This Little Piggy Went to Market

Daily State of the Markets 
Friday Morning – February 5, 2010  

Good morning. Market technicians like to say “the tape tells all.” The thinking among chart watchers is you should ignore the news and just watch the action on the charts. But perhaps one of the most difficult aspects of managing money in the markets is dealing with a fear-based panic such as we saw yesterday. The problem is that when your charts are plunging, those flashing red numbers don’t always tell you why the dive is occurring. And in my humble opinion, understanding why a move occurs is probably more important than deciphering the importance of trendlines, moving averages, and support/resistance zones.

If you glanced at the major press headlines and/or listened to the radio looking for answers about why the market was suddenly getting trashed yesterday, you may have been misled. Early in the day, we heard lots of talk about the weekly jobless claims being the primary reason for the market decline. Then there were stories about disappointment over the pace of the economic recovery. And one radio report in Chicago blamed the big drop on fears about this morning’s jobs report. Although all points may have been true, these were NOT the catalysts for the dance to the downside.

Nope, yesterday’s rather ugly action can be summed up with a little game we’ve probably all played with our kids when they were little. So, here goes… The story behind the 268 point tank job on the Dow can be summarized with the following, “This little piggy went to market… This little piggy stayed home.”

The concerns about sovereign debt problems in the PIGI’S (Portugal, Italy, Greece, Ireland, and Spain) is not new. However, on Thursday, the situation got worse as one of the PIGI’S “went to market” with a 500 million Euro t-bill auction. But unfortunately the rest of the PIGI’S (and just about every other country) apparently stayed home as only 300 million Euro worth of bills were purchased.

In short, it was Portugal’s “failed auction” that put the fear of credit contagion back on the table yesterday. Never mind that Portugal is a small country. Never mind that the EU had just given their stamp of approval on another PIGGI’S (Greece) plan to reduce their deficit. Never mind that there has not yet been the hint of a default on sovereign debts. And never mind that fact that the U.S. debt-to-GDP is no better, or even worse, than the PIGGI’S. The key here is that a sovereign debt auction failed because the risk was perceived to be too high.

One of the big reasons the credit crisis got out of hand in 2007/08 was the idea that traders/investors no longer were pricing risk properly in the debt markets. Thus, it is no surprise that the market might now be ultra sensitive to the risk of default.

The bottom line is traders and investors have seen this movie before and they did not care for the ending. So, instead of hanging around with the assumption that the EU won’t let any of the PIGGI’S fail, traders decided to sell risk assets instead.

We’re of the mind that this will likely wind up being a “bad-news panic” where stocks “whoosh” lower for a spell and then snap back when it becomes clear that the worst case scenario isn’t likely to transpire. But for now, it might be a good idea to take your foot off the gas pedal.

Turning to this morning, we’ve got the Big Kahuna of economic data – the Jobs Report – so, let’s get to it. The Labor Department reported that Nonfarm Payrolls in the month of January fell by 20,000, which was well below the consensus estimates for an increase of 15,000 jobs.

The nation’s Unemployment Rate was reported at 9.7%, which was below the consensus for 10% and December’s rate of 10.0%. This number appears to be out of whack. We should note that this is likely due to people “falling out of the workforce” and is not indicative of the jobs picture improving. We’d also point out that this data comes from a different source than the nonfarm payrolls.

There were revisions to the December payrolls as the Labor Dept. now shows December having lost 150K jobs, which was well above the prior report of 85K.

Running through the rest of the pre-game indicators, the overseas markets were lower across the board. Crude futures are down $0.53 to $72.61. On the interest rate front, we’ve got the yield on the 10-yr trading higher at 3.63%. Next, gold is moving down by $6.10 and the dollar is higher against the Euro and the Pound, but lower against the Yen. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a slightly higher open. The Dow futures are currently ahead by about 15 points; the S&P’s are up about a point, while the NASDAQ looks to be about 5 points above fair value at the moment.

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

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