Select on Node List Variable

I am having trouble understanding the behavior of the following stylesheet.
I intended for the main template to build a node-list of <item> elements and
then process them using another template, but instead Saxon 6.5.2 is giving
me a stack overflow error.  If I change the 'apply-templates' and
corresponding template to use a mode, it works as intended (outputs 'hello'
and 'goodbye').

<?xml version="1.0" ?>

<xsl:stylesheet version="1.0"
xmlns:xsl="http://www.w3.org/1999/XSL/Transform">
  <xsl:output method="xml" indent="yes" omit-xml-declaration="yes"
standalone="no"/>

  <xsl:template match="/">
    <xsl:variable name="item-elements">
      <xsl:element name="item">hello</xsl:element>
      <xsl:element name="item">goodbye</xsl:element>
    </xsl:variable>
    <xsl:apply-templates select="$item-elements"/>
  </xsl:template>

  <xsl:template match="item">
    <xsl:value-of select="."/>
    <xsl:if test="position() != last()">
      <xsl:text>&#10;</xsl:text>
    </xsl:if>
  </xsl:template>

</xsl:stylesheet>

Why the infinite loop?

--
Roger L. Cauvin
roger@xxxxxxxxxx