Market Commentary

Stocks rallied on a better than expected
February 10, 2010

Stocks rallied on a better than expected NFIB Small Business survey and hope that Europe will compose a bailout plan for Greece.  Yesterday I read an article in the Financial Times stating that hedge funds have amassed the largest short interest ever in a single currency—the euro.  I rhetorically thought the euro was being pounded because of fears of Eurozone debt and the FT confirmed this view.  Wow!

I think the problems that Greece is facing are similar to the predicaments that other Western countries may be facing….large deficit spending to stimulate/resuscitate growth.  Under basic Keynesian philosophy this spending is required to jump start production via stimulating private investment but then must be repaid.

However I believe many governments, including the current Administration, has no intent to slow spending much less repay it other than increasing taxes that will further curtail growth.  As noted the other day and as per the National Bureau of Economic Research an exogenous tax increase of 1% of GDP lowers real GDP by roughly 2% or 3%.

Moreover this spending should encourage private investment, not curtail it.  Recent surveys clearly demonstrate Washington is a major issue as to why private investment is not occurring at the pace anticipated.

Most will state the Administration’s agenda is similar to that of the European socialist democracies.  It is clearly evident, especially via the largest short interest in the currency of the 27 nation Eurozone, this socio/economic structure is believed as flawed.

Can or will the Administration change its agenda?  Can the President offer true leadership to tackle this issues the country is facing?  Yes there are proposals to reduce some types of discretionary spending, but there are none regarding reducing entitlement spending of Social Security, Medicare and Medicaid which comprise 38% of the budget.  In fact entitlement spending has risen exponentially under the current Administration with plans for even greater increases.

I am fearful speculation can become rampant regarding the potential outcome of such out of control spending.  It must be dealt with directly, addressing the true issues at hand. 

I am however an optimist and I believe solutions will be found.  The President’s approval ratings have plummeted partially the result of unbridled spending.  If the Administration and Congress does not change their ways, the electorate will change its members.

What will occur today? 

Last night the foreign markets were up.  London was up 0.77%, Paris up 1.10% and Frankfurt up 1.10%.  Japan was up 0.31% and Hang Sang up 0.67%.

The Dow should open nominally higher on the prospect for German aid for Greece alleviated immediate default concerns.  The 10-year is up 7/32 to yield 3.62%.