Market Commentary

Market direction is dependent
May 03, 2010

Market direction is dependent upon the perception of what might happen tomorrow.  Stocks fell the last day of April on mounting legal concerns against Goldman rose and fears that next week might be the equivalent to TARP II The European version.  I would like to discuss the later.

Next week the German parliament must vote as whether or not it will support a Greece bailout.  As widely noted the most populous German state has an election on May 9.  A portion of Greece’s debt must be rolled over by May 16.  However as per Bloomberg a bailout must be crafted by next Friday, several days before the German election.

At this juncture it is highly unlikely the German parliament will approve such funding thus suggesting European markets might face a considerable decline if prices follow the same path as domestic equities did when TARP was first rejected.  To remind all US equities fell 8.5% the day after Congress failed to pass the measure.

There were various rumors circulating Friday that the Fed and the ECB are discussing the possibility of re establishing swap lines in case the Greek crisis turns into a European contagion, a scenario some believe is increasingly likely if the ECB, EU and European officials continue to procrastinate regarding lending funds to Greek.  Some believe the situation could quickly flare up into a banking crisis of global crisis.

I believe—and so does the markets--a deal will eventually be done, a bailout structured and funded primarily by the IMF but only after much debate.  If the markets did not think such a bailout is indeed plausible, all markets—especially European—would already be crushed.

Commenting upon Goldman’s criminal investigation, because of Goldman’s high profile and the public angst towards this company and Wall Street, such legal action should be expected.  In my view it is also a sign of economic strength.  Last year the financial sector would have been able to withstand such an onslaught.

Speaking of the economy, in my view first quarter GDP was largely as expected.  Inventories contributed about 1.6% to growth, slight more than the 1.0% expected gain but purchases by households rose by 3.6% versus the 3.2% consensus view. Real final sales (domestic GDP less inventories) rose by 1.6% versus the consensus view primarily the result of lower state and local spending.

For the six months ending March 31 the economy expanded at an annual rate of 3.2%, the best six month performance since the second half of 2003.

What will happen this week?  Obviously Greece will be front and center.  The economic calendar is extremely heavy as personal income/spending, ISM, vehicle sales, factory orders ,ISM Non manufacturing, pending home sales, a host of private employment surveys and the BLS employment report are all released.

Last night the foreign markets were down. London was down 1.15%, Paris down 0.52% and Frankfurt down 0.14%.  Japan was up 1.21% and Hang Sang down 1.41%.

The Dow should open higher on merger news and economic optimism.  Greece was bailed out over the weekend.  The IMF and the Euro region governments loaned that beleaguered government $146 billion to stop a possible contagion.  Will Greece public unions accept the austere budget cuts mandated by such a bailout?    The 10-year is off 10/32 to yield 3.69%.