we not too difficultly forecast on this morning’s Markets Hub, and who wants to get in front of this Euro-bus barreling down the highway? Not too many people, that’s for sure.

Let’s hope Germany or France doesn’t have a leg wound like Brad Pitt had in “Seven Years in Tibet.” Oof da.

From Edward Hugh at a Fistful of Euros, a long post but worth the time if you’ve got it (hat tip naked capitalism):

According to one popular analogy currently going the rounds, the Euro Area countries could be likened to a group of 16 Alpine climbers scaling the Matterhorn who find themselves tightly roped together in appalling weather conditions. One of the climbers – Greece – has lost his footing and slipped over the edge of a dangerous precipice. As things stand, the other 15 can easily take the strain of holding the Greeks dangling, however uncomfortable it may be for them, even if they cannot quite manage to pull their colleague back up again. But as the day advances others, wearied by all the effort required, start themselves to slide. First it is Ireland who moves closest to the edge, and gets nearer the abysss with each passing moment. But just behind comes Portugal, while some way further back Spain lies Spain, busily consoling itself that it is in no way as badly off as the others. But if all three finally go over, dragged down by the weight of those who precede them, then this will leave 12 countries supporting four, something that the May bailout package only anticipated as a worst-case scenario. In the event that this is finally what happens, Mr Reglin will find he has plenty of work to do, as will Mr Trichet’s successor at the ECB. In the meantime all the rest of us can do is wait and hope, firm in the knowledge that having come this far, we can only go forward, since there is no easy way back down to the point from which we started. But for heavens sake, the only thing we don’t need to be told at this point is that the danger has already past, even as we slide, inch by inch, onwards and downwards.

How easy was that?

The hotly anticipated results of the European bank stress tests were released at noon Eastern time. Ninety-one banks were tested, apparently tested very gingerly, and 84 of them came through unscathed. One Greek bank, one German bank, and five Spanish banks. That’s it. Only seven banks on the entire European continent were found wanting.

How credible does that sound?

Let’s be frank: there is no way, no way, these tests were designed to rigorously test the strength of the European banking system. Like their American counterparts, the tests were rigged exercise designed to shore up public confidence. The truth never entered into the calculations, and why should it? Everybody already knows the truth. American banks failed a very real stress test in the fall of 2008, when the government had to come in and save the entire industry. European banks similarly failed their very real stress test this past spring.

First off, the European tests ignored the biggest risk out there, the one that really started this whole downward spiral: a sovereign default. If reality interests you at all, you can stop right there, because if the events of 2010 made one thing clear, it’s that Europe’s banks, on the whole, absolutely were not prepared to suffer through a sovereign default.

Credible or not, these tests will probably go a long way toward fulfilling their real goal: restoring confidence among the populace. It’s amazing to me that last year’s stress tests here get as much credit as they do. I don’t think the tests themselves did anything at all. What would have happened if the feds conducted the stress tests, and did nothing else to rescue the banking system?

If European leaders hadn’t cobbled together that nearly $1 trillion bailout fund, you think anybody’d care about these stress tests? Of course not.

“Regardless of what the stress tests say about a given bank, the real factor driving the willingness of credit markets to do business with a bank in London or Paris is the condition of the government and the probability that the government will support the bank,” Chris Whalen of Institutional Risk Analytics wrote.

- Consumer credit falls for fourth straight month. “There’s absolutely nothing encouraging about these numbers from a standpoint of ‘recovery,’” Karl Denninger writes. Perhaps more disturbing is the negative revisions. “They effectively erased the alleged ‘improvement’ in the rate of decline that was allegedly ‘reported’ last month.”

- Paul Krugman wants to know what went wrong as high unemployment continues to plague the economy. “It’s now obvious that the stimulus was much too small; yet there’s virtually no chance of getting additional measures out of Congress,” Krugman says. “From a strictly economic point of view, we could still fix this: a second big stimulus, plus much more aggressive Fed policy,” he adds. But politically, we’re stuck…I’d like to say something uplifting here; but right now I’m feeling pretty bleak.”

- Bank lobbyists successfully watered down financial reform, Simon Johnson writes, except for one key aspect: the Kanjorski Amendment. The amendment “gives federal regulators the power and the responsibility to limit the activities or even break up big banks if they pose a ‘grave risk’ to the financial system,” Johnson says. “The debate on big banks and the dangers they pose is far from over.”

- Apple’s (AAPL) next release of its Apple TV set-top box will let viewers watch individual TV episodes for 99c, according to the NewTeeVee blog. In a move reminiscent of how AAPL launched what became the world’s biggest music retailer, it’s apparently trying to get TV programmers to allow episode rentals for less than the current $1.99 or $2.99 fees.

- The housing bust, which first hit the working class, has made its way up the ranks and now is hitting the affluent pretty hard. About one in seven homeowners with loans of more than a million dollars are seriously delinquent, NYT reports, while only one in 12 mortgages under $1M are delinquent. The “message here is that high income borrowers aren’t taking the Freddie/Fannie/bank bluster about strategic defaults seriously,” Yves Smith says.

- Adobe’s (ADBE) next version of Flash will support 3D graphics, if the session lineup for the company’s MAX 2010 conference is any indication. The session, flagged in a CNet post, promises “a deep dive into the next-generation 3D API coming in a future version of Flash Player.”

- Percentage of S&P 500 stocks trading above their 50-day moving averages has spiked up to 28% amid this week’s big rally, Bespoke Investment Group reports. “For bulls, this means there could be a long way to go before the rally runs out of steam. For bears, this shows that even after a pretty big rally, breadth remains rather weak.”

- Sure the New York Stock Exchange is flying both the Dutch and Spanish flags, but don’t be fooled by the alleged display of World Cup nonpartisanship. NYSE CEO Duncan Niederauer asked exchange employees to wear orange in support of colleagues in The Netherlands (where NYSE operates an exchange) before Sunday’s final with Spain, says spokesman Ray Pellecchia, emphasizing in a blog post that his own blue-and-orange tie is “NOT a Mets tie.”

- Deflation worries are still prevalent. “Debate rages about whether the trend is a warning sign for the economy or merely statistical noise,” James Picerno notes at The Capital Spectator. “To be fair, outright deflation isn’t here yet, nor is it certain (or even likely) that it’ll turn up.” But the risk remains. “And with the outlook for a jobless recovery looming, this is no time to soft pedal the D risk.”

- Reuters blogger Felix Salmon is pessimistic that there’s an easy solution to the long-term unemployment issue plaguing the US. “Maybe unemployment is simply a problem to which there is no good medium-term solution, let alone any short-term fix,” he says. “Certainly the government can’t directly employ the unemployed, and although I’m a big fan of arts subsidies as a way of creating jobs, that kind of thing is only ever going to have a marginal effect.”

So much for the standstill. US stocks take a dive in the final 30 minutes after barely budging throughout much of the session and close 2Q at 2010 lows. S&P 500 was perched around 1040 throughout most of the day, but once it fell through that key support level, there was no looking back.

DJIA closes off 97 at 9774, marking its fifth straight decline and finishes down 10% for 2Q. S&P 500 drops 11 to 1031 and Nasdaq Comp falls 26 to 2109.

Moody’s warning this afternoon on Spain’s debt didn’t help matters. Also the weak ADP report cast a dark shadow on the market throughout the session. But all eyes remain focused on tomorrow’s ISM data and, more importantly, Friday’s jobs report.

Some interesting factoids from our market’s data desk as the quarter comes to a disappointing end. The Dow dropped 3.6% for the month of June, marking its second straight monthly drop. And it’s 10% drop in 2Q breaks a streak of four quarterly gains and represents the measure’s worst quarterly performance since 1Q09.

The Dow’s also down 6.3% year-to-date as of June 30, marking the third straight year the index has been in negative territory at the half-way point.

It’s getting ugly out there.

- Spain’s recent decision to publish stress-test results of local banks comes as ECB resisted releasing other results on individual European banks, Yves Smith notes at naked capitalism, which could “increase frictions among an already fractious eurozone leadership group,” Yves Smith says. “”Ooh, this might get ugly.”

- S&P 500 remains above its 200-day moving average, but portfolio manager Roger Nusbaum says he wouldn’t be surprised if it quickly reversed course. He thinks it wise to buy a double short ETF to stay defensive. “The possibility of a whipsaw always exists with this strategy but I believe it is a very effective way to avoid the full brunt of ‘down a lot’ which is a very important objective for us.”

- The Gulf oil spill may actually prove a “godsend” for President Obama, as he should be “thanking BP, not demonizing it,” Jeremy Warner writes.

- Initial jobless claims disappoint. But “looking forward over the next few months we must keep an eye on what influence the Gulf of Mexico disaster will have on jobs,” Peter Boockvar notes. “But it doesn’t seem to have been an impact in this report as the states leading the rise were not down south.”

- The threat of social security insolvency is “unvarnished nonsense,” FusionIQ CEO Barry Ritholtz says. Social Security is merely a target of “persistent fear-mongering” as deficits increase and baby boomers start retiring.

- “The negative news in the housing market is beginning to pile up even faster than I suspected,” Pragmatic Capitalism notes. Toll Brothers (TOL) warns of weakness ahead and housing starts are declining amid the removal of the home-buyer tax credit. “Move over Europe. We have bigger problems to deal with here at home over the next 18 months.”

- Investors haven’t seen a real sideways market in a while, Bill Luby notes on his VIX and More blog. Still, he expects the S&P 500 to trade in a 1040-1219 range for a “surprisingly long period.” If that happens, “options selling strategies are likely to perform well, particularly if high volatility persists,” Luby adds. “This means covered calls may soon be back in vogue, with more advanced traders looking at the likes of straddles, strangles, butterflies and condors.”

- BP CEO Tony Hayward’s approach in a hostile congressional hearing is fairly straightforward. He “isn’t interested in winning anything, here, he’s just interested in letting the hearing time out by being infuriatingly passive and unhelpful,” Reuters blogger Felix Salmon opines. “He’s simply letting the attacks come, refusing to show any spark of humanity or willingness to engage.”

- Fannie Mae (FNM) and Freddie Mac (FRE) plunged yesterday amid surging volume after the government-sponsored enterprises said they plan to de-list from NYSE. That breaks the prevailing trend, says FT’s Alphaville. In the past, low-priced stocks, like FNM, FRE, AIG and Citi (C), generally rose on spiking volume. “In short, de-listing clearly equals the end of a unique high-frequency arbitrage opportunity for some.”

- Leaving the White House yesterday, Hayward looked a lot like the big-bank heads after their November 2008 meeting with then President Bush when they agreed to accept TARP, Peter Atwater says at Minyanville. Similar to bank CEOs, “Hayward had just been voluntold to turn over $20 billion” to Uncle Sam. Voluntold? Urban Dictionary says it’s “used in reference to an unpleasant task to which you have been assigned by your boss,” Atwater notes. He’s no BP defender, “but being voluntold feels very unsettling to me,” especially as it now seems more norm than exception.

Now that BP’s paid its pound of flesh, well, 20 billion pounds, is the worst over for the energy sector? We discuss that, as well as Spain’s bond auction and this morning’s data, on today’s Markets Hub.