Getting Their Due

Daily State of the Markets 
Thursday Morning – April 8, 2010  

With the stock market having become a one-way street for the past two months, it is safe to say that the bears are overdue for a day or three in the sun. To help put things into perspective, we must recognize that since February 9th, the S&P had gained +12.6% through Tuesday’s close. And given that this would be a strong return for most calendar years, it would not surprise anyone to see some selling crop up at some point.

And some selling is exactly what we saw yesterday. Although there were some negative inputs, the key thing to understand about the game right now is that the bears are due to run with the ball for a while. Thus, the fact that some news out of Greece started things on a downward path yesterday shouldn’t have caused much concern.

Reports that Greece is uncomfortable with accepting financial aid from the IMF and was publically rethinking the idea sent global markets lower before the open yesterday morning. And the fact that Athens said it would have to revise up its deficit numbers due to weaker than expected growth definitely didn’t help matters. But despite the word “default” being bandied about again Wednesday, the fear of contagion was fairly subdued and the modest selloff in the markets appeared to be being taken in stride.

In fact, stocks actually turned around and rallied once the Treasury reported the results of its 10-year note auction. After two straight auctions that were considered fairly crummy by most analysts, traders were a little on edge about the demand for longer-term U.S. paper. So, the fact that the auction was well bid gave the bulls a lift. And before long, the losses were gone and there was some green cropping up on the screens.

However, the fun didn’t last long as just about the time the indices had peeked their heads above breakeven, Kansas City Fed President Thomas Hoenig used the words “raise rates” and “soon” in the same sentence. While everybody knows that Mr. Hoenig is not happy about the “extended period” language in the Fed’s current monetary policy statement, the fact that a voting member of the FOMC was talking about taking rates from 0% to 1% – and “soon” – was enough for the bears to return to the game.

It also didn’t help that the Federal Reserve reported Consumer Credit actually fell by $11.5 billion in February. Analysts had been looking for an increase in consumer borrowing during the month. Thus, the report created concerns that the return of the consumer might be a smoke screen.

In looking at the charts, the fact that the bears may be getting their due hasn’t done much damage so far. And as long as the Dow holds above 10,800 the charts will remain in decent shape. Finally, given the fact that expected good news from the earnings parade doesn’t get rolling for another week, we might expect to see some additional selling before the bulls return to the game.

Turning to this morning… We’ve got Greece complaining about the “barbaric rates” it is being asked to pay, the news that both the ECB and BOE have left rates unchanged, and the same-store-sales results coming in from the nation’s retailers (which, at first blush, appear to be strong).

On the economic front, the Labor Department reported that initial claims for unemployment insurance for the week ending April 3rd rose by 18,000 to 460K, which was above the expectations for a reading of 435K. Continuing Claims for unemployment for the week ending March 27th were below consensus at 4.55M vs. expectations for 4.63M. For comparison purposes, last week’s revised total was 4.681M (from 4.662M).

Running through the rest of the pre-game indicators, the major overseas markets are lower across the board. Crude futures are down $0.58 to $83.30. On the interest rate front, the yield on the 10-yr is currently trading at 3.86%. Next, gold is down $5.10 to $1147.90 and the dollar is higher against the Yen, Euro, and Pound. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to another lower open. The Dow futures are currently off by about 35 points; the S&P’s are down about 4 points, while the NASDAQ looks to be about 7 points below fair value at the moment.

Wall Street Research Summary

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