Market Commentary

A New Year and decade has begun.
January 05, 2010

A New Year and decade has begun.  Ten years ago all were euphorically optimistic adamantly stating we have entered into a New Paradigm where the business cycle is dead.  Ten years later and the Dow trading about 400 points lower than it stood in January 2000, the inverse is true.  Many believe capitalism and the markets are toast, forever altered by the events of the last two years, destroyed by a combination of massive government intervention and greed and arrogance.

Similar as too 2000 where I did not believe we had entered into a New Paradigm, I do not believe capitalism nor the markets are toast.  Yes there will be change and increased regulation especially in the credit default and derivative markets; I do believe the markets will navigate these challenges as markets are people and people move markets. 

Speaking of markets equities surged yesterday on a stronger than expected reading for the national ISM survey.  This national manufacturing index expanded in December by the fastest pace since April 2006 capping a late 2009 global factory rebound that helped pull the world out of the worst slump since the 1930s.  The annual advance for the ISM was the greatest since 1983.

Can I write that it is never different, there are just different people?  In every post WWII recession manufacturing and housing have led the recovery.

Speaking of housing, pending home sales are released today.  Will there be a similar upside surprise in the data?

Friday the all inclusive unemployment data is released.  Consensus is expecting nonfarm payrolls to be flat, meaning no job losses for the first month since December 2007.  If this does occur, could hiring return in January?

In every post WWII recession for the exception of the previous two job growth began within sixty to ninety days after the recovery commenced.  If the economy does produce jobs in January it would be consistent with the long term norm.

I reiterate my view monetary policy will change faster than most expect, perhaps following January’s jobs data released on the first Friday in February.  I can envision a scenario of two consecutive months of jobs growth, a “five handle” for the initial estimates of fourth quarter GDP and surprising strength in housing data given the complete lack of inventory.  New homes available sale are at the lowest absolute level since May 1971….239,000.

What are the odds of a February change in monetary policy?  Will it make a difference given that rates are around 0.00% considerably lower than the 25 year average of 5% and monetary neutrality is around 3.0%?

I think when the inevitable change does occur equities will decline 5%-7% but end 2010 higher by 10%-12% as profit growth supports valuations.

Wishful thinking?  2008 and 2009 the unexpected occurred. Perhaps 2010 will be the year of normalcy.

What will occur today?

Last night the foreign markets were up. London was up 0.61%, Paris up 0.22% and Frankfurt up 0.03%.  Japan was up 0.25% and Hang Sang up 2.09%.