Market Commentary

Stocks were modestly higher and bonds modestly lower following the conclusion
January 28, 2010

Stocks were modestly higher and bonds modestly lower following the conclusion of the two day FOMC meeting.  In my view there was little surprise with the markets responding appropriately to a marginal upgraded economic outlook and the increasing but not imminent increase in rates.  There was also no real change regarding the eventual end of quantitative easing (QE) policies.

Yesterday the markets were also focused upon China and the political events in DC, events that overshadowed good earnings releases.  It appears that China is not rolling over loans and calling back loans made at the beginning of January perhaps foreshadowing a rise in nonperforming assets (NPAs). 

As noted several times, the Peoples Bank of China (PBOC) mandated its banks to lend up to 25% of GDP during the first six months of 2009 to combat the global financial crisis.  In my view lending at this rate is at best reckless.  Is China the next country to suffer a banking crisis?  If so how will such a crisis impact global growth assumptions?

Yesterday the markets were also concerned about the State of the Union Address (SOTU).  If the grilling the Treasury Secretary took regarding the government’s bailout of AIG is harbinger of things to come, potential policy decisions will be extremely damaging to the economy.  For the record I support last fall’s actions taken by both the Treasury/Federal Reserve. From where I sat the global economy and financial markets were indeed at the brink of the abyss and radical action was required.

Yesterday the markets were also faced with sovereign debt fears.  Will Greece, Portugal and Spain follow a similar path as Iceland?  Huge budget deficits and gargantuan social programs that redistribute the wealth coupled with higher taxes is a potent recipe to ensure inevitable economic collapse. 

What will occur today?  The vote to reconfirm Bernanke is expected this morning.  It is believed the FRB Chief will be approved.  And then there is the SOTU address.  How will the President’s remarks be interpreted?

As noted the other day the markets are facing another round of uncertainty, this one however is the result of Washington.

Last night the foreign markets were up.  London was up 0.74%, Paris up 0.87% and Frankfurt up 1.14%.  Japan was up 1.58% and Hang Sang up 1.61%.

The Dow should open moderately higher on the belief that the US economy is in recovery, a view extended yesterday by the Federal Reserve.  I think attention will now focus upon companies that can increase profits at greater pace than peer, not companies that have survived the worst downturn in at least 25 years.    The SOTU was essentially a non event with reaction along party lines.  The 10-year is off 6/32 to yield 3.67%.