September 14th, 2011 9:26 AM by Mel Samick
Stimulus, default, double-dip fears, terror threat, record 60-year low for 10-year Treasury rate and the 10th anniversary of September 11 marked the week filled with all the elements of drama from a Hollywood blockbuster. Among all of these somber events, gold was the only shining aspect. Security agencies in the U.S. would have sighed in relief as the September 11th anniversary came and passed without any type of terror event. Meanwhile, the Greek default threat has again become a recurring nightmare haunting the markets on a very frequent basis. Stocks are trying to move up a slippery slope; every time it takes small baby steps up over the course of weeks, it comes crashing down in days. In other words, things are about the same as they have been on a number of occasions over the past three years. The more things change, the more they seem to stay the same. Anxiety and uncertainty are the underlying tone of the market.
Doubts continue to grow over Europe's ability to solve its debt crisis. So far, all the half-baked measures taken in Europe have not worked and this is the cause of the recent pressure on the markets. The resignation by the European Central Bank's (ECB) chief economist, Juergen Stark, has highlighted the divisions within the ECB over the handling of the financial situation. The purchase of sovereign bonds has been one of the main tools that the ECB has employed to fight the debt crisis. Stark resigned over this bond-buying program. European banks are on the hooks. If investors begin to panic, we may see further sell-off in equity markets. In the meantime, investors continue to seek the safety of Treasuries which sent the 10-year note yield trading at 60-year lows last week, at below 1.90 percent. Europe may embark on a sloppy financial markets socialization process that has been held back for nearly 2 years by 3 bailouts. The weak links may not be able to raise enough capital and so a few EMU (European Monetary Union) members may be forced to exit and use a reintroduced currency for this process. Due to the fear of a Greek default, the value of the Euro fell to $1.36. This was the weakest level in the past 6 ½ months. On September 8, Bloomberg reported that credit-default swaps on Greek government debt surged to a record, signaling a 91 percent chance the nation will fail to meet debt commitments, after its economy shrank more than previously reported.
The sole asset on the rise these days seems to be gold, which was never shinier than its current level. Gold surged to a record near $1,900 an ounce on speculation that Europe's debt crisis will worsen, dampening economic growth and driving investors to protect their wealth. Gold is in the 11th year of a "bull run", the longest rally since at least 1920, as investors seek to diversify away from equities and some currencies. It climbed to records priced in Euros, British pounds and Canadian dollars today.
President Obama unveiled a jobs stimulus package costing $447 billion before Congress on September 8. The bill would include tax cuts and more spending on roads and bridges, schools and teachers plus a variety of other proposals. Mark Zandi, of Moody's, estimated that the plan would add 2 percentage points to real GDP growth and 1.9 million payroll jobs, while reducing the unemployment rate by a percentage point. Other forecasters were less optimistic because of the delays in getting these projects started. They fear that private businesses, which are our biggest job creators, cannot possibly plan on increasing employment or expenditures based on temporary stimuli. Some aspects of his plan are likely to get past Congress and some will not.
Low rates seem to be an attractive mirage for many borrowers, and chatter about various refinancing plans is back in play, from academics and others. The average interest rate on the 30-YR Fixed Rate Mortgage survey fell to 4.12% for the week ending September 8, according to a survey by Freddie Mac. This is the lowest rate for this mortgage rate ever since the survey began in 1971. Still, mortgage applications fell 4.9% in the week ending September 3, after a 9.6% decline the prior week. Despite record low mortgage rates, activity is not picking up. There are some rumors that a new plan may be afoot, either from the administration or perhaps in conjunction with other agencies, to promote a refinance plan for potentially millions of borrowers. The Federal Reserve is thought to be pondering a new plan to foster economic growth. Meanwhile, the European debt crisis is helping interest rates go down to record lows.
The week ahead is filled with important data on inflation with August PPI and CPI reports released on Wednesday and Thursday respectively. Markets will be looking at August Retail Sales on Wednesday with a keen eye to see any hope from the consumer. Manufacturing data due out on Thursday from NY and Philadelphia. The market is also anticipating the outcome of the Fed meeting on Sep 20-21. Some market participants are expecting the Fed to come out with a new grandiose program to help push down interest rates with a hope of kick-starting or re-inflating risky assets including stocks.
Information Provided by NYCB Capital Markets