Market Commentary

Equities declined about 1.25% as the SEC
April 19, 2010

Equities declined about 1.25% as the SEC sued Goldman Sachs for fraud tied to collateralized debt obligations. (CDOs)  Goldman obviously denies any such wrong doing.

As noted last week I believe the markets are over bought and subject to profit taking, perhaps predicated by fears of a potential change in monetary policy or from the proverbial “buy on rumor and sell on fact” scenario as earnings exceed expectations  I did not suggest it would be from fraud charges levied against a large financial.

There are numerous questions that such charges beget.  For example, how long were these charges in the offing?  Did the SEC delay filing these charges until all became convinced the financial industry could weather such charges?  Around this time last year I wrote the possibility of such a scenario evolving. If this is indeed the case, a positive spin is that these charges are “An all clear sign.”

Can other firms be implicated?  Is Goldman the proverbial canary in the coal mine?  Are there politics involved especially as it relates to the financial reform bill that is currently being debated in Congress?  Is the SEC attempting to convince Congress that it is still an effective regulatory agency?  Or are there more sinister political motives including the possibility of Presidential politics as the Administration desperately needs a solid victory to boost slumping approval ratings.  Many abhor Goldman and view it as the poster child for all that is wrong in banking.

For the record, I believe regulation is required in the derivative and CDOs/CDS market, regulation that includes increased transparency of pricing and contra party risk.  An efficient and transparent market needs to be developed.

What impact will these charges have upon the largest financial results?  Currently the banking system is minting money via the sharply sloped yield curve…borrowing money at 0.50% and lending it at 7.0%.  Can any potential fines be meaningless given the steepness of today’s slope?

I think the greater long term damage that these charges enable the passage of an extremely restrictive financial reform bill.

Earnings season accelerates this week.  Profits released to date have been great, exceeding expectations.  Will the trend continue?

The economic calendar is also heavy.  Releases include the LEI, inflation, durable goods and housing.  Speaking of housing, last week’s housing data was stronger than expected offering evidence that this beleaguered sector has finally turned.  Will this week’s data confirm or deny this view.

Last night the foreign markets were down.  London was down 0.61%, Paris down 0.64% and Frankfurt down 0.37%.  Japan was down 1.74% and Hang Sang down 2.10%.

The Dow should open moderately lower after further regulatory probes on Goldman widened in Europe.  I reiterate a statement written above…As perverse as this might sound is this the “All clear sign” for in my view for as even as six months ago the financial system was still too fragile that it would not have been able to withstand such questioning.  The 10-year is off 2/32 to yield 3.77%.