Market Commentary

The familiar refrain “Never Short A Dull Market” is echoing.
March 11, 2010

The familiar refrain “Never Short A Dull Market” is echoing.  All financial markets were again relatively quiet attempting to discern the strength of the recovery and the direction of monetary policy.  In my view yesterday’s release of several third tier data points offered little economic insight.  Will this change today as both the trade gap and weekly jobless claims are released?

I would like to comment upon the strength of two sectors—technology and financials.  Capital spending is dependent upon corporate cash flows.  If companies are not making money, little money will be allocated to computer/software expenditures.  As widely discussed, corporate profits declined for a record nine consecutive quarters before expanding last quarter by 75%. 

Fourth quarter GDP suggested business and software expenditures rose by 13%. Data is suggesting a similar increase for this quarter.  This is the strongest back to back spending in about 10 years.  The NASDAQ’s 73% 12 month advance is perhaps a reflection of this strong rebound in computer spending predicated by a return of corporate profitability.

Regarding the financials, the KBW Bank Index is up 121% over the last 12 months albeit it is still down almost 60% from its February 2007 apex.  In order to have a strong economy a strong banking system is required.

If the economy is accelerating at a 4% pace and if March’s nonfarm payrolls rise between the estimated 50,000 and 300,000, I think March will be regarded as the month where the biggest threat to the economy is interest rate not event risk.  In my view the year long advance in the financials is one of relief…borrowers are able to repay loans.  I think the advance could accelerate if the above transition does occur.

As stated above, the trade gap and weekly jobless claims are released today at 8:30.  A $41 billion deficit and 460K claims are expected, respectively.

Last night the foreign markets were mixed. London was down 0.44%, Paris down 0.44% and Frankfurt down 0.09%.  Japan was up 0.96% and Hang Sang up 0.09%.

The Dow should open nominally lower.   The 10-year is off 5/32 to yield 3.74%.

The yield curve or the difference between the thirty year and two year treasury is now 3.79%, close to the 3.85% level achieved on February 17, the most since at least 1980as per Bloomberg.  A steeply sloped yield curve is closely correlated to an accelerating economy, an environment that could perhaps create inflationary pressures.  Perhaps the steeply sloped yield curve is suggesting a 300,000 increase in March’s nonfarm payrolls is not as outlandish as it may appear.