Bernanke Keeps It Close

Daily State of the Markets 
Friday Morning – January 29, 2010  

Stock market investors may want to once again say a silent thank you to Ben Bernanke. As was the case during the credit crisis, it is our humble opinion that things could have been a lot worse yesterday had it not been for Mr. Bernanke. Or more accurately, the confirmation vote to keep Bernanke behind his desk at the Fed.

After opening higher for grand total of 5 minutes yesterday morning, stocks headed south in earnest. There was a host of reasons behind the move lower, most of which were tied to the movement in the U.S. Dollar. In short, the buck (and for those of you without the ability to track the dollar index or currency futures, the action in the greenback is easily tracked by the PowerShares US Dollar ETF – UUP) broke above an important resistance zone (the $23.20 mark on the UUP) Thursday morning. The move triggered selling in the “risk assets” such as stocks, commodities, and emerging markets. And before lunch the Dow found itself down -180 points.

The reasons behind the dollar’s move higher were tied to a couple of familiar themes – problems with banks and sovereign debt. While everybody knows the difficulties that Greece and Portugal are having with their financial affairs, mounting fiscal worries and the fact that no one appears to be willing to backstop these countries puts pressure on the Euro. As such, the dollar becomes the best house in the relatively bad neighborhood.

The other big driver of the rise in the dollar was the announcement from Standard & Poors that they will no longer classify the UK’s Banking System among “the most stable and low-risk banking systems in the world.” S&P cited the UK’s weak economic environment, the damage to the banking system, and the dependence on government stimulus as reasons for the downgrade.

On the economic front, things were not all peaches and cream either. The report on Initial Jobless claims did improve a bit, but the number of individual seeking unemployment insurance for the first time remains stubbornly high. And if you’ve been watching the news headlines, the layoffs in corporate America continue to pile up (recall that Wal-Mart’s Sam’s Club announced it was laying off 12K just this week). In addition, the report on Durable Goods, while not a disaster, reinforced the concept of a sluggish recovery.

It also didn’t help that 3M’s CEO said that he sees “choppy economic waters ahead” and continued weakness in the auto and housing markets.

So, with the dollar breaking out, stocks responded in kind by breaking down on a chart basis. And if you look closely, you will see that the S&P 500 and the Dow have both put in modest “lower lows” on a closing basis. The bears will tell us that this means the uptrend that has been in effect since July is in jeopardy.

The good news is that the cloture and confirmation votes for Ben Bernanke in the Senate helped stem the tide of red ink and allowed the major indices to finish well off their lows. So, although the day wasn’t pretty, at least the Bernanke news kept things close.

Turning to this morning, earnings from Mr. Softie (MSFT) have put some traders in a better mood. In addition, we’ve got big news on the economy. The government’s advance report of the nation’s gross domestic product shows GDP increased at an annualized rate of 5.7% in the fourth quarter, which as well above the consensus estimates for a growth rate of 4.7% and the 2.2% growth rate seen in the third quarter. This was the best quarterly growth rate for the economy since the fourth quarter 2003.

The Personal Consumption component of the report came in with a gain of 2.0%, which was also above estimates for 1.8%. On the inflation front, the GDP Price index increased less than expected at 0.6% vs. 1.3% and the Employment Cost Index rose by 0.5% vs. the consensus of 0.4%.

Running through the rest of the pre-game indicators, the overseas markets are mixed by region with Asia following Wall Street lower and Europe higher. Crude futures are up $0.36 to $74.03. On the interest rate front, we’ve got the yield on the 10-yr trading higher at 3.68%. Next, gold is moving down by $0.60 and the dollar is lower against the Yen but higher against the Euro and Pound. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a strong open. The Dow futures are currently ahead by about 65 points; the S&P’s are up about 7 points, while the NASDAQ looks to be about 17 points above fair value at the moment.

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

Wall Street Research Summary

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