Market Commentary

As penned last week all the European debt rescue
May 18, 2010

As penned last week all the European debt rescue package did was to buy time.  On a smaller scale the Greece crisis highlighted the intrinsic weakness of the European Union; one central bank and 16 disparate fiscal policies, not to mention cultural issues.  On a larger scale no one trusts the accounting behind the fiscal policies.  That is what ignited the crisis.  Not that Greece’s budget deficit as percentage of GDP was greater than the EU’s limitation, it was triple than what the government said it was.

Over the weekend it was announced the new UK government will empower an independent commission to review that country’s finances.  Will there be another negative surprise?  I think (hope) not but this action underscores the lack of trust.

The simple fact of the matter is either the government will fix the problem or the markets will resolve it in the form of high interest rates or the unavailability of credit regardless of price.  Any organization that losses credibility via the violation of trust is severely punished as lending is all about confidence.

Once trust is restored, which I hope will be in quick order, the issues surrounding out of control spending must be addressed.   Unfortunately it takes political courage and capital to resolve these problems as any cut or freeze in entitlement spending is met with great resistance.  However as written above, if the government does not find a solution the markets will.

Speaking of trust/credibility, the domestic markets are still reeling from the May 6 breakdown of trading, not only questioning the physical integrity of the trading systems but also why the decline actually did occur.

Last week I read a story on Bloomberg stating the largest Wall Street banks made money every trading day last quarter.  I forget the odds of such occurring but it something similar to winning the lottery, getting hit by a meteor and winning the Publisher Clearing House Sweepstakes all on the same day.  In my view such incredible success does nothing to build credibility, offering evidence that Wall Street is nothing but a rigged casino dominated by the largest entities. 

Markets require a Wall of Worry to move higher.  Perhaps today a mountain is being formed however I will also write if the issues are as troubling as some suggest the Dow would be around 6500 given the thin scab from the events of fall 2008/winter2009, declining under the guise of sell on rumor and buy on fact.  All must remember the markets are the ultimate discounter.

I reiterate my long held view the markets will remain volatile until fall trading in a range of 10250-11000 until another catalyst emerges.  I think this catalyst will be sustained economic growth permitting the averages to post a 10%-12% gain.

Speaking of volatile stocks were again volatile yesterday, erasing almost an 180 point deficit to close fractionally higher.  

Last night the foreign markets were higher.  London was up 1.21%, Paris up 2.34% and Frankfurt up 1.72%.  Japan was up 0.07% and Hang Sang up 1.17%.

The Dow should open moderately higher on belief that the Euro issues will not derail the global expansion.  The 10-year is up 1/32 to yield 3.48%.  PPI and housing starts are released momentarily.