Still All About the PIGI’S

Daily State of the Markets 
Tuesday Morning – February 9, 2010  

Good morning. The bulls tried mightily Monday to extend their streak of consecutive winning Monday’s to nine. But at the end of the day, worries about the PIGI’S and global growth prospects wound up pushing to Dow to another triple-digit loss.

After Friday’s big reversal, there was an awful lot of talk about the current corrective action having ended. The bullish technicians, who care little for the reasons why a move occurs, argued that after being down big on Friday, the spike higher into the close presented a “key reversal” on the charts. The glass-is-half-full crowd opined that this reversal meant a trend change was at hand and that it was time to get long.

The only problem with this theory is that the premise behind a “key reversal” didn’t appear to be evident on Friday. Instead of evidence that the sellers had become exhausted after a frenetic move to the downside, it appeared that a batch of buy programs were run in front of what was expected to be a ninth straight gain on Monday. So, while there is no telling when the current dance to the downside will end, yesterday’s crummy tape action proved that Friday was not likely a key reversal day.

The issues in the market yesterday were not exactly new. While things got started off on the right foot on the back of decent earnings, some upbeat analyst comments about tech, and a decline in the dollar (yes fans, the inverse dollar/stock linkage is still intact), talk of credit contagion in the PIGI’S as well worry about the Fed’s exit strategy proved to be too much for the bullishly inclined.

The big-picture situation with the PIGI’S isn’t good. They have too much debt, weak economies, and not a lot of options. And with the G-7 saying nary a word about helping the little out the PIGI’S over the weekend, countries like Greece have little choice but to implement austerity programs. While this sounds all well and good, the problem with this path is it basically prescribes a continuation (if not a deepening) of the recession. Apparently the Greek austerity plan did not sit well with the union workers as they have called for a strike in protest of the government actions.

Another concern yesterday had to do with the talk about the Fed’s exit strategy. The WSJ published an article about the Fed’s new tool – paying interest on bank reserves. The fear is that the Fed might be being encouraged by the politicos to get things moving faster than may be prudent at the present time.

So, when you look at the macro picture which includes the Chinese working to slow their economy, trouble with sovereign debt, and the Fed perhaps ready to take action, it is hard to see how we get robust economic growth. And with stocks having traveled a long way in a short period of time, some corrective action makes sense.

Turning to this morning, things are looking up all of a sudden and yes, it is still all about the PIGI’S. There is word that the EU’s Trichet’s made a change to his flight plans and is heading back to Europe instead of Australia. This is fueling speculation that the EU is working on a plan to backstop Greece’s debt. And since a lot of the current decline has been tied to the PIGI’S, any measures to help/fix the situation will be met with celebration in the markets.

Running through the rest of the pre-game indicators, the overseas markets are mixed but have been improving with the Trichet news. Crude futures are up $0.97 to $72.86. On the interest rate front, we’ve got the yield on the 10-yr trading higher at 3.60%. Next, gold is moving up by $10.40 and the dollar is lower against the Euro, the Pound, and the Yen. Finally, with about an hour before the bell, stock futures in the U.S. are pointing to a significantly higher open. The Dow futures are currently ahead by about 100 points; the S&P’s are up about 12 points, while the NASDAQ looks to be about 16 points above fair value at the moment.

* Report includes items that make comparisons to the consensus estimate questionable

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