Deal or No Deal?

Daily State of the Markets 
Friday Morning – March 26, 2010  

The European version of “Deal or No Deal” spoiled another perfectly good rally on Wall Street Thursday as infighting between Germany and France allowed traders to go both ways with gusto. After weeks of what is now being referred to as the “tortoise rally,” volatility made a big comeback yesterday – in both directions.

The day started off with a confluence of positives. First, Germany’s Chancellor Angela Merkel said she would support a combination of Eurozone and IMF aid to Greece as a measure of last resort. This appeared to put an end to the worry that the bickering between France and Germany would stall a deal for Greece. Next, the weekly report on Jobless Claims showed that the job market continues to improve, albeit slowly. This seems to support the sentiment that the economy is on the cusp of creating jobs in the next few months. And finally, the earnings from Best Buy (BBY) seemed to put the icing on the cake of a very nice earnings season for retailers. This in no small way helps downplay the idea that the consumer is dead.

The combination sent stocks higher at the open. Then word that Ben Bernanke remains committed to keeping the punchbowl available for an extended period (or at least until the recovery becomes stronger) as well as the report that Germany and France had formally agreed on an aid plan for Greece sent stocks to highs of the day – up nearly 120 points on the DJIA.

In the process, the S&P 500, DJIA, NASDAQ, Russell 2000, and S&P Midcap indices all hit new 52-week highs and as traders headed off to lunch, it looked like we were on our way to a continuation of the melt-up. Even another relatively weak response to the Treasury’s auction of 7-yr notes didn’t initially derail the rally train.

However, it was all downhill from there once ECB President Jean Claude Trichet said publically that IMF involvement in any Greece bailout was a “very, very bad” thing. In short, the game of “deal or no deal” with Greece finally got on traders’ nerves and their response was to send a message via some concentrated selling.

Now mix in a new high for the year for interest rates as the yield on the 10-year finished at 3.90% (with the economy improving, rates moving up is a natural response) and a clear breakout for the dollar, and you’ve got a delicious recipe for sell programs. And with the Dow plunging something on the order of 100 points in the last hour, it is a safe bet that there was some computer assisted selling happening.

While it was no fun to see the market give up another batch of nice gains and finish down on the day, we had opined earlier in the day that the market was vulnerable to a sudden reversal. Our thinking was that it felt like things were just getting a little too frothy to continue unabated. And the good news is that although the reversal day (however, this was NOT a “key reversal”) looks fairly ugly on the chart, the uptrends remain intact.

Turning to this morning… Confirmation from the EU that there has been agreement on a plan for Greece is helping the mood a bit.

On the economic front, the government’s 3rd (and final) revision of the nation’s fourth quarter GDP shows the economy grew at an annualized rate of 5.6% in the fourth quarter, which was below the expectations for a growth rate of 5.9%, but still well above the 2.2% growth rate seen in the third quarter. The Personal Consumption component (consumer behavior) of the report also came in a bit light with a gain of 1.6%, which was below the estimates for 1.7%. On the inflation front, the GDP Price index increased a tenth more than expected at 0.5% vs. 0.4% and the Core PCE rose by 1.8% vs. the consensus of 1.6%.

Running through the rest of the pre-game indicators, Asian markets are higher while European bourses are now a little lower. Crude futures are up $0.36 to $80.97. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.88%. Next, gold is moving up $4.10 to $1097.00 and the dollar is lower against the Yen, EUro and Pound. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a modestly higher open. The Dow futures are currently ahead by about 35 points; the S&P’s are up about 4 points, while the NASDAQ looks to be about 10 points above fair value at the moment.

Wall Street Research Summary

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