Market Commentary

A combination of a slowing Chinese manufacturing
May 05, 2010

 A combination of a slowing Chinese manufacturing sector and questions arising over Greece’s restructuring amplified by a market ripe for profit taking, stocks were hammered. This is the sixth consecutive day the Dow has moved triple digits and the fourth consecutive day stocks have either closed 100 or more points higher or lower from the preceding day.

Even though I have expected volatility, I did not expect it would be this severe.  The obvious interpretation to make is that there is a tug a war between great earnings, strong economic activity versus sovereign debt issues.

As widely discussed a fragile IMF/EMZ bailout has been crafted for Greece.  Because of the austerity measures demanded by this bailout, public work unions in Greece are protesting. Wow!  As also disseminated Germany is a major participant of the EMZ whose participation must be approved by the German parliament on Friday, several days before a contested election where Greece bailout has evolved into a major issue.

In my view if German politicians even hint they will delay the vote, volatility will increase further.

Will the bailout come to fruition?  If not what are the implications?  Will Europe/global financial system experience a/another fall 2008/winter 2009 meltdown?  Will the Euro become a meaningless currency?  As inferred above evidenced by recent volatility, many are nervous.

As per Credit Suisse, American banks have little exposure to Greece or European debt, the inverse of the Panic of 2008 when it appeared the entire world had a position in American mortgages.  Yes there could be volatility and great worry; I do not think it will be the issue some could irrationally fear.

If the Euro does unravel I do not think it will be disastrous under the simple premise that success was not guaranteed.  Several years ago I wrote the odds are significant the Euro will not survive its first major challenge under the simple premise of “there is no interest like self interest.”  I additionally wrote it would be difficult for a single currency to survive/thrive given 16 different governments whose fiscal policy is controlled by not the interest of the aggregate but by the interest of the individual.

Little did I realize how prophetic my thoughts would become. 

What will occur today?  The private ADP Employment survey is released.  Analysts are expecting a 30K increase, the first such increase since January 2008.  The ISM Non Manufacturing Index is also released.

What are the odds the greatest concern of the markets will evolve back to monetary policy, fearing an increase in interest rates might occur sooner rather than later given the strength of recent economic reports?  Radical yes but the inconsistency of this crisis is its inconsistencies.

 If the economy is on the verge of hiring, what does this hiring to profit expectations?  In my view a reason why earnings have been so great is that corporate America fired too many people last year to ensure survivability.  Labor is the largest cost of production.  If labor costs rise, will profit expectations decline?

I reiterate my long held view, for whatever the reason I think stocks will experience a period of rough sledding for a moderate period of time but end the year 10% to 12% higher.

Last night the foreign markets were down.  London was down 0.37%, Paris down 0.35% and Frankfurt down 0.11%.  Japan was closed for a holiday and Hang Sang down 2.01%.

The Dow should open nominally lower on European contagion fears. The 10-year is up 3/32 to yield 3.58%.