Stocks tumble on Italian debt woes

Yields on Italian bonds skyrocket as uncertainty surrounding the country's financial situation builds. European markets fall. GM warns of weakness in Europe's auto market.

By TheStreet Staff Nov 9, 2011 8:35AM

TheStreetImage: Wall Street sign (© Corbis/SuperStock)By Andrea Tse, TheStreet


Updated at 12:19 p.m. ET

U.S. stocks were plunging Wednesday as the markets agonized over the possibility that Italy could default on its debt.


The Dow Jones Industrial Average ($INDU) was plunging 238.5 points, or 1.9%, at 11,931. The S&P 500 ($INX) was down by 28.4 points, or 2.2%, at 1,247, and the Nasdaq ($COMPX) was losing 63.9 points, or 2.3%, at 2,663.


U.S. stocks tumbled as the markets feared for the future of Europe's third-largest economy. Italy's borrowing costs headed toward untenable levels even after a crucial budget reform measure was passed by the Italian Parliament on Tuesday.


The material, financial, energy and technology components were leading losses on the Dow. Hewlett-Packard (HPQ) was taking the biggest beating, tumbling 4.4%, followed by JPMorgan Chase (JPM), which was down 4%. Chevron (CVX) was behind by 2.3%

and Alcoa (AA) was falling 2.9%.


Italian Prime Minister Silvio Berlusconi's promise to step down failed to end the protracted period of political uncertainty in the country, and that, combined with the move by clearinghouse LCH.Clearnet to hike the initial margin required to trade Italian bonds, mobilized a snowball effect that helped trigger soaring yields Wednesday.


Italian 10-year yields surged by 65 basis points to breach the crucial 7% level at a crisis level of 7.42%, and the five-year bonds were trading at 7.63%, indicating deep fears about a the possibility of an Italian default.

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"Some are even thinking that Italian bond yields have become the new fear index, like the VIX,” said Morgan Stanley’s deputy chief investment officer Charles Reinhard, of Wednesday’s record yields.


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“Just when it seemed safe to assume that the path of least resistance for the euro was more likely located in a northerly direction, an increase in LCH.Clearnet margin on Italian government bond trading has tripped up the unit,” noted Miller Tabak  economist Andrew Wilkinson.


Italy was scheduled to hold a five-year-bond auction worth 6 billion euros on Monday, and now investors await more details on whether the sale will be amended. There is little word yet on whether the European Central Bank will try to halt the falling prices of Italian bonds.

“Whether it’s stocks or bonds, it’s all policy driven at this point in the game... the shelf life, especially for the money bond market, is short and immediately we turn to the next headline,” Morgan Stanley chief fixed income strategist Kevin Flanagan remarked.


Wednesday’s news flow outweighed expectations that China could start trimming interest rates and enact economic growth measures, as the country’s  annual inflation rate slowed to 5.5% in October from 6.1% in September.


London's FTSE shed 1.9%, and Germany's DAX fell 2.2%. Japan's Nikkei lost 1.2%, and Hong Kong's Hang Seng rose 1.7%.


In corporate news, General Motors (GM 0.00%) said its third-quarter profit fell 15% to $1.7 billion, or $1.03 a share, on revenue of $36.7 billion. While the results beat the 96-cent average estimate of analysts surveyed by Thomson Reuters, the company said weakness in the European market may cause it to miss profit targets this year. Shares were losing 8.1% to $22.99.


Adobe Systems (ADBE) said it plans to eliminate 750 jobs, or roughly 8% of its work force, as part of a restructuring. The company backed its outlook for fiscal-fourth-quarter adjusted earnings, saying it still sees a non-GAAP profit of 57 cents to 64 cents a share on revenue of between $1.075 billion and $1.125 billion. Shares were plunging 8.7% to $27.77.


Dow component Cisco Systems (CSCO) reports fiscal-first-quarter results after the close. The average estimate of analysts polled by Thomson Reuters is for earnings of 39 cents a share on revenue of $11.03 billion. The stock is down roughly 10% so far in 2011 vs. a gain of more than 5% for the Dow overall. Shares were falling 2.1% to $17.92.


Activision Blizzard (ATVI) said third-quarter profit nearly tripled as revenue rose 1% to $754 million. Activision earned $148 million, or 13 cents a share, in the quarter, up from $51 million, or 4 cents, a year earlier. Adjusted earnings were 7 cents a share, 2 cents above analysts' expectations. The company also raised its outlook for the year. Shares were losing 5.2% to $13.20.


In U.S. economic news, the Commerce Department’s wholesale inventories report showed that that inventories fell 0.1% in September amid weak sales -- the first dip since Dec. 2009 --  compared with the 0.5% increase that economics surveyed by Thomson Reuters were expecting.


Separately, Federal Reserve Chairman Ben Bernanke, speaking at a small business and entrepreneurs conference at 9:30 a.m., told the audience that policymakers should provide more support to small businesses and entrepreneurs as part of the plan to mobilize job growth.


The December crude oil contract was gaining 10 cents at $96.90 a barrel. Gold for December delivery was down by $5.20 at $1,794 an ounce.


The benchmark 10-year Treasury was rising 27/32, diluting the yield to 1.989%. The dollar was gaining against a basket of currencies, with the dollar index up 1.299%.

Nov 9, 2011 8:57AM
The world is now One Big Economy and intricately related. Get hardened to the fact that there will unfortunately always be turmoil somewhere in it and that the turmoil will be marketed by those who espouse fear, 5th Ave advertisers, Wall St, the 6 O'clock News... It's a New Market and its not going away.
Apparently we have been lied to. Investment returns are no where near 8 percent a year. And we owe $34,000 each for the high on the hog retirement benefits our politicians have given themselves.

I say it's time we cut their pensions to zero and kick them out of the feeding trough. Normal people no longer get pensions why should they??? And considering they voted for these pension plans for themselves we should be able to over turn them. 

After all we are a democracy we should take back power from these guys.

Stocks recently have returned only 0.25 percent a year. What a waste of money to put it in the stock market

No pension? You may still owe $30,000 on 
Pension accounts for state and local government workers are underfunded by $4 trillion, according to one recent analysis. If America's households were to split that tab today, each would have to kick in $34,000.


Don't have that kind of cash on hand? Another option is to chip away at the shortfall over 30 years starting now. That would cost households $1,400 a year beyond what they pay in taxes today.


Most states assume a yearly return of around 8%, says Kil Huh, who manages fiscal research for the Pew Center on the States, a think tank. "In past decades, when investment markets boomed, they were able to achieve those returns," he says. "Now they're not even coming close."



But plenty of market forecasters expect just the opposite -- for America's burdensome debt, aging population and slowing economic growth to reduce stock returns to a crawl. If they're right, states and cities are vastly understating what they owe.


"You'd never say to your bank, 'I'm not going to make my credit card payments because my stock returns will take care of that,'" says Mr. Rauh. "That's what state and local pensions do."


A bigger problem than pension-gaming, however, is "ignoring your bill, and that's what pensions have done," says Mr. Huh.


Not everyone agrees that there's a pension funding crisis. In June, the National Conference of Public Employee Retirement Systems, a trade group for pensions, published survey findings showing that plans were "solidly funded." Among more than 200 funds that participated in the survey, the average had achieved average returns of 8.2% a year over the past 20 years and was now assuming a 7.7% yearly return in its funding math.


Over the past five years, however, the Standard & Poor's 500-stock index, a benchmark for U.S. stocks, has returned 0.25% a year. NCPERS did not respond to requests for comment.


"At the end, what you have is a distributional problem," says Mr. Novy-Marx. State and local governments say they're $1 trillion underfunded, but the truth is closer to $4 trillion. All of the discussion should be about how to distribute that pain."


Possible recipients of that pain, he says, include taxpayers, who could pay more or get less in services; workers, including future hires and retirees, who could have benefits cut; and municipal bondholders, who could suffer defaults if local governments can't pay what they owe.


States are already working on changes. Illinois has raised its retirement age and capped the salaries used in calculating benefits. New York has proposed similar changes. California's governor proposed a shift toward a defined contribution plan. But most of the changes don't apply to current workers.


The "day of reckoning" won't come for 10 to 15 years, says Mr. Rauh. By then pension accounts will be low on assets and municipal bond markets will react, he says. "As we know from the European debt crisis it's hard to predict when bond investors will panic," he says. "We've known about Greece for a long time, but its bonds imploded only recently."


To prevent such a fate, pensions will have to decide soon how to distribute the pain. "Most of it is going to go to the taxpayers," says Mr. Novy-Marx, "because they're the only ones who can afford to pay."

Nov 9, 2011 9:05AM

I sure as hell hope that one day, politicians, speculators, big oil and the like fear their future because of the American People half as much as the American People fear their future because of them!! What a sweet day it will be!!



Nov 9, 2011 8:57AM
Be careful what you wish for, because you might get it.  The stocks markets were up yesterday because Berlusconi was going to quit .. and now there stock markets are down because he plans to quit.  I guess people are starting to wake up to the fact that Italy's problems can get a lot worse, quick .. and if they do, hang on for the roller coaster ride.
Nov 9, 2011 10:47AM
WAIT a minute! Seriously, wasn't it just yesterday that the markets were down in the morning because of Italy and then like WOW up in the afternoon because of Italy?>???? AND now today down again because of Italy.  A YO-YO is a child's toy and this is what the government officials are treating the people like; some kind of simple toy they can manipulate.  Perhaps if they just got out of their own way they might be able to do what is necessary to be both effective and efficient.  These government officials have a terrible time understanding that their egos are a disastrous guide to follow.
Nov 9, 2011 10:15AM

Its amazing to me that people in this country still sign up to watch the same things happen over and over and over again. Anyone watching the GOP race can easily figure out that Mitt Romney & Rick Perry are life long politicians making the same back room deals that Washington has always made. And yet Romney is leading all the polls that I've been watching and Perry is still within striking distance.


If we do what we've always done we'll continue to get the results we're getting today. Romney & Perry are no better than what we have in office today. How about "us" as voters do some research, listen to the candidates (not the media print), and think outside the box a bit. HOw about some one who won't be bought by the first dollar that walks thru the door. Why are Romney & Perry backed by big dollars? Because they'll run our country the way the "big" dollar people want them to.


I've pretty much come to the conclusion that people don't want change. They're too afraid of the unknown. They just say they want change and protest to change but do not want to vote for change.

Nov 9, 2011 8:58AM
The old saying has always been___Watch Out What You Wish For!!  Now Wall Street has egg on its face again. Investors are taking a raping from rumors out of Europe that have a possibility of 1 in 100000 of happening. Be at least smarter than our investment professionals and realize they will step in and handle anything that is or could happen in Italy or Greece. These events are only in the news because they are manipulation moves out of Wall Street. This whole deal is one great big joke!!!!!!
Nov 9, 2011 9:13AM
Two-year note yields rose above 10-year rates, with five- year debt climbing above 7.5 percent....

This is the problem.  And this is what happens when you run an economy dependent on debt to fund more debt.  When you no longer can get new funds at a reasonable rate, borrowing to fund is no longer a smart option.  But..... since now your dependent on the borrowing to keep the lights on, you're basically SCREWED.

Like I've been trying to tell you guys, you're OK...... till you're not.  And when you're not.... it's TOO LATE!
Nov 9, 2011 11:14AM
Yesterday Italy was doing great and now today it's terrible?  Really? Market is driven by speculators and not any financial rationale. 
Nov 9, 2011 10:13AM
Stocks waver on Italian Stalemate
Dow jumps 102 as Italy's Berlusconi says he'll quit
Uncertainty over Italy's future slams markets
Above are listed 3 headlines from the past 36 hours.

You would think that if the Italian president quit, that he would be replaced by somebody else, just in the natural flow if things, but some traders (or computers) look at it as two different events - so stock goes up - for a nanosecond, then falls shortly afterwards.

The market goes up the market goes down and often it is because no forethought is given to events.  Every action causes a reaction.  You can act once - when you have the whole story - or you can make two instantaneous actions and enforce the opinion that the market or the marketers don't have a clue as to what they are doing.
Nov 9, 2011 10:52AM
the stock market has worse mood swings that a teenage girl
Nov 9, 2011 11:18AM
subsides don't subsidize.  they line pockets.
And buy votes...
Nov 9, 2011 9:41AM

The only winners are the bloody banks and trading houses. The worse it gets, the better chance they get a bail out and come out ahead.

Nov 9, 2011 11:27AM
I support Firefighter, Police, Nurses and the working class.
Good, then you won't mind picking up the tab when their unfunded pensions blow up...
Nov 9, 2011 11:20AM
The market is driven by GREED. FEAR. STUPIDITY. Some take advantage of this. THINK!!!Gift with a bow
Nov 9, 2011 1:20PM
"Cant we agree that we need a president that isnt more of this two-party sham? Cant we agree that we need to stop spending, stop foriegn aid (at least until we can actually afford it), stop foreign wars, and (for Christ's sake) stop passing entitlement programs (designed to buy votes) that we cant afford."

And stop trying to push liquidity to solve structural insolvencies. The practice of not allowing impossible-to-pay debt to clear through bankruptcy or default, but simply tacking it on to other already impossible-to-pay public balance sheets is simply insane. I do not understand how ostensibly intelligent people can think this is a solution. It is not. It is simply the easiest and most cowardly way to prolong a reckoning.

Nov 9, 2011 12:40PM
Judging by what people write on these posts, I can see that most Americans disagree with each other almost to the point of hate! And usually people are divided along party lines, which amazes me. We all know that there is quite a bit wrong with the financial world today, and I hope we can all admit that the problems were created by both parties over a long period of time. There is no debating that we have, and continue to overspend and it needs to stop. We can also see that The Fed or any central banking system has never done anyone any good, and that this current path WILL lead to war, just like it has many times before. Cant we agree that we need a president that isnt more of this two-party sham? Cant we agree that we need to stop spending, stop foriegn aid (at least until we can actually afford it), stop foreign wars, and (for Christ's sake) stop passing entitlement programs (designed to buy votes) that we cant afford.
Nov 9, 2011 10:00AM
jesus! why don't they just admit it already! we are in a deppression,& have been since 08! not just here in the u.s. but the rest of the world as well. the too big to fails,& too big to saves of the world are only skimming up what they can from the middle class until "the day of reckoning" which will happen sooner rather than later,"probably sooner".then still dumbfounded.people are gonna act surprised and stunned that their pension has been sucked dry.its every other day now,gimme a break! wall st. & the banks are laughing at us while they collect bonuses...the system is collapsing,as soon as we admit this the better.then we can get on with some kind of based on intrinsic value,where there are no derivitives,no quadrillion dollar debts that are just ludicrous to think they'll ever be repaid.A gold std.would be my vote,and no government regulation of not gonna get into politics,another time.the focus now is 1 day they blame it on greece,the next its italy,then a flat day,the next day down,and they blame it on europe..enuff said, we are in a deppression,not a double dip,or triple dip recession,but a deppression.
Nov 9, 2011 9:48AM

Hey wait a minute you guys cant get your stories straight one day Italy is falling apart, then the next day there doing alright. let me report this Italy is falling and there is NO helping them out of this other countrys will fall also along with the US. you cant fix broke! all these countrys are broke.


Nov 9, 2011 9:47AM
Bernie wants to know why he is in jail? He has been reading the news regarding the Wall Street Money managers causing the DOW to go up and down because of Greece now Italy and probably tomorrow it will be because of Cuba. Wants to know why people have not caught onto this Ponsi scheme ? If they are in jail then why am I ?
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[BRIEFING.COM] The stock market finished the Tuesday session on the defensive after spending the entire day in a steady retreat. The S&P 500 (-0.6%) posted its third consecutive decline, while the small-cap Russell 2000 (-0.9%) slipped behind the broader market during afternoon action.

Equity indices were pressured from the start following some overnight developments that weighed on sentiment. The market tried to overcome the early weakness, but could not stage a sustained rebound, ... More


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