Thursday, August 4, 2011 10:25 AM – Why Stocks are Down

Stocks are roughly 1.5%-2% lower again today in the US and Europe. China was mixed, Japan up slightly and the rest of Asia down 1.2%. Interest rates are lower, gold is up 2% . . . stop me if you’ve heard this before.

Q – Why are stocks continuing to drop?
A – European debt woes are worsening in Italy and Spain & the economy is slowing around the world.

Europe is driving the decline in our stocks.
You can see it in the trading between 9:30AM – 10:45AM, the time when European orders are heaviest. When the NY stock exchange opens at 9:30 our time their markets have only 90 minutes left in the trading day. 7 of the last 9 days there was a big sell-off during those hours and that set the tone for our day. Often it was the low for the day or close to it. That is not uncommon and is the reason why selling during that span is often not a good idea.

Why are Europeans selling our stocks? They see the beginning of a liquidity problem and that means they need cash.
What better place to get it than a huge, liquid market that is going down?

There are reports that European banks are hoarding cash. As rates in Europe rise, banks are losing money on their vast bond holdings and see more losses ahead. European leaders were sheltering banks from formal write-downs of Greek debt but no more.

There is a general consensus that Italy, the 3rd largest economy in Europe and the 3rd largest bond market in the world behind the US and Japan is too big too bail out.

Spain, the 4th largest economy in Europe is in far worse shape than Italy with >20% unemployment and huge debt relative to their declining economy. I think we have heard this story, too. A worsening situation in Italy will almost surely drag Spain down with it. And as, Europe’s economy declines it drags us lower, too since the US does a great deal of business with them.