Stocks Plunge As Fears Arise That Europe’s Debt Crisis Might Spread And New Legislation Dampen Investment Returns

The yenguy reports that stocks fell  early again today as more investors woke up to the possibility that economic problems such as Europe’s debt crisis might spread around the world and that the benefits of the Federal Reserve’s Quantative Easing have played out. They were also concerned that bank credit tightening in China will slow economic growth there and globally. Then late in the day came the bombshell:  the Senate voted to vote on US financial regulatory reform, causing capital to take flight from the marketplace.

Ambrose Evans Pritchard quotes David Rosenberg from Gluskin Sheff as saying “A fresh train wreck may be coming in the US mortgage market as rates on a wave of Option ARM contracts reset upwards in September.”

Alistair Bair of MarketWatch reports one the late in bomb shell article Regulatory Concerns Upend Financial Rally, that regulator concerns weighed on the financial sector as congressional debate over a financial-reform bill heated up. The Senate voted Thursday to close off debate on the bill, setting the stage for enactment of legislation by the end of the week or early next week. See full story on successful cloture vote in Senate.

“While the ultimate impact of financial reform is difficult to handicap at this stage, we are becoming increasingly concerned with potential ramifications of the financial-reform bill, as the amendment process has taken a more draconian turn,” wrote Todd Hagerman, an analyst at Collins Stewart, in a recent note to investors.

“With over 320 amendments currently attached to the bill, and significant new provisions added daily, the overhang on the U.S. bank sector will likely be considerable until final resolution of the bill,” he said. “At the very least, the pending financial legislation serves to strengthen our argument that, for many companies, normalized earnings expectations are too high as investors continue to digest the structural changes likely to occur coming out of the credit cycle.”

Tim Paradis and Stevenson Jacobs of the Associated Press earlier in the day reported “The economic recovery story has started to look like a mirage and the new reality is a return to credit crunch conditions” like those seen during the financial crisis, said Tom Samuels, manager of the Palantir Fund in Houston. “If that’s correct, stock prices are well ahead of economic reality.”

Investors appear increasingly convinced that European countries will need to adopt stringent spending cuts to pay down their heavy debt loads, independent market analyst Edward Yardeni said. Such cuts would likely to lead to long economic slump for those countries, a prospect that investors may now be accepting as reality as they sell stocks and the euro, the currency shared by 16 European nations, Yardeni said.

The euro, which has become a key indicator of confidence in Europe’s economy, managed to rise to $1.2514 in late afternoon trading, a day after hitting $1.2146, a four-year low. But its advance didn’t help stocks.

“The drop in the euro is the initial phase of a long-term, multi-year economic decline in Europe,” Yardeni said. “It shows a declining confidence in the workability of the EU (European Union) monetary union, and that’s why their stock markets are down.”

“It’s starting to look like one of these tragic stories were one person falls through the ice, then everyone else rushes in to help and ends up drowning,” he added.

“Investors are in the midst of a major de-risking period due to debt concerns in Europe and signs of a slowdown in China, and now that’s accelerating,” said Peter Boockvar, equity strategist at Miller Tabak. “The fundamental concern right now are these threats to global growth.”

As investors pulled out of stocks and other risky investments like commodities, they moved into safer investments such as U.S. Treasurys. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.27 percent from 3.37 percent late Wednesday.

Commodities prices also fell as investors speculated that a weak world economy would curtail demand for raw materials. Crude oil fell $1.86 to $68.01 per barrel on the New York Mercantile Exchange.

Traders were trying to anticipate the scenarios that could occur as Europe struggles to contain its debt problems.

“There’s a question out there now that potentially we could be talking about a collapse of the eurozone or countries breaking away from the euro,” said Tim Quinlan, an economist at Wells Fargo & Co. As recently as four months ago, that wasn’t even considered a possibility, Quinlan said.

Still, the Chicago Board Options Exchange’s Volatility Index, VXX, known as the market’s fear gauge — leaped 22 percent to its highest level since March 2009. The increase in the VIX signals that traders are bracing for more drops in the market.

The Labor Department’s latest employment report added to worries about the global economy.

The department said new claims for unemployment benefits rose by 25,000 to 471,000, their largest amount in three months. That came as an unpleasant surprise to investors who were expecting a slight drop to 440,000. High unemployment remains one of the biggest obstacles to a sustained recovery in the U.S. The latest report snapped a streak of four straight weekly drops and again calls into question the strength of the job market.

Weekly claims have been stuck around 450,000 since January, unable to break closer to the 425,000 range that is considered a sign that employers are regularly hiring new workers.

A private research group reported an unexpected drop in its index of leading economic indicators.

Yahoo Finance Reports the following ETF transactions:

Regional Banking Shares, IAT, and KBE fell 9%. The Ben Bernanke Portfolio, RWW, fell 6%.

Real Estate, IYR, which has seen a lot of yen carry trade investment, fell 5%.

The financiall sensitive Russell 2000, IWM, fell 5%.

Yen carry trade investment came out of steel, SLX, which fell 7%, emerging markets, EEM, fell 5%, home builders, XHB, fell 4%.

LBOs, traded by PSP fell 4%.

The charts of the Proshares Bear market ETFs seen in FINVIZ screener show dramatic rise: SRS, SJH, SSG, EEV, SMN, SMK, BZQ, SIJ, EPV, FXP, SCO.

Since April 24, 2010 gains on the bear market ETFs have been as follows:

SCO 48%

BZQ 46%

SMN 39%

EPV 37%

SMK 36%

EEV 35%

SJH 30%

SSG 28%

SIJ 28%

FXP 24%

SRS 23%

MSN Finance Chart shows the rise. (Click on the image to open it in another and larger window)


Government Debt, ZROZ, TLT, IEF, all  rose significantly.

The gold ETF, GLD, fell to 115.

Gold mining shares, GDX, disconnected from the price of gold and fell to 47.

Oil, USO, fell to 32.

The Euro, FXE, rose to 124.75.  The US Dollar, $USD, fell to $85.81. The yen, FXY, rose to 110.57.

The  Euro carry trade, FXE:FXY, spiked lower to 1.13.

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