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 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%.
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."
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."
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.
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!
Stocks waver on Italian Stalemate
Dow jumps 102 as Italy's Berlusconi says he'll quit
Uncertainty over Italy's future slams markets
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.
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