They Don’t Ask How…

Daily State of the Markets 
Thursday Morning – March 11, 2010  

Since we have run clean out of birthdays and anniversaries to talk about this week, we might as well get straight to the topic at hand: identifying the driving forces behind the stock market’s movements. Cutting to the chase, perhaps the best way to summarize the action of Wednesday (and the rest of the week, for that matter) is with the old golf cliché, “They don’t ask how, just how many.”

How does a saying that is generally associated with a ball taking a lucky bounce (usually off of a tree, a cart path, or a sprinkler head) apply to the stock market, you ask? In short, the bears have been grumbling about the gains in the stock market this week. The chief complaint is that short-covering induced gains in companies where the government is the primary shareholder shouldn’t be viewed as a positive at all. In fact, our furry friends go so far as to suggest that such gains are temporary and will quickly be reversed.

However, on the other side of the aisle, our heroes in horns can be heard citing golf lore and pointing out that a gain is a gain, regardless of how it is acquired.

At issue here is the fact that the primary mover of stocks this week has been a short-squeeze in the poster children for the government bailouts during the credit crisis: C, AIG, FNM, and FRE. The “squeeze” has been triggered by a couple of issues. First, there is the rumor that the SEC is about to change the rules associated with shorting these and other companies. Why cover a short if shorts are going to be banned? The idea is to cover now in order to get ahead of the game and to perhaps avoid the mother of all short squeezes if the rules are actually changed. (For the record, the SEC has denied all rumors of changes in short selling rules as they apply to the companies in question.)

The second reason behind the blast higher in these stocks is the fundamental story. Citi’s recent offering was oversubscribed and AIG is selling off assets. The bottom line here is these transactions have put some price tags on the holdings of the companies. This has value-oriented investors playing with their calculators and concluding that there is value in the rubble of these once great firms – assuming of course, that we will see a meaningful recovery in the economy.

But, regardless of your view on the fundamentals involved with the likes of Citi, AIG, and Fannie/Freddie, the bottom line is the market finished higher again on Wednesday. For those of you keeping score at home, the NASDAQ put up its fifth straight gain while the small caps in the Russell 2000 finished in the green for the eighth consecutive session.

In addition to the fun in the banking sector (which is up 13% since the March low), the semiconductors benefited from some upbeat analyst commentary (the SOX was up 2.2% on the day) while more M&A speculation provided some additional support.

However, while we support the bulls’ right to invoke the “they don’t ask how, just how many” explanation for the recent gains, we must also recognize that the joyride to the upside is getting a little long in the tooth. Everybody on the planet sees that stocks are now overbought and that the Dow and S&P are encountering some resistance. Thus, logic would dictate that the bears ought to find a reason to do some selling in the near-term – even if they need a ball to bounce off a tree to get things going their way.

Turning to this morning, the Labor Department reported that initial claims for unemployment insurance for the week ending March 6th fell by 6,000 to 462K, which was a smidge above the expectations for a reading of 460K. Continuing Claims for unemployment for the week ending February 27th were also above consensus at 4.558M vs. expectations for 4.5M and last week’s revised total of 4.521M (from 4.5M).

Running through the rest of the pre-game indicators, the overseas markets are fairly quiet with most indices waffling around breakeven. Crude futures are down $0.38 to $81.71. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.74%. Next, gold is moving up $0.30 to $1108.40 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 lower open. The Dow futures are currently off by about 30 points; the S&P’s are down about 5 points, while the NASDAQ looks to be about 8 points below fair value at the moment.

Wall Street Research Summary

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