Of Banks, Obama, and the Buck

Daily State of the Markets 
Friday Morning – January 22, 2010  

Good morning. Stocks were tagged for steep losses on Thursday in response primarily to three factors. While the President’s latest round of bank bashing (there have three incidences this week, alone) and the ensuing uncertainty received most of the attention yesterday, it was actually another surge in the dollar that got things started off on the wrong foot in the early going.

Although the extent of the damage in the stock market was indeed a surprise Thursday, the fact that stocks moved down in the early going was not. For starters, strong macroeconomic data (GDP and CPI came in higher than expected) out of China renewed concerns about further tightening measures. And since China has been the driving force behind the global recovery theme, the cliché “don’t fight the Fed” continues to come up early and often in discussions on this subject.

Next up, the closely watched report on weekly jobless claims disappointed for the second week in a row. With investors looking to better days ahead in the economy, the fact that the numbers for both initial and continuing claims for unemployment insurance continue to disappoint serves as a reminder that job growth remains a big problem for the economy going forward.

With the futures pointing lower, traders expected to see some red at the open. But with earnings from the likes of Goldman Sachs (GS) coming in well above expectations and no technicals levels having been violated, things perked up at the open and there was some hope that the buyers would emerge at some point during the session.

However, suddenly and without warning, the market began to drop like a rock. And while the President’s proposal to break up the banks was eventually blamed for the move in the popular press, it was actually a spike in the dollar above important technical resistance that caused the program selling to kick in. Although the whole currency analysis thing gets a little complicated at times, it was pressure on the Euro that created buying in the dollar. And with the Euro breaking down (and the dollar breaking up), it was clear that stock market sell programs kicked in on the currency movement.

Why is this a problem, you ask? While we hate to beat a dead horse, the issue with the rising dollar remains the problems created by the unwinding of the dollar-carry trade. And once again, just like clockwork, when the dollar rose yesterday stocks, commodities, and the emerging markets sold off hard. In short, while all eyes are on the banks right now, this remains an important area to watch.

And then finally, we got the President’s new proposal to break up the big banks. Blaming “proprietary trading” for the credit crisis, the administration basically told the banks, “You can choose to engage in proprietary trading, or you can own a bank, but you can’t do both.”

While there was a fair amount of political rhetoric attached to the announcement, it was the uncertainty of what such a plan would bring to the banking industry as well as the economy that kept the sellers in business for the remainder of the day yesterday.

Thursday’s drubbing in the market violated several short-term key technical levels and the increase in volume was not lost on chart watchers. However, there is still some support to be found on an intermediate-term basis and we’d watch the action around the Dow’s 50 dma closely.

Turning to this morning, we don’t have any economic data to review before the bell today, but there is another batch of earnings numbers to sift through including numbers from Google (GOOG), American Express (AXP), Advanced Micro (AMD), Capital One (COF), GE (GE), McDonald’s (MCD), and Schlumberger (SLB).

Running through the rest of the pre-game indicators, the overseas markets are lower across the board. Crude futures are down $0.30 to $75.78. On the interest rate front, we’ve got the yield on the 10-yr trading higher at 3.60%. Next, gold is moving down by $8.60 and the dollar is higher against the Yen and Pound, but lower versus the Euro. Finally, with about 60 minutes before the bell, stock futures in the U.S. are pointing to a modestly lower open. The Dow futures are currently off by about 27 points; the S&P’s are down about 4 points, while the NASDAQ looks to be about 5 points below fair value at the moment.

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

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