Too Much Talk

Daily State of the Markets 
Thursday Morning – March 4, 2010  

Good morning. Just about the time traders had come to the conclusion that they didn’t really need to worry about Greece, that the economy just might continue to rebound after all, and that buying stocks seemed to make sense in an improving environment, the President decided to start talking about regulating the banks again.

Just about the time investors had concluded that the new gridlock in Washington was a good thing and that the administration had best stick to its knitting by focusing on the economy, the President decided it was time to start talking about health care again. And in short, all the talk reminded traders that there is still political risk in the market. And before you could look up the number of jobs that are expected to be lost in Friday’s Employment report, a nice gain in the market had evaporated.

Before the hate mail starts (digital or otherwise), let me say that it is not my intention to make a political statement here. No, the goal of our morning missive is to try and identify the drivers of the markets on a daily basis. So, when the market suddenly takes a dive after “looking good” for several days, our job is to make sure we understand the reason behind the move. And the bottom line is that stocks tanked immediately following word that the Obama administration was planning on not abandoning, but rather, stiffening the sol-called “Volcker rule.”

Up until that point, the major indices were enjoying another nice day. Traders liked what they heard out of Greece, the ADP private sector Employment report was relatively benign, Challenger, Gray & Christmas said that planned layoffs had fallen to their lowest level since July 2006, mortgage applications were on the rise, there was more talk about “who’s next” in the M&A game, the ISM report on the services sector came in above expectations, and the Fed’s Beige Book confirmed that the economy is indeed improving. What’s not to like, right?

Although the market had popped up rather nicely over the past few days and had become overbought in the process, the feeling was stocks were on a mission to recapture the high ground they had given up when everyone started worrying about Greece. With the small- and mid-cap indices already at new cycle-highs and displaying leadership, it felt like the market was in good shape.

But then the headline hit. In its draft of the Volcker Rule, which would prohibit banks from dealing with hedge funds and doing proprietary trading, the administration decided to expand its net and include “non banks” as well. The language from the White House notes that any financial firm identified as needing heightened supervision would be subject to additional oversight, additional capital, and have limits placed on trading activities – even if they aren’t banks.

While the reaction wasn’t dramatic – we’re only talking about 50 or 60 Dow points – the fear of more regulation for the financial industry was enough to send traders to the sidelines ahead of Friday’s big report on the labor markets.

In reality, the action wasn’t terribly alarming. We had opined that a pullback to test the breakout area would be logical and so far at least, that appears to be what we’re looking at from a chart perspective. So, we’ll continue to watch the 1110 area on the S&P and hope that we don’t see any new “tape bombs” come out of Washington.

Turning to this morning, the government reported Nonfarm Productivity in the fourth quarter increased by +6.9% (final), which was above the consensus for +6.3% and Q3’s rise of +8.1%. On the inflation front, Unit Labor Costs were reported to have fallen -5.9% (final) versus the prior reading of -2.5% and Q3’s drop of -4.4

Next up, the Labor Department reported that initial claims for unemployment insurance for the week ending February 27th fell by 29,000 to 469K, which was a smidge below the expectations for a reading of 470K. Last week’s revised total was 498K (from 496K). Continuing Claims for unemployment for the week ending February 20th were also below consensus at 4.5M vs. expectations for 4.6M and last week’s revised total of 4.634M (from 4.617M).

Finally, we’ve got same-store sales comparisons coming in from the nation’s retailers to reveiw. In scanning the list, we see a lot of green numbers, which means the results were above expectations.

Running through the rest of the pre-game indicators, the overseas markets are lower across the board. Crude futures are down $0.17 to $80.70. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.63%. Next, gold is moving downby $5.60 to $1137.70 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 slightly higher open. The Dow futures are currently ahead by about 20 points; the S&P’s are up about 2 points, while the NASDAQ looks to be about 2 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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