Yen stabilizes after hitting record high

The call comes after twin natural disasters pushed the yen to a record high against the dollar, and fears over the country’s unfolding nuclear crisis continue to spook investors.

On Wednesday, the dollar fell as low as 76.54 against the yen in late trading, dipping under the previous all-time low of 79.75 set in April 1995. By Thursday afternoon, the dollar had stabilized around 79 versus the yen.

Reports published in advance of the conference call speculated that finance ministers would voice a measure of support for Japanese efforts to weaken the yen.

For an economy facing a tough road ahead, a weaker currency would be a good thing. A stronger home currency will make Japanese goods more expensive in overseas markets, to the detriment of Japan’s manufacturing industry.

Under normal circumstances, intervention would be frowned on by other central bankers, but because of the scale of the disaster, Japanese authorities might be given a free pass by their counterparts.

Despite the nation’s turmoil in recent days, the yen has long been a haven for risk-averse investors.

In the coming months, Japanese corporations are expected to repatriate vast amounts of capital. Those funds are currently tied up in foreign markets but will be needed to facilitate rebuilding. That phenomenon would act to strengthen the currency further.

At this point, most analysts see global risk as the dominating factor for the yen’s rise. In addition to the natural disasters in Japan, Portugal’s credit rating was downgraded on Wednesday. And violence in the Middle East and North Africa continue.

All that uncertainty is sending investors scurrying for cover, moving from high-risk assets into cash and bonds.

If Japan is able to arrest the yen’s appreciation, it might allow the country to turn its attention to other matters: calming equity markets, bolstering government bonds and starting the rebuilding process

Safe havens? Gold, the yen and peanut butter

(Muchfinance) – It’s getting harder by the minute to find so-called safe havens in this turbulent market.

Stocks fell Friday after the government reported that the pace of economic growth in the first half of the year slowed to a crawl. Making matters worse, there’s still no agreement by the nimrods in Washington to raise the debt ceiling.

By mid-morning though, the market had recovered and was essentially flat. Still, the Dow, Nasdaq and S&P 500 are all down about 3% this week.

But take heart weary investors! There are still some pockets of security out there.

The flight to quality is on in gold, the Swiss franc and German stocks. That all makes sense. And one money manager said peanut butter and coffee have a place in your portfolio too. More about that later.

Gold’s rally to near a new record high is no surprise. The yellow metal is often viewed less as a commodity and more like an alternative currency. So it often does well when the dollar is in the dumps.

Ditto for the Swiss franc, which has all the benefits of being part of the developed European world without those nasty side effects of that whole EU exposure to the PIIGS thing. The dollar fell to a new all-time low against the Swiss franc Friday.

“The dollar got absolutely hammered due to awful economic data and no progress on a debt deal,” said Boris Schlossberg, director of currency research with brokerage firm GFT in New York.”The Swiss franc is a safe haven unlike Europe because it has no credit problems and a very sound economy.”

Germany, despite being a member of the EU, is also viewed as safe. It is arguably the strongest and most important economy in the euro zone and is home to global leaders like software giant SAP (SAP), industrial conglomerate Siemens (SI) and financial powerhouse Deutsche Bank (DB).
5 winners of the debt ceiling crisis

And with continued worries about the U.S. economy slowing down, investors have flocked to German stocks. Fund tracker EPFR Global reported Friday that inflows into German equity funds this past week hit their highest level since the middle of 2008.

But some other safe havens may surprise you, such as the Japanese yen and U.S. Treasury bonds. The yen hit a multi-month high against the greenback.

Japan? Even after the horrible earthquake and tsunami in March? Schlossberg explains that part of the reason is technical. The yen is often used as a funding currency for the so-called carry trade. Investors borrow the yen due to Japan’s low interest rates and invest in riskier assets.

Still, Schlossberg said there are some other fundamental reasons why Japan is viewed as a less risky area in the global debt storm. It still has an economy that’s driven by exports and is fairly wealthy — even though it also has an onerous debt load.

The flight to quality into Treasuries is more mystifying at first blush though. Yields fell to about 2.85% on the 10-Year Treasury as investors bought U.S. bonds.

Why are investors still buying U.S. bonds at a time when people are growing increasingly worried that a credit downgrade may take place?

Sure, to paraphrase Casablanca, the cut from AAA to AA is maybe not happening today or tomorrow. But it will probably be soon.

However, even though the U.S. risks getting booted out of the perfect sovereign credit club, many fixed income managers maintain that creditors will continue to view the U.S. as a good risk.

That’s because (stop me if you’ve heard this before) the debt ceiling drama is more of a political crisis than a true financial meltdown like 2008. And that’s why yields on long-term U.S. Treasuries are still substantially lower than the likes of Spain, Italy and Greece.

Also, investors tend to buy bonds when economic growth is slow. It may seem paradoxical but even when things appear bleak in the U.S., America remains in better fiscal shape than many other nations around the world.

“For whatever reason, rates keep going lower. We can stroke our chins and speculate about why it’s happening. But it is happening. And it’s probably going to continue,” said John Kosar, director of research with Asbury Research in Chicago.
More on America’s debt crisis

Of course, that doesn’t diminish the valid concerns people have about what might happen if the U.S. actually defaults. But investors also shouldn’t panic and dump all their holdings either.

Sandy Villere III, co-manager of the Villere Balanced Fund (VILLX) in New Orleans, La., said some stocks may even remain safe. You just need to find companies with strong balance sheets, preferably those that pay good dividends as well.

And although consumer spending is sluggish, Villere said companies with products that people have to buy regardless of economic conditions are good bets.

He likes auto parts retailer O’Reilly Automotive (ORLY, Fortune 500) for example, arguing that consumers may not want to buy a new car but they will keep fixing their old one. He also said Smucker (SJM, Fortune 500), the company famous for peanut butter, jelly and Folgers coffee, is a good defensive bet.

Villere said that with most stocks being dragged down due to debt ceiling fears, now is a good time to buy.

“When a debt deal finally gets done, people may look back and realize that a lot of companies are lean and mean and had strong earnings,” he said.

Schlossberg added that it would be a mistake for investors to rush into the Swiss franc, yen or other currencies that are currently surging. He said that Friday’s poor GDP number might be the thing that gets politicians to realize that they have to raise the debt ceiling in order to not make the economy even worse.

And if that happens, he argues that with so many currency traders shorting the dollar, there is a lot of room for it to go up once the lunacy in D.C. finally is over.

“I think we are getting to a point of maximum pain,” Schlossberg said. “I think all the parties may soon come to the table and the dollar would rebound because its so grossly oversold.”

Reader comment of the week. The debt ceiling craziness has got me in a foul mood. More than usual if that’s humanly possible. At one point Thursday, I tweeted that I was “listening to song by Cee Lo Green on Spotify with title that’s unprintable here. But you know it. And it’s how markets feel about DC now.”

My colleague Julianne Pepitone was quick to reply. “What’s unprintable about “Forget You”?” she asked.

Well-played, Julianne. And to quote another famous Cee Lo song (with help from Danger Mouse) this is my message to Washington.

“Who do you, who do you, who do you think you are? Ha ha ha, bless your soul You really think you’re in control? Well, I think you’re crazy.”

Investors downgrade the rating agencies

(Muchfinance) – The big rating agencies may eventually downgrade the debt of the United States. But it looks like Wall Street is already downgrading the stocks of the big rating agencies.

Shares of Moody’s (MCO) fell about 4% in mid-afternoon trading Wednesday despite reporting impressive quarterly earnings. And McGraw Hill (MHP, Fortune 500), the parent of Standard and Poor’s, dipped more than 1%.

Fitch is majority-owned by French financial firm Fimilac. Fimilac’s shares were down a bit in trading on the Paris Stock Exchange Wednesday as well.

With executives from Moody’s & S&P fortuitiously appearing on Capitol Hill Wednesday to talk about the impact of financial reform on the rating agencies, is it possible that some of lawmakers’ venom is spiiling over to the stocks?

Probably not. The reason Moody’s is down is due to its outlook. Plain and simple. The company issued cautious guidance for the second half of the year.

But here’s the irony. Moody’s and its rivals are likely to face a tougher third and fourth quarter due to the very debt ceiling drama that they are all key supporting players in.

Edward Atorino, an analyst with The Benchmark Company who follows Moody’s and McGraw-Hill, said that both companies benefited from strong demand for bond issuance in the second quarter.

Atorino thinks a lot of the new bond issues that came out in the second quarter were pushed up from later in the year. And that was due to worries about what will happen in the credit markets if the U.S. doesn’t raise the debt ceiling, subsequently defaults and, you guessed it, is downgraded by the likes of Moody’s and S&P.

With interest rates so low in the second quarter, Atorino said many companies didn’t see a need to wait to issue new debt.
5 states Moody’s may downgrade if debt ceiling not raised

Doug Arthur, an analyst with Evercore Partners who also follows Moody’s and McGraw-Hill, added that Europe’s fiscal problems (remember the PIIGS?) aren’t helping the companies either.

“We have this dual debt crisis. The best may be behind us for new issuance,” he said. “Activity has really slowed in July.”

For the most part, corporations (although usually not sovereign governments) pay the agencies to issue ratings on their debt. So a slowdown in the bond market hurts the rating agencies.

It is somewhat sublime that the stern finger-wagging by Moody’s and other rating agencies could damage their own businesses going forward. It’s even more comical when you consider these companies were all roundly criticized in the wake of the 2008 credit crisis.

Moody’s & S&P were loudly chastised for being asleep at the wheel with too-favorable ratings of subprime mortgage securities that turned out to be toxic. So you can hardly blame them for having an itchy trigger finger now.

But Atorino does not think investors are punishing the rating agencies for their sins past and present.

It’s important to note that the drop in the two big rating agency stocks Wednesday was taking place on a day when the overall market was down due to worries about the lack of a debt ceiling deal and some uninspiring earnings and economic reports.

If you take a step back, Moody’s actually is still one of the better-performing stocks in the S&P 500 this year. Shares are up 35% as investors had already priced in the solid earnings for the first half of 2011. McGraw-Hill, which also owns a big educational publishing division in addition to S&P, is up 20%.
More on America’s debt crisis

So don’t mistake the pullback in Moody’s and McGraw-Hill as a sign of shareholder anger. Sure, the rating agencies may be guilty of jumping the gun a bit with their downgrade warnings.

“I don’t know why the rating agencies made a big splash about the debt ceiling so soon. They may have created unnecessary anxiety. But I don’t think investors are dumping the stocks because agencies may downgrade the U.S.,” Atorino said.

Arthur takes it a step further. He noted that Moody’s executives are often as gloomy when talking about the company’s outlook as their analysts are when discussing sovereign debt problems.

It may be foolish on my part to put Moody’s and Apple (AAPL, Fortune 500) in the same sentence. But the weak forecast from Moody’s may be just another case of the company trying to talk estimates down so it can crush targets next quarter.

That game of underpromising and overdelivering is one that fans of the iPad maker know all too well.

“Moody’s is always cautious on its guidance. You have to take their outlook with a huge grain of salt. Even in the best of times in early 2000 they were cautious,” said Arthur.

In the time of chimpanzees, I was a monkey. Time for a Buzz shout-out! I tweeted on Tuesday about how SAP (SAP) stock was surging after the German software maker boosted guidance.

In honor of the company’s Teutonic origins, I asked followers to name the tune with this lyric: “Sprechen sie deutsche, baby!”

The answer is “Loser” by Beck. The winner is StockTwits editor Sean McLaughlin, aka @chicagosean. Sean, you are decidedly not un perdedor!

Deal or no deal. Economy still stinks.

(Muchfinance) – Hooray! It looks like the United States is not going to default on its financial obligations. I think. Interest rates won’t skyrocket after all. But oh, wait. What’s that? The economy still stinks?

While the debt ceiling compromise is undeniably good news, it’s not a cause for raucous celebration. The economy is growing at a clip that’s far more tortoise than hare.

Sure, the turtle eventually won the race. But this economy needs some short-term momentum right now, not slow and steady expansion.

The unemployment rate remains uncomfortably high as employers have cut back on the pace of hiring. The housing market is still in shambles. And the manufacturing sector, which had been a bright spot in the first half of the year, is starting to cool off too.

Add that all up and it’s no wonder that long-term Treasury rates are continuing to slide. The 10-year Treasury is currently at 2.73%. That’s the lowest it’s been since last November.

All the worries about interest rates shooting up are in some respects misplaced. Yes, Standard & Poor’s and/or Moody’s may still wind up downgrading the credit rating of the U.S. And that would put some upward pressure on rates.

But all signs point to the 10 year yield falling even further. As long as the economy remains mired in a slow-to-no growth recovery — some economists are using the silly term of “growth recession” to describe the current malaise — not even a downgrade from AAA to AA would do much to change that.

“The impact of a downgrade could be relatively modest. The economic picture is what really is driving interest rates,” said Krishna Memani, director of fixed income with OppenheimerFunds in New York. He added that the concerns about the debt ceiling and deficit have been a “sideshow.”
Economy grinds to near halt

Japan is a perfect example of how you don’t have to be a perfect credit risk to have bargain basement interest rates. Japan’s rated AA by the major agencies and its 10 year bond yields a little more than 1%.

There’s little chance that the 10 year yield will fall that low in the U.S. — or even to the financial crisis bottom of just above 2% from December 2008 for that matter. Experts said the economy would really need to fall into another recession for rates to plummet to those levels.

But make no mistake. They do have room to drop from here.

Robert Tipp, chief investment strategist for Prudential Fixed Income in Newark, N.J., said that it would not be a surprise if the 10-year fell as low as 2.5% in the not-so-distant future. Tipp said that 2.25% isn’t out of the question either if the economy continues to languish.

It’s also important to remember that rates go down when investors rush into bonds.

Despite the many concerns facing the U.S. economy, Tipp notes that there has still been a “steady flow of demand” for Treasuries from individual investors, pension funds and commercial banks. The worst-case fear of investors dumping our debt is unlikely to be realized.

But you know what? It may not be the end of the world if the Treasury buying binge slows down. Interest rates are extremely low but that’s still not enough to stimulate the economy.

Affordability of credit is not the problem. You’d have to be insanely miserly to complain about a 30-year fixed mortgage rate of about 4.5%. The problem is that banks are still reluctant to lend to even the most creditworthy borrowers.
More on America’s debt crisis

Until banks lend more, it’s hard to imagine how the economy will pick up. Rates will stay low as investors buy more U.S. debt.

“Growth will be more modest and fragile. It’s going to be at stall speed and always risk not being self-sustaining,” said Matt Freund, senior vice president with USAA Investment Management Company in San Antonio. “But the Treasury market is still being viewed as a liquid, high quality safe haven.”

If that’s the case, that’s likely to mean that the stock market will continue to bounce around like a Tilt-a-Whirl. Employers may keep sitting on cash in order to preserve their record profit levels. And the American consumer remains the biggest loser as unemployment stays too high.

While nobody likes it when interest rates are higher, it’s easy to forget that higher interest rates are often a sign of a healthier economy. Of course, nobody wants long-term bond yields to shoot up to the double-digit levels in Greece, Spain and other troubled European nations.

Still, there’s a happy medium between the super low rates associated with a stagnant economy and the junk levels of the PIIGS. Nobody should root against higher interest rates if it means that investors are willing to take on more risks in a more vibrant economy.

The 10 year was in a range of about 4% to 5% during the housing boom of 2005 and 2006. It was often above 6% in the tech-fueled late 1990s. The difference back then was that the unemployment rate was low and housing prices weren’t in free fall.

Those days are distant memories, especially since our “leaders” in Washington seem willing to sacrifice the present in order to focus almost entirely on the deficit.

“The likelihood of a government plan to support the economy now when we are debating raising the debt ceiling and cutting spending is essentially zero,” said Memani.

Hooray! It looks like the United States is not going to default on its financial obligations. I think. Interest rates won’t skyrocket after all. But oh, wait. What’s that? The economy still stinks?While the debt ceiling compromise is undeniably good news, it’s not a cause for raucous celebration. The economy is growing at a clip that’s far more tortoise than hare.

Sure, the turtle eventually won the race. But this economy needs some short-term momentum right now, not slow and steady expansion.

The unemployment rate remains uncomfortably high as employers have cut back on the pace of hiring. The housing market is still in shambles. And the manufacturing sector, which had been a bright spot in the first half of the year, is starting to cool off too.

Add that all up and it’s no wonder that long-term Treasury rates are continuing to slide. The 10-year Treasury is currently at 2.73%. That’s the lowest it’s been since last November.

All the worries about interest rates shooting up are in some respects misplaced. Yes, Standard & Poor’s and/or Moody’s may still wind up downgrading the credit rating of the U.S. And that would put some upward pressure on rates.

But all signs point to the 10 year yield falling even further. As long as the economy remains mired in a slow-to-no growth recovery — some economists are using the silly term of “growth recession” to describe the current malaise — not even a downgrade from AAA to AA would do much to change that.

“The impact of a downgrade could be relatively modest. The economic picture is what really is driving interest rates,” said Krishna Memani, director of fixed income with OppenheimerFunds in New York. He added that the concerns about the debt ceiling and deficit have been a “sideshow.”

Economy grinds to near halt

Japan is a perfect example of how you don’t have to be a perfect credit risk to have bargain basement interest rates. Japan’s rated AA by the major agencies and its 10 year bond yields a little more than 1%.

There’s little chance that the 10 year yield will fall that low in the U.S. — or even to the financial crisis bottom of just above 2% from December 2008 for that matter. Experts said the economy would really need to fall into another recession for rates to plummet to those levels.

But make no mistake. They do have room to drop from here.

Robert Tipp, chief investment strategist for Prudential Fixed Income in Newark, N.J., said that it would not be a surprise if the 10-year fell as low as 2.5% in the not-so-distant future. Tipp said that 2.25% isn’t out of the question either if the economy continues to languish.

It’s also important to remember that rates go down when investors rush into bonds.

Despite the many concerns facing the U.S. economy, Tipp notes that there has still been a “steady flow of demand” for Treasuries from individual investors, pension funds and commercial banks. The worst-case fear of investors dumping our debt is unlikely to be realized.

But you know what? It may not be the end of the world if the Treasury buying binge slows down. Interest rates are extremely low but that’s still not enough to stimulate the economy.

Affordability of credit is not the problem. You’d have to be insanely miserly to complain about a 30-year fixed mortgage rate of about 4.5%. The problem is that banks are still reluctant to lend to even the most creditworthy borrowers.

More on America’s debt crisis

Until banks lend more, it’s hard to imagine how the economy will pick up. Rates will stay low as investors buy more U.S. debt.

“Growth will be more modest and fragile. It’s going to be at stall speed and always risk not being self-sustaining,” said Matt Freund, senior vice president with USAA Investment Management Company in San Antonio. “But the Treasury market is still being viewed as a liquid, high quality safe haven.”

If that’s the case, that’s likely to mean that the stock market will continue to bounce around like a Tilt-a-Whirl. Employers may keep sitting on cash in order to preserve their record profit levels. And the American consumer remains the biggest loser as unemployment stays too high.

While nobody likes it when interest rates are higher, it’s easy to forget that higher interest rates are often a sign of a healthier economy. Of course, nobody wants long-term bond yields to shoot up to the double-digit levels in Greece, Spain and other troubled European nations.

Still, there’s a happy medium between the super low rates associated with a stagnant economy and the junk levels of the PIIGS. Nobody should root against higher interest rates if it means that investors are willing to take on more risks in a more vibrant economy.

The 10 year was in a range of about 4% to 5% during the housing boom of 2005 and 2006. It was often above 6% in the tech-fueled late 1990s. The difference back then was that the unemployment rate was low and housing prices weren’t in free fall.

Those days are distant memories, especially since our “leaders” in Washington seem willing to sacrifice the present in order to focus almost entirely on the deficit.

“The likelihood of a government plan to support the economy now when we are debating raising the debt ceiling and cutting spending is essentially zero,” said Memani.

Is the bull market over?

(Muchfinance) – This hasn’t been a fun summer for investors.

Stocks fell in May, June and July. August is off to an ugly start as well. The S&P 500 is now slightly in the red for the year following a huge sell-off Tuesday.

At this point, the more than two-year-old bull market seems a lot more like the gentle cartoon character Ferdinand (you know, the bull who wants to sit and smell the flowers instead of fight) than Jake LaMotta (“So give me a stage where this bull can rage!”)

How bad is this mini-crash? The Dow suffered its eighth consecutive loss Tuesday. The last time the blue chip index fell on nine straight days was in February … 1978!

With so many worries about the economy rapidly losing steam, is this the beginning of a market correction? Could stocks even finish 2011 in negative territory?

That is looking increasingly possible.

Stocks surged dramatically from the bear market lows of March 2009 largely on the belief that the worst in the economy was over.

And while few expect another Great Recession — especially now that the debt ceiling deal has removed the risk of the U.S. defaulting — it’s fair to wonder if the rally was too fast too soon. Keep in mind that the S&P 500 doubled in just two years.

“When you have a bull market, you want to give it the benefit of the doubt. They usually go on longer and rise further than you expect,” said Barry Ritholtz, CEO of Fusion IQ, a New York-based research firm. “But during the past three months, it’s becoming clear that the economic data is getting softer and softer.”
Debt ceiling deal won’t restart hiring

The economy isn’t substantially better now than it was two and a half years ago. The unemployment rate is still above 9%. Consumers are starting to spend less and save more. That doesn’t bode well for corporate sales growth.

Lance Roberts, CEO of Streettalk Advisors, an investment management firm in Houston, said he thinks it’s 50-50 whether stocks finish 2011 with gains at this point. Simply put, earnings can’t continue to impress investors if the economy remains stagnant.

“The economy drives profits. Earnings have been decent but a lot has been due to cost cutting. Without sales growth, profit margins may be at their peak,” Roberts said.

That’s not encouraging. While valuations may not be insanely crazy like they were in the height of the dot-com era of the late 1990s, stocks aren’t dirt cheap. The S&P 500 is valued at 13 times 2011 earnings estimates.

That’s reasonable considering that earnings are expected to increase by about 10% this year and in 2012. But if profits miss forecasts in the next two quarters, it’s tougher to justify current valuations. And would it really be a surprise if earnings disappoint?

A much weaker-than-expected report on manufacturing activity in July spooked investors Monday. Until then, many investors had been holding out hope that the earthquake in Japan in March would be just a temporary problem for industrial companies.

That no longer appears to be the case. Sluggish second-quarter results and cautious earnings outlooks from the likes of 3M (MMM, Fortune 500), Caterpillar (CAT, Fortune 500) and Illinois Tool Works (ITW, Fortune 500), seem to confirm that notion.

“There have been two camps regarding Japan and manufacturing,” said John Derrick, director of research with U.S. Global Investors in San Antonio. “One is that it was an unusual event and now activity should normalize. The other is that there are bigger problems and we should have seen improvement already.”

“I am leaning toward the latter,” Derrick added.

So what can lift the markets out of its funk? Roberts thinks that if stocks drop much further, the Federal Reserve may feel inclined to try a third batch of bond buying, a policy known as quantitative easing.
More on America’s debt crisis

Roberts said that QE3 would be a “game changer” that could help stocks rally for the remainder of the year.

But Derrick isn’t so sure. After all, QE and QE2 didn’t do much to help the economy. They just propped up stocks. And the bond market arguably doesn’t need the Fed’s help. The 10-year Treasury is currently sitting at 2.64%.

Making matters worse, Derrick said that he thinks the global market now is viewing the U.S. more cautiously. He argues that there is a growing sense that regulators and lawmakers are either unable or unwilling to help fix the economy’s short-term problems.

“The debt ceiling deal doesn’t exude confidence. It’s still a dysfunctional situation,” he said. “We are not getting the leadership you want from the largest economy in the world.”

Ritholtz is even more glum. He’s worried that the focus on the deficit at the expense of everything else could create another downturn. He said that a few months ago, he pegged the odds of a double-dip recession at just 10%. Now, he thinks the likelihood is 30%.

“If you want a recession after a credit crisis, just stop stimulus. Austerity is another way of saying recession,” he said.

That may be a bit dramatic. But it’s a valid point. Washington is no longer interested in propping up the economy in the short-term. And investors don’t like that at all.

Throw 3 coins in the fountain. Italy needs them

(Muchfinance) – If you think the markets have been ugly in the United States for the past eight days, you obviously haven’t looked at Italy.

Sure, the Dow (INDU) has fallen 6.7% during its losing skid. It was down another 1% in mid-afternoon trading Wednesday. But Italian stocks have suffered a double-digit percentage plunge.

The iShares MSCI Italy Index Fund (EWI), which owns companies trading on the Milan Stock Exchange, has plummeted more than 13% since July 21.

And in a sign of just how nervous investors are about Italy’s financial health, long-term bond yields there have skyrocketed lately.

The 10-year yield in Italy is up to about 6.1%. (I mentioned Italian bonds in a column about bonds just three weeks ago and the yield was 5.6% at the time.)

While that’s still much lower than yields in Ireland, Portugal and Greece, it’s a lot higher than the puny 2.58% yield for a 10-year Treasury. And Italy’s long-term bond yields are now only slightly below Spain’s.

Italy, like the U.S. and many other developed nations, needs to get its debt burden under control. Its debt, as a percentage of gross domestic product, is second only to Greece in the European Union.

“It’s like a mudslide. It’s slow but inexorable,” said George Feiger, CEO of Contango Capital Advisors in San Francisco. “The Europeans are in a race to the bottom. The Italian budget may be in better shape than Spain’s but it’s still hard to be optimistic about Spain.”

The crisis in Italy is so worrisome now that Prime Minister Silvio Berlusconi even addressed Parliament about it on Wednesday in an attempt to calm market fears.
IMF: Debt crisis threatens to engulf Europe

Berlusconi said that Italian banks are adequately capitalized and reiterated that the government has to do more to boost growth. (Apparently he was channeling Treasury Secretary Tim Geithner.)

Some experts believe that Italy, which already passed a so-called austerity budget in mid-July, may need to do even more.

“Italy has a high debt load but the reason they have been able to stay under the radar until now is that the economy had been growing,” said Ashraf Laidi, chief executive officer of Intermarket Strategy Ltd, a London-based research firm. “The problem though is that growth is slowing everywhere and the government’s deficit reduction plan may not be going far enough.”

The panic taking place in Italian stocks — especially bank stocks like Unicredit and Intesa — is particularly worrisome since many large U.S. and European banks have a decent chunk of exposure to both Italian sovereign debt and Italian banks.

In that regard, Italy’s problems are somewhat reminiscent (although probably not as severe) of the liquidity and credit crisis that hit the U.S. in the fall of 2008.

And the higher that Italian interest rates go, the less attractive Italy’s bonds and other investments will become. So what can be done, if anything, to save Italy?

Italy’s finance minister reportedly met with EU officials in Luxembourg Wednesday to discuss options to assist the country in the event that bond rates surge further. It’s not clear though if Italy will actually need a bailout like Greece, Portugal and Ireland did.
Arrivederci, rally! Why Italy is latest worry.

And the head of Italy’s treasury was said to be in Asia trying to urge investors there to buy Italian debt.

But Fabio Fois, European economist with Barclays Capital in London, said that economic growth in Italy is likely to be extremely sluggish going forward even if bond rates pull back.

That’s why he thinks the government has to enact more policy changes — particularly when it comes to labor laws — to make the country more competitive.

“We know GDP in Italy is going to be quite weak,” Fois said. “The only way the Italian government can decisively change market sentiment is to approve structural reform in a credible way. But that’s not easy to implement.”

You need look no further than Washington for proof of that. Perhaps the famous saying about Italy’s capital should be changed to “When in Rome, do as the Americans do.”

The Fed can't (and shouldn't) save the day

(Muchfinance) – News flash for harried traders! The Federal Reserve may have two mandates. But placating Wall Street isn’t one of them.

Yes, stocks are continuing their, to quote Tom Petty, free fall out into nothing. The Dow was down more than 400 points Thursday afternoon. And yes, the economy seems to be losing steam — especially the job market.

Still, several experts said that the worst thing the Fed could do is overreact and launch a third round of bond buying.

This so-called quantitative easing, which investors have already dubbed QE3, may do little to help what ails the markets and economy. It might even make things worse.

Market strategists pointed out that the last round of QE2 (Born: November 2010, Died: June 2011) was one factor that helped lift oil and gas prices earlier this year. That’s because anytime you essentially print money to buy debt, you are devaluing your currency.

“Interest rates are already low. There could be unintended consequences from more Fed stimulus,” said Stephen Cucchiaro, chief investment officer with Windhaven Investment Management in Boston. “People ran from the dollar and that helped fuel energy inflation after QE2.”

Even if Friday’s job numbers stink, which they most assuredly will, the Fed still shouldn’t hit the panic button. Nonetheless, you can probably expect more people to start clamoring for the central bank to hint that QE3 is coming.

The Fed’s policymakers meet next Tuesday (Aug. 9). And what just a few weeks ago was shaping up to be a relative snooze of an event (no press conference from Fed chairman Ben Bernanke, no new economic forecasts) is now something that is undeniably a Wall Street main event.

So what can the Fed do to actually help fulfill its real two mandates of low unemployment and price stability? Sadly, not a heck of a lot.

As I’ve already explained, more bond buying could be counterproductive from an inflation standpoint. And even though Bernanke is a well-known deflation hawk, it’s premature to start fighting that battle again just because stocks are correcting.
10 job killing companies

On the job front, a low 10-year Treasury yield hasn’t helped inspire confidence. You don’t see businesses going out to hire because of low interest rates.

So what good would QE3 do? Unless we’re in a competition with Japan for who can have a long-term bond closest to zero, buying more Treasuries accomplishes little.

The bond market is already doing its own version of QE3 after all. Remember how investors were worried that rates would skyrocket because the U.S. still hadn’t raised the debt ceiling? What a difference a week makes.

The daily default watch is mercifully over. And guess what? People can’t get enough of our debt! The 10 year fell below 2.5% Thursday. That’s less than half of a percentage point above the 2008 crisis low of about 2.04%.

In addition, it seems like many developed nations are enacting a sort of coordinated easing. Switzerland and Japan have intervened to rein in their suddenly strong franc and yen.

The European Central Bank kept rates unchanged Thursday — at a still low 1.5% — and also pledged to buy more euro zone debt. That’s an attempt to stop the bleeding in Italy, Spain and the other PIIGS.

Cucchiaro added that the Fed is still reinvesting proceeds from maturing securities too. So it is not out of the Treasury market.

All that should keep rates in the U.S.– to use a favorite Fed phrase — “exceptionally low for an extended period.” In other words, the lack of cheap credit is not an issue.

“The economy is not suffering from a lack of liquidity so adding more liquidity is not the right way to solve the problem,” said Bob Gelfond, CEO of MQS Asset Management, a global macro hedge fund based in New York. “The Fed should do nothing at this point but there is pressure on them to do the opposite.”

It’s unfortunate that the Fed may feel inclined to act because lawmakers aren’t going to step up to the plate. It’s increasingly clear that the 24/7 focus on the deficit means that little will be done in Washington to help the economy now.
Is the bull market over?

Stimulus isn’t just off the table. There isn’t even a table for stimulus to be on anymore because Congress set it on fire. Despite that, it’s not the Fed’s job to ensure the economy grows at a 4% clip ad infinitum.

This may be an unpopular thing to say. But freaking out about the sell-off and weak economic data is silly. Stocks were due for a correction after doubling from March 2009 lows.

And the economic slowdown, while not pleasant, should hardly be surprising. It took us decades of excess to get into the debt mess we’re in. Why would any reasonable person think that the economy would experience a miraculous recovery a few short years after enduring the worst crisis since the Great Depression?

I know it seems counterintuitive. But the Fed could show strength by standing pat instead of kowtowing to the fickle whims of the market.

“If the Fed were to do QE3 now, you’d have to wonder why. Are things that bad? With this sell-off, stocks are now down slightly for the year,” said Rob Stein, senior portfolio manager with Astor Asset Management in Chicago.

“You should be allowed to have a down year for stocks,” Stein added. “I’d be concerned if the Fed did anything. Forget about being too big too fail. People are panicking because they think we may be too big to slow.”

Yogi Berra market: Sell-off ain't over 'til it's over

(Muchfinance) – Do you want the good news or the bad news first? Good news? Okay.

Even though the Dow plummeted more than 500 points Thursday on global economic worries, market experts say now is not the time to panic.

Now the bad news. Those same experts said that they’re not expecting stocks to come roaring back anytime soon either.

Yes, Friday’s jobs report was a pleasant surprise. You could argue that Thursday’s sell-off might have been due to expectations that the jobs report would be a total stinker. But let’s be honest. An increase of 117,000 jobs is hardly robust.

What’s more, Europe is still, to use a favorite Project Runway line, a hot mess.

And that’s probably why stocks pulled back sharply Friday after a big pop at the open. The Nasdaq fell over 3% at one point in mid-afternoon trading. Stocks finished mixed in what was a wild roller coaster of a day.

Trying to call the bottom here is a dangerous game. Baseball legend Yogi Berra said it best. “It ain’t over ’til it’s over.”

So what are fund managers doing now? Playing it safe. And so should you.

Rob McIver, co-manager of the Jensen Portfolio (JENSX) in Lake Oswego, Ore., said investors need to resist the urge to sell everything. Investors should stick with what they have in their portfolios and maybe add more if they can stomach the near-term risk.
Regaining faith in U.S. but not the economy

“When you see stocks on sale like they are today, we feel comfortable even though the market is very volatile,” McIver said. “Now is the time to have the courage of your convictions and add to your positions of stocks you like.”

McIver, whose fund focuses on quality blue chip companies with a long record of strong returns on equity, said that some of the stocks he’s most bullish on are PepsiCo (PEP, Fortune 500), United Technologies (UTX, Fortune 500) and Emerson Electric (EMR, Fortune 500).

Mark Coffelt, president & CIO of Empiric Advisors and manager of the Empiric Core Equity Fund (EMCAX) in Austin, said he will also do some buying of stocks today. But not much.

He said that some companies may have been unduly punished on recession fears and those are the kind of stocks that might be good bargains after Thursday’s rout. Coffelt cited auto parts makers American Axle and Manufacturing (AXL) and Lear (LEA, Fortune 500) as two stocks his fund owns that have been “unmercifully bashed.”

Coffelt also said that, despite the fact that the economy is obviously slowing, affluent consumers may still feel comfortable spending. That could bode well for a company like auctioneer Sotheby’s (BID), which is also a holding in his fund.

Other fund managers said that in volatile times like this, it’s a good idea to embrace anything that guarantees you a steady stream of income.

Ed Perks, manager of the Franklin Income Fund (FKINX) in San Mateo, Calif., said there are several companies with strong balance sheets that pay dividends that yield more than the 10-year Treasury’s puny 2.45%.

Electric utilities Southern (SO, Fortune 500) and PG&E (PCG, Fortune 500) are two examples of stocks Perks owns that have high payouts. Each yield over 4.5%.

These companies are clearly being looked at by investors as safe haven/bond surrogates. Both were up Friday even as the broader market sank. And on Thursday, Southern fell less than 1% while PG&E actually rose slightly.

Perks said Intel (INTC, Fortune 500) and PepsiCo are two other blue chips that he likes thanks to their solid dividends. He added that he expects many more companies with lots of cash to boost their quarterly payouts.

“There are lots of opportunities for dividend growth. It’s a more conservative path for companies to take with their cash if they are still worried about uncertainty,” Perks said.
Is the bull market over?

Another manager said that, ironically enough, some high-quality corporate bonds are looking more attractive.

“If the persistent worries about the deficit continue to pick up, AAA-rated corporate securities could be a better credit risk than the U.S. government,” said Dave Kavanagh, president of Grant Park Funds in Chicago and manager of the Grant Park Managed Futures Strategy Fund (GPFIX).

With that in mind, he said he’s starting to look at bonds from companies like Microsoft (MSFT, Fortune 500), Exxon Mobil (XOM, Fortune 500) and Johnson & Johnson (JNJ, Fortune 500). But he’s not buying yet. And he’s too nervous about the global economy to be buying stocks.

“I am still looking at the big picture negatively. You need to be cautious about buying the first dip. You could quickly see another one,” Kavanagh said.

Sadly, based on what happened early Friday, it looks like he’s right.

Reader comments of the week. Yes, plural. This market volatility has everyone on edge. One reader likened the wackiness to one of my favorite daytime diversions from the 1980s.

“Remember that TV game show, #PressYourLuck? I feel like we’re playing that each week now. ‘Come on, big bucks — no whammies!’” tweeted @IanGertler.

That is awesome. But I had to give co-honors to a former colleague of mine at Red Herring magazine (my last gig before here). I tweeted this morning about Bank of America’s stock plunging below $9 and mused about the possibility BofA (BAC, Fortune 500) would have to do a reverse stock split like Citigroup (C, Fortune 500).

That led Scott Raynovich, aka @rayno, to ask this. “Will they change the name to Bank of GoingSouth America?”

Ha. Bank of no opportunity, perhaps?

Worst not over for banks. But it's not 2008

(Muchfinance) – Bank of America and other big financials are getting tarred and feathered by investors lately. And despite a rebound Tuesday, it may not get that much better anytime soon. Shares of Bank of America (BAC, Fortune 500) have plummeted nearly 43% this year and about 20% in just the past week. And that includes the 17% bounce Tuesday. Insurer AIG (AIG, Fortune 500) dropped a bomb Monday when it sued Bank of America alleging “billions of dollars of damage” tied to what it claims were fraudulent mortgage securities sold by BofA units. And while other banks don’t have the same legal woes as BofA, their stocks are getting killed too. JPMorgan Chase (JPM, Fortune 500), Citigroup (C, Fortune 500), Goldman Sachs (GS, Fortune 500), Wells Fargo (WFC, Fortune 500) and Morgan Stanley (MS, Fortune 500) are all still nursing big losses over the past five days and year-to-date. But how bad is it really for the banks right now? Many bank experts are quick to point out that this is not the autumn of 2008 all over again. Still, it seems reasonable to worry about the near-term future of the financial sector. The good news is that many big banks learned their lesson from 2008. They have cut back on risky loans (some would argue they’ve also cut back on lending to credit-worthy borrowers though) and have raised more cash to avoid future credit crunches. Pretty much all the big banks have higher Tier 1 capital ratios — one of the most widely cited measures of a bank’s financial health and ability to withstand risk –now than in the third quarter of 2008. That’s true for BofA as well. “Most of the banks reported in the second quarter that they have an unusually high level of capital built up. And asset quality is improving, which is the opposite of what happened in 2008,” said Frank Barkocy, director of research with Mendon Capital Advisors, a New York money manager that focuses on financial stocks. “The comparisons to 2008 are unfair,” he added. Hopefully, that means that BofA or other big banks will not need more “exceptional assistance” from the government. It’s hard to fathom anyone in Washington agreeing to TARP, Part Deux at a time when cutting the deficit is arguably the sole economic focus. U.S. Treasuries are still safe! Sorta. But even if the banking sector doesn’t lead the broader economy into a tailspin, it may be a case of the broader economy causing another big swoon pullback (Note to my usual Buzz editor Karen McGowan: Sorry!) for the banks. Before Standard & Poor’s killed stocks Monday with its downgrade of the United States, nobody in their right mind was saying that the economy or financial markets were in good shape. The combination of chronically high unemployment and a terrible housing market may be bad news for banks. At the very least, it should lead to even less demand for loans. (What few the banks would approve in the first place.) It also could cause problems for existing loan books. If the economy weakens further, would anyone be surprised if there was an increase in delinquencies for monthly mortgage, credit card or auto payments? The Federal Reserve isn’t helping either. While lower rates are usually a good thing for banks, that’s not the case with rates near zero for over three years. It just makes it harder for the banks to squeeze out a profit from their lending operations. “The domestic business for big banks is weak and may get weaker so we want to stay away from that. Extremely low interest rates are bad for the banks too,” said Kent Gasaway, co-manager of the Buffalo Growth Fund (BUFGX) in Kansas City. What the debt downgrade means for your mortgage Gasaway’s fund did own shares of JPMorgan Chase and Northern Trust (NTRS) as of the end of the first quarter. While he didn’t say whether the fund still owns those stocks, he did say that he liked how both banks had strong international operations to help offset problems in the U.S. In addition to concerns about the slowing economy, sovereign debt problems in Europe could also hurt large banks, according to Terry Morris, senior equity fund manager with National Penn Investors Trust Company in Wyomissing, Pa. He added that regional banks may be hit by the knock-on credit downgrades of mortgage giants Fannie Mae and Freddie Mac as well as some municipal bonds. That’s because many of those banks have exposure to the debt of Fannie and Freddie as well as munis. Nonetheless, it does seem like some of the recent sell-offs are a bit overdone. Ripple effects of the downgrade The pummeling of Bank of America also seems to be an unusual situation that shouldn’t really hurt its rivals. BofA is facing numerous legal headaches tied to the foreclosure robo-signing scandal and bad mortgage investments it inherited when it bought Countrywide Financial. Even though some big investors have agreed to settle with BofA over soured mortgage securities, there are lingering worries that BofA may need to raise capital to deal with the numerous lawsuits against it. The bank has repeatedly claimed that won’t be the case. Barkocy conceded that BofA is a “unique” case and that only investors who have years of patience should be looking at the stock now given the risks. But he argues that other well-run large banks now could be good opportunities because they have been oversold. He cites Wells, U.S. Bancorp (USB, Fortune 500), Fifth Third (FITB, Fortune 500) and PNC (PNC, Fortune 500) as examples of banks that look attractive now. Morris isn’t so sure about that though. He said the only bank his firm owns in the large and mid-cap accounts he runs is Cullen/Frost Bankers (CFR), a San Antonio-based regional bank that turned down bailout money in 2008. “There’s no denying that many of the big banks are cheap. But cheap doesn’t always equal value,” said Morris. “If things keep deteriorating and the economy continues to slow down, there is a huge risk for banks,” he said.

Bernanke has thrown in towel on economy

(Muchfinance) – Is the Federal Reserve waving the white surrender flag? It sure looks that way.

The Fed made the unusual (and unprecedented) move on Tuesday to tell the market in plain English that it intends to keep rates near zero for the next two years!

That is disappointing on many levels. First and foremost, it is a crystal clear sign from Ben Bernanke and other Fed members that they think the economic recovery (if one could still call it that) will remain tepid for a long time.

That is probably one of the reasons that the post-Fed euphoria on Tuesday afternoon on Wall Street quickly gave way to despair again on Wednesday.

This is not good. The Great Recession may have technically ended in June 2009. But for many Americans, this current malaise is just an extension of the problems that first began to surface in 2007. Lost Decade anyone?

Yes, that’s a Japan reference. And it’s sadly apt. The Fed, by pledging to leave short-term rates “exceptionally low” for what will eventually amount to a four-and-a-half-year stretch, is essentially guaranteeing that long-term bond rates will remain persistently low — just like in Japan.

The yield on the 10-year Treasury is at about 2.13%. Yields actually briefly touched the all-time low from December 2008 of 2.03% on Tuesday after the Fed announcement before bouncing back.

Would it be any surprise if the 10-year soon had a 1 handle on it like there is for Japan’s 10-year bonds? That would be extremely troubling. The time to emulate Japan’s economy was in the 1980s. Not now.
Recession 2.0 would hurt worse

It’s even more ironic since Bernanke criticized the Bank of Japan in a paper in 1999 while he still was a professor at Princeton. The title? “Japanese Monetary Policy: A Case of Self-Induced Paralysis?”

I have several more bones to pick with the Fed. Why did the central bank feel that it was a good idea to put a specific time frame on when it will raise rates in the first place? Even if it was mid-2012 that would have been silly.

I’m all for transparency. And the Fed under Bernanke is clearly a lot less opaque than it was under Alan Greenspan. But sometimes the Fed can give the markets, to use teen texting parlance, TMI.

The Fed has now effectively boxed itself in regardless of what the economy does over the next few months and year. Sure, it seems impossible now to think that the economy will pick up dramatically anytime soon. But keep in mind that economists, the market and the Fed are often wrong.

Things can change quickly. Nobody saw the Arab Spring revolts coming. Ditto for the Japan earthquake.

In the unlikely event that the economy does begin to improve next year, the Fed won’t be able to start raising interest rates without causing another panic because it has promised fickle investors that we’ll be at zero until 2013.

I guess the Fed could backtrack and change its mind. Kurt Karl, chief U.S. economist with Swiss Re in New York, points out that the Fed didn’t technically rule out rate hikes next year. He said that small increases from zero would still technically keep rates “low.”

But the market is clearly interpreting the Fed statement as a sign that it will keep rates on hold. So any interest rate bump could further damage the Fed’s credibility in the eyes of investors, consumers and politicians.
U.S. Treasuries are still safe! Sorta.

Yes, politicians. Try as the Fed might to stay above the political fray, that’s impossible for a Washington-based government organization to do.

Think about it. The Fed conveniently picked mid-2013 as its earliest possible start date to tighten? Really? Is it coincidental that by doing so, the Fed avoids getting dragged into the nasty presidential election cycle? Come on.

I applaud Fed regional presidents Charles Plosser of Philly, Richard Fisher of Dallas and Narayana Kocherlakota of Minneapolis for objecting to putting a firm time table on tightening.

The Fed should react when it’s necessary — not when the calendar tells it is okay to do so. (Earth to Barney Frank. This is why Fed presidents, instead of only Fed governors, need to stay on the FOMC. They actually have a backbone!)

Now to be fair to the Fed, it looks like the central bank is also acknowledging that it probably needs to keep rates low because there is a snowball’s chance in you know where of any other Washington body doing what’s needed to get the economy back on track.

The word “stimulus” is now considered to be more profane than any of the colorful phrases that used to be tossed around on the late, great HBO show “Deadwood.”

“While the rest of the government is obviously incapable of providing stimulus, the Fed is showing that it is willing to do so for the long-term,” said Dr. Robert Shapiro, chairman of Sonceon, an economic advisory firm in Washington.

Shapiro, who served as Under Secretary of Commerce for Economic Affairs in President Clinton’s administration, said the Fed doesn’t need to be fighting inflation now. And he’s right. To a point.

Low rates are a blessing and a curse. Sure, it’s encouraging that investors around the world are still buying U.S. debt (and driving rates down in the process) in spite of Standard and Poor’s downgrade on Friday.

But at the same time, extremely low rates are a symptom of stagnation that is often accompanied by a weak currency. It will be harder to call the dollar the world’s reserve currency with a straight face if it continues to lose ground.

A chronically weaker dollar risks fueling commodity inflation again like it did earlier this year. And the last thing Americans need right now is yet another round of sticker shock at the gas pump and grocery store.

That could also be a reason why the Fed may be reluctant to start a third round of quantitative easing, a program of bond buying that also helps to keep long-term rates low.

“Will the Fed jump in with QE3? There was commodity inflation with QE2. That is clearly a problem,” said Karl.

Yes, it is. Especially when you consider that the Fed seems to be more interested in trying to calm the financial markets with low rates instead of coming up with plans that might actually help “promote effectively the goals of maximum employment and stable prices.”

Last I checked, those were still the Fed’s only two mandates.