Stocks staged their steepest drop in two weeks, as fresh European sovereign-debt worries helped knock the market off a 2 ½-month closing high.
Greece heads for standstill before austerity vote as the government refuses to make the proper cuts needed as protests and chaos reign.
The economy is so fragile at this point that rare increases and enthusiasm in stocks could cause a back draft later on in a weird dichotomy. This is what happened to Japan.
Here are the top financial stories of the day:
1) Germany's caution on debt plan sinks Wall Street-From Reuters
Stocks suffered their worst loss in two weeks on Monday after comments from Germany's finance minister caused investors to fear Europe's solution to its debt crisis may not come fast enough.
The S&P index had risen for two straight weeks for the first time since July, riding a wave of euphoria built on optimism that European leaders had a newfound commitment to tackle a crisis that threatened financial stability and global growth.
The rapid rally left the market susceptible to swift declines. German Finance Minister Wolfgang Schaeuble, speaking of an October 23 European Union summit on the debt crisis, tempered enthusiasm, saying, "we won't have a definitive solution this weekend.
U.S. bank earnings also contributed to the selling pressure. Wells Fargo & Co (NYSE:WFC - News) shares fell 8.4 percent to $24.42 after the U.S. lender financial results fell short of expectations.
The KBW Bank index (Philadelphia:^BKX - News) lost 3.9 percent.
"The German Finance Minister basically came out and sort of ruined the expectation that a grand plan was coming along, that some sizable fund was being put together to recapitalize European banks," said Stephen Massocca, fund manager with Wedbush Morgan in San Francisco.
"Depending on the development there, we could technically get back down to the low end of the trading range, which is about 1,100 on the S&P."
With that in mind, investors rushed to seek protection in the options market against losses. The CBOE Volatility index VIX (Chicago Options:^VIX - News), Wall Street's so-called fear gauge, rose 16.6 percent to 32.92, its highest one-day jump since August.
The VIX is a 30-day risk forecast of stock market volatility conveyed by S&P 500 index options; it generally moves inversely to the S&P benchmark.
The Dow Jones industrial average (DJI:^DJI - News) was down 246.58 points, or 2.12 percent, at 11,397.91. The Standard & Poor's 500 Index (^SPX - News) was down 23.72 points, or 1.94 percent, at 1,200.86. The Nasdaq Composite Index (Nasdaq:^IXIC - News) was down 52.93 points, or 1.98 percent, at 2,614.92.
Trading volume was light, with just 6.73 billion shares exchanging hands on the New York Stock Exchange, NYSE Amex and Nasdaq for the day, well below the year's daily average so far of about 8 billion.
Events in Europe overshadowed a $21 billion deal by Kinder Morgan Inc (NYSE:KMI - News) to buy rival El Paso Corp (NYSE:EP - News), combining the two largest natural gas pipeline operators in North America in a huge bet on the fast-growing market for that fuel.
El Paso's shares surged 24.8 percent to $24.45 and Kinder Morgan shares jumped 4.8 percent to $28.19.
Shares of Citigroup Inc (NYSE:C - News) fell 1.7 percent to $27.93. The bank reported higher third-quarter earnings as it set aside less money to cover bad loans and recorded an accounting gain available to banks in turbulent markets.
Of the 45 companies in the S&P 500 that have reported earnings, 62 percent have beaten analyst expectations, according to Thomson Reuters data.
Declining stocks outnumbered advancing ones on the NYSE and the Nasdaq by a ratio of about 5 to 1.
2) Greece heads for standstill before austerity vote-From Reuters
A ruling Greek Socialist party deputy quit parliament on Monday to protest against austerity, striking a blow at Prime Minister George Papandreou's efforts to secure approval of a deeply unpopular package of measures later this week.
Although the resignation does not change the government's majority, it compounds Papandreou's woes. A 48-hour general strike has been timed to coincide with the vote, seen as essential to secure a loan installment and avert bankruptcy.
"I can no longer continue to vote without knowing what I'm voting about ... to vote for unjust and unpopular measures under threat that the government will collapse," Thomas Robopoulos said in his resignation letter to the prime minister.
Papandreou had earlier appealed for unity, saying these were critical times ahead of an EU summit on Sunday, where European leaders are meeting to forge a comprehensive solution to the Greek debt crisis that is shaking the euro zone.
"This is maybe the most crucial week for Greece and Europe," Papandreou said in a meeting with President Karolos Papoulias.
"It is very important on our part, that the entire Greek political class shows a sense of unity and responsibility."
Greece's two main unions, representing about half the four million-strong workforce, are preparing for one of the biggest protests since the crisis began two years ago, likely to hit food and fuel supplies, disrupt transport and leave hospitals run by skeleton staff.
Memories are fresh of battles between riot police and stone-throwing protesters at anti-austerity demonstrations in June and sporadic incidents were reported on Monday with a petrol bomb hurled at a garbage truck in a northern suburb of Athens.
Trailing badly in opinion polls, Papandreou has defied a wave of protests, pledging to push through a deeply unpopular package that includes tax rises, pay and pension cuts, job layoffs and changes to collective pay deals.
His four-seat majority is expected to hold up with the support of smaller opposition parties but at least one more member of the ruling PASOK party may oppose part of the bill.
With European Union leaders racing to prepare a new bailout deal in time for a summit next Sunday and growing speculation that Greece may be forced to default on its massive public debt, Papandreou said Athens had to show its resolve.
"We must show we want the great changes, to go into this negotiation on October 23 with our head high, with a strong negotiating hand, to make sure we obtain the best for Greece," he said.
Trapped in deep recession and choked by a debt equivalent to some 162 percent of gross domestic product, Greece has been shut out of bond markets and would run out of money within weeks without international support.
Inspectors from the EU and the International Monetary Fund were in Athens last week and have recommended releasing an 8 billion euro aid tranche to enable the government to keep paying its bills past November.
That will only provide temporary relief and they have told Papandreou's struggling team to push ahead with further belt-tightening, structural reforms and privatizations, on top of what are already the deepest cuts in Greece's postwar history.
"I WANT THEM OUT"
How far this will be possible remains unclear in the face of growing bitterness from Greeks who have increasingly turned against their political leadership.
"I want them out. They can't solve our problems because they are the ones who got us here," said Maria Papadopoulou, a 57-year old pensioner who helps to support both an unemployed daughter and a son at university.
"I don't usually take to the streets but this week we have to rise up and send a message to the government," she said, as mournful protest songs from the era of the 1970s military junta blasted out of loudspeakers set up by strikers occupying the nearby finance ministry.
"These measures are targeting the wrong people, the poor. I hope they won't be passed," she said.
With the official unemployment rate running at about 16 percent and many people already suffering wage cuts of more than 50 percent over the past two years, there has been growing doubt that repeated doses of austerity can solve the crisis.
The strike will hit public sector institutions including tax offices, state schools and airports as well as banks and businesses ranging from taxis and clothes shops to suppliers of everyday staples like bakers.
As well as the finance ministry, the justice ministry has also been occupied and even judges will hold indefinite stoppages, only issuing rulings on major cases.
Customs officials who clear fuel refinery deliveries hold a 24-hour strike on Monday and will decide whether to extend their action, potentially hitting petrol supplies.
A 48-hour strike by seamen, starting on Monday, has brought passenger ferries to a halt, disrupting traffic to the country's dozens of islands.
Garbage piled up on Athens streets for a week due to labor action and municipalities hired private firms to collect it before a "disease bomb" explodes, the health minister said.
3) U.S. Economy Trapped by Its Circle of Strife-From The Wall Street Journal
Bursts of enthusiasm aren't uncommon in bear markets. But they should be watched with caution.
Consider Japan. Just when the nation's stock market finally seemed to have stabilized, in the fall of 1991, another downdraft began.
The Nikkei 225 index, already down 35% from its December 1989 peak, went on to drop another 35% by the following summer. But even that wasn't the bottom. Nor was the next low in mid-1995. Nor the following one in late 1998.
The Nikkei, in fact, didn't bottom until it reached 7607 in April 2003. The 80% decline took 13 years to fully play out. And just when the deflation finally appeared to be over, the global financial crisis hit and pushed stocks to a fresh low again.
There are many important differences between Japan's experience and the U.S. today. But both instances, along with the Great Depression, are classic examples of credit booms turned bust. These are fundamentally different from garden-variety recessions and expansions triggered by inventory or demand shocks.
They are supercycles in terms of both time frame and scope. They are marked by asset-price bubbles that, upon reversal, trigger financial crises as the banking system struggles to stay afloat. And importantly, these financial crises tend to occur at the start—not end—of the debt-shedding process that can take years or even decades fully to play out.
Somewhere in the early innings of this debt-shedding process, then, is where the U.S. stands today.
And it is why investors and policy makers shouldn't overreact to bouts of bright economic news, like the retail-sales strength in September. The economy is hardly on the verge of a break-out performance.
Any flurries of strength, in fact, only risk ushering in periods of renewed weakness.
For instance, the yield on 10-year U.S. Treasury notes has jumped from a low of nearly 1.7% to more than 2.2% in the past three weeks as recession fears have faded. That in turn has pushed 30-year mortgage rates back above 4%, undercutting the refinance boom that policy makers are trying to trigger. Oil and commodity prices have also rebounded. And the urgency for Washington to move forward with fiscal stimulus measures has lessened. In other words, brighter growth prospects tend to reverse the very things that had helped to brighten growth prospects in the first place.
This is no side issue. These automatic destabilizers are the central reason why the U.S. recovery will remain choppy and confusion will continue to plague both businesses and households.
Policy makers will try to keep doing enough to stave off an immediate downturn. But they will likely be unable to return asset prices to their prior unsustainable levels. Short-term stimulus measures don't address the core issue of excessive debt. Plus, there is no guarantee that policy makers will be able—or willing—to keep the economy growing anyhow.
If there is one lesson from Japan—or the Great Depression, for that matter—it's that it ain't over when you think it's over. The U.S. economy is going nowhere fast.
Quote of the Day from Dave Ramsey.com:
Start with where people are before you try to take them to where you want them to go. — Jim Rohn
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