Market Commentary

Stocks tumbled yesterday by the greatest amount since November
January 21, 2010

Stocks tumbled yesterday by the greatest amount since November as China moved to curb bank lending, concerns about Grecian Sovran debt, and earnings that are marginally exceeding expectations.  As written previously I think the markets have fully discounted fourth quarter earnings, declining via the proverbial buy on rumor and sell on fact.

However what I do think was interesting is the performance of the tier II and tier III financials.  One day does not make a trend but many of the smaller community banks and midsized regionals posted handsome advances.

Event risk (loan defaults) is the greatest threat to these entities. As evidenced by the highest price for bank tradable loans and the lowest price for credit default swaps (CDS) since December 2007, the market is suggesting event risk is not the issue it was six months ago. 

Typically bank charge offs are lower for the smaller banks as compared to their large cap brethren as the smaller lenders are more apt to work with troubled borrowers.  This is probably the result of their inability to access the capital markets and the mono revenue line.  If the worst has passed, earnings for the tier II and tier III financials should sharply accelerate.

At the end of the last banking crisis in 1991ish, these smaller financials surged with many posting exponential advances.  Will history repeat itself?

I reiterate my view that in three months the greatest risk to the banks will be interest rate risk not event risk as the Fed accelerates ending its quantitative easing programs.

I would like to add further comment about Tuesday’s election.  I believe it is the “off noticed” events that change society.  About 12 years ago Thailand defaulted on the Bhat.  Almost all dismissed this as meaningless.  As we all know this ushered in the emerging market crisis that crippled Long Term Capital Markets (LTCM) which almost brought down the global financial system.  [Note:  It was a warm up for 2008’s crisis]

As little as 10 days ago, many were dismissing Massachusetts off year/off month special election as a meaningless non event.   How will the loss of this senate seat impact Washington?

Yesterday I asked the rhetorical question will tax stability or actual tax reduction become a new tenant of economic policy?  As per the Bank of Montreal, the Obama Administration is now floating trial balloons to gauge congressional sentiment in extending the Bush tax cuts from 2010 to 2012.

Wow!  Life is indeed stranger than fiction!

What will happen today?

Last night the foreign markets were mixed. London was down 0.10%, Paris up 0.25% and Frankfurt up 0.14%.  Japan was up 1.22%and Hang Sang down 1.99%.

The Dow should open little changed ahead of several top tier earning releases and ahead of the Index of Leading Economic Indicators that gained for nine consecutive months. The 10-year is off 4/32 to yield 3.66%.