Market Commentary

Stocks initially gained yesterday
March 26, 2010

Stocks initially gained yesterday as France bowed to German pressure to utilize the IMF in conjunction with the ECB to bail out Greece although at this juncture the details appear to be scarce.  Equities were also earlier boosted by profit forecasts that topped estimates and encouraging jobless claims.  Treasuries however declined again on disappointing auction demand for the seven year note.

Will the advance in equities continue?  What about the rout in treasuries?  Earning season is quickly approaching and if results again surpass expectations and if the data does not disappoint I think the odds favor further equity gains.  However there is always the proverbial “buy on rumor and sell on fact” scenario, the environment that history suggests had occured as fourth quarter earnings season commenced.

What happens if the data suggests a “V” shaped recovery, the view of a small but influential group of economists?  Will monetary policy assumptions be completely altered as all are expecting the overnight rate to remain low for an “extended period?”

If this does occur I think equities would undergo a period of rough sledding as interest rates are the primary component of most valuation models.  However I think any change in monetary policy will ultimately be viewed as an “all clear sign.”

Reflecting briefly upon weekly initial jobless claims, claims have declined three out of the past four weeks and the number of new claimants are at the second lowest level since August 2008.  Next Friday the all inclusive and influential BLS report is issued.  Consensus is now suggesting a 190,000 increase in nonfarm payrolls but some are forecasting a gain of over 300,000.  Obviously if 300,000 jobs are created in March, I think many will begin to rethink monetary assumptions.

As inferred above equities yesterday retraced a 100 point gain ending essentially unchanged.  The catalyst for the strong reversal was France’s statement that the region needs to take responsibility for its members and that possible IMF aid for Greece is “very very bad.”  As noted above France bowed to German pressure to permit such solicitation of help.

What will occur today?

Last night the foreign markets were mixed. London was down 0.25%, Paris down 0.22% and Frankfurt down 0.34%.  Japan was up 1.35% and Hang Sang up 1.32%.

The Dow should open nominally higher after European leaders agreed on an aid plan for Greece, easing concern the nation’s debt crisis will spread and derail global recovery.  The 10-year is up 8/32 to yield 3.85%.