Rewind to the Unwind

Daily State of the Markets 
Thursday Morning – January 21, 2010  

Good morning. Stocks struggled through their roughest outing of the year on Wednesday in response to worries about the Chinese putting the clamps on lending, more weak earnings out of the banks, and a rather unexpected result of the Scott Brown victory in Massachusetts.

I will have to admit that I did go to bed Tuesday evening looking forward to green screens on Wednesday. After all, since stocks had rallied tripe-digits on the potential that a Republican could win the Senate seat in Massachusetts, it wasn’t much of a stretch to think that the bulls might really get the party going now that victory had been confirmed.

However, the news that Chinese officials had instructed big banks to halt lending for the remainder of the month because they had already exceeded the monthly quota in the first two weeks definitely put a damper on the celebration. The bottom line here is there is little doubt that China is looking to tighten monetary policy. Thus, the worry now is that they will go too far and wind up hurting economic growth.

Next up, the results from the banking sector continued to come in on the punk side as nearly all the big bank reports have been light on revenue. Bank of America (BAC) said that part of their problem during the quarter could be blamed on slack loan demand, which doesn’t sound like a good thing. So, things were not looking great even before the opening bell rang.

However, once the bell did sound, things proceeded to get ugly in a hurry. Since the futures were projecting a quick drop of 50 points, the fact that the numbers were red wasn’t surprising. But it definitely was surprising to see the opening plunge just keep going. And before you could find the coffee cup, stocks were down 170 points. Huh?

So, in the desperate search for the reason behind the rather fervent dance to downside we finally came to a chart of the dollar. To which, I responded with, “Oh, so we’re back to that.”

Back in mid-to-late October, investors were introduced to the concept of the dollar-carry trade and the potential risks it presented to investors if the trade started to unwind prematurely. With the idea of borrowing in dollars and investing stocks, commodities and emerging markets having become all the rage amongst the big-money crowd, Nouriel Roubini opined at the time that “there could be a market crash all over the world when the U.S. dollar reverses [higher].”

While we hate to bring up this subject again, the combination of the Republican victory in Massachusetts and the pressure on the Euro (caused by further problems in Greece) sent the dollar skyward yesterday morning. And with the stronger dollar came, yep, you guessed it, selling in stocks, commodities, and emerging markets.

So, while we don’t want to suggest that everything is all about the dollar, the swiftness of the drop yesterday morning tells us that this remains an area to watch going forward.

Turning to this morning, the earnings parade continues as Goldman Sachs put up impressive numbers and Freeport-McMoRan also easily beat the street.

On the economic front, the Labor Department reported that initial claims for unemployment insurance for the week ending January 16th increased by 36,000 to 482K, which was above the expectations for a reading of 440K. Continuing Claims for unemployment for the week ending January 9th were in line with consensus at 4.599M vs. expectations for 4.598M and last week’s revised total of 4.617M (from 4.596M).

Running through the rest of the pre-game indicators, the overseas markets are mixed but Europe is modestly higher across the board. Crude futures are up $0.17 to $77.91. On the interest rate front, we’ve got the yield on the 10-yr trading higher at 3.67%. Next, gold is moving down by $8.30 and the dollar is lower against the Yen but higher versus the Euro and the Pound. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a lower open once again. The Dow futures are currently off by about 20 points; the S&P’s are down about 3 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

Wall Street Research Summary

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