6/11/13 8:47 AM – Stocks Around the World Dropping Sharply Today

Stock markets in Asia were down sharply today after the Bank of Japan did not announce an expansion of its bond-buying program. Like the US program the BOJ program has put a lot of money out there that has gone into the markets, especially during the last six months. So successful was the BOJ program at boosting asset prices that the Japanese stock market rose 75% November to May before starting on a 15% recent slide.

In Europe the German Supreme Court is debating the issue of whether the ECB bond buying program exerts too much control over German citizens and is unconstitutional. If it finds against the program, some fear that the more indebted nations of Europe might not be able to stay in the Eurozone without German backing for these bond buys. Whether or not that is the case, it would certainly put the Eurozone troubles back on the front burner. A decision is not expected until September but the tone of upcoming questioning by the justices might give some insight into how they think.

The US news is pretty light. I think the issues above are really just the excuses for profit-taking after an 18% run January through May this year.

I also think the markets are genuinely worried about the Fed “tapering off” its bond-buying program that has kept US interest rates so low and provided so much juice for the stock market since 2009. Remember that the Federal Reserve has been by far the biggest buyers of US Treasury bonds the last few years, dwarfing all other buyers to the tune of buying 2/3 of all US Treasuries issued in 2012. Taking away that buying, even if it is gradual, means higher interest rates ahead and that is one reason I sold most bond funds.

In the stock market, it has been the leaders of the last year that have been hit hardest the last week or so, the conservative, income-oriented stocks. Commodities and stocks that depend on them have gotten hammered already this year. I think at least a 5%-10% drop in stocks from here could be in order, 1.5% of which could in the open today.