Market Commentary

Life is indeed stranger than fiction
April 28, 2010

Life is indeed stranger than fiction as I believe there is no way someone could make up recent events.  Earnings have been incredible. Goldman is being publicaly flogged.  Greece is on the verge of default if the IMF (read US) or EMZ (read Germany) does not bail Greece out.  Issues are arising in Portugal.  Data is suggesting a possible “V” shaped recovery.  There is a record treasury auction where demand is great.  And the Fed is expected to maintain current monetary policy for an “extended period of time.”

Commenting upon earnings, s per Bloomberg S & P 500 companies may rise by 29% this year and by 19% in 2011, the biggest two year advance since 1998.

Because of these incredible results cash is now at record amount on the balance sheets of S & P 500 companies totaling over $1.8 trillion [Bloomberg] and I believe these cash balances should permit the recovery to surprise on the upside as firms have huge sums available to buy/produce things.  This spending creates an environment for greater hiring.  In fact a major reason why consumer sentiment rose to the highest level in April since September 2008 was the belief that jobs availability is rising.

Regarding Greece, the situation is fluid as Greece’s two year debt is now yielding 23.9% as per Bloomberg.  The bailout has run into considerable political resistance in Germany, the country expected to fund the majority of a possible EMZ bailout.  As widely noted there is an election in Germany’s largest state on May 9 and most Germans are against bailing out their southern neighbor.  Some of Greece’s debt must be rolled over by May 16.

Because I think an EMZ bailout is improbable, that leaves the IMF as the only international body that has the wherewithal to fund Greece’s maturing debt.  However is not the US really bailing out Greece as the US is by far the largest contributor to the IMF?   On April 20 the Obama Administration requested from Congress $100 billion to lend to the IMF.  (Reuters)

While I do think an IMF bailout is the better than a Greek default to prevent the possibility of a European contagion especially as Portugal was downgraded, governments must begin to exercise fiscal restraints. 

While I do believe the averages are prone for profit taking yesterday’s 200 point Portuguese induced sell off could become a harbinger of things to come is the developed nations continue to act in a reckless fiscal manner. 

And then there is the conclusion of the two day FOMC meeting and the continuation of this week’s record treasury auction.   As one should expect treasuries rallied on the Greek/Portuguese news but will the advance continue today?

All are expecting no change in monetary policy and little altering of its post FOMC meeting statement however as noted above the economy appears to be recovering a pace sharper than anticipated even one month ago.  Will or how can the Central Bank address the rapidly changing environment, a point heightened by an extremely accommodative 0.00%-0.25% overnight rate.

Life is indeed stranger fiction.  As written many times the only constant is change.  It is the velocity of change that is frightening.

Last night the foreign markets were down.  London was down 0.61%, Paris down 1.66% and Frankfurt down 1.61%.  Japan was down 2.57% and Hang Sang down 1.47%.

The Dow should open flat albeit Europe was crushed on contagion fears.  At this juncture earnings are trumping sovereign debt concerns.  The 10-year is off 8/32 to yield 3.72%.