Market Commentary

The tug of war is continuing
May 19, 2010

The tug of war is continuing...globally high deficits versus strong earnings and economic data.  I would like to discuss the later.  As widely noted earnings have been great, the result of strong economic activity and incredible productivity.

Yesterday housing starts exceeded expectations and rose to the highest level since October 2008.  Permits however declined by the greatest amount since December 2008 and are now at a 6 month low.  This data point can either be viewed as half empty or half full.

Viewed pessimistically, builders are not confident about the incipient recovery.    Optimistically new home inventories will not surge further suggesting builders are not borrowing from future starts. 

Perhaps one concrete statement to make about housing is that banks are still hesitant to lend.

As noted several times I believe the economy will continue to recover at a pace greater than most expect.  Greece is an issue however I think it will not evolve to be the issue some are suggesting.

The volatility continued yesterday as Germany surprisingly banned the naked short selling of Euro bonds, credit default swaps and 10 banks.  Strong arguments can be made for and against this action.  Will this help ease recent volatility?  Or is this suggesting that even greater issues are behind the proverbial curtain.  Trading, i.e. liquidity, between European banks was thin, perhaps as all are wondering what financial institution has the greatest exposure to Greek/PIIGS debt.

The simple fact of the matter entitlement spending throughout the world must be curtailed.  If it is not, the markets will curtail it for all.  If global deficits continue to grow at the current pace, there will not be enough monies to fund these deficits unless there is massive monetization of debt.

As noted many times, Washington has the potential to impact the economy/markets by the greatest amount in almost two generations.  One must follow the political happenings in an attempt to discern possible market/economic direction. 

Yesterday’s primaries in Arkansas, Pennsylvania and Kentucky will be analyzed many ways drawing many different conclusions.  I am a firm believer the American electorate is considerably smarter than most suggest.  We did not become the most powerful country in the world by being a bunch of bubbas whose only redeeming quality is drinking beer while watching reality TV shows.

When times are good, many quickly dismiss shortfalls or dysfunctional thinking.  People are generous.  The opposite is the case when times are difficult.

I reiterate my long held view the American electorate will arise and insist their leaders take the appropriate action.  If not, the electorate will elect someone who will.  Is this wishful thinking?  Is this another example of expecting the unexpected, the hall mark of this unending crisis?  In my view no.  There is ample precedent to suggest this is the typical course of action.

What will occur today?

Last night the foreign markets were down as Germany et.al are questioning the survivability of the Euro.  To state the obvious the weakest countries—the so called club Med countries—would be killed if the Euro is dissolved as these are the weakest members depending upon the relative financial strength of their northern brethren to obtain access to the markets for debt financing.  As stated above, what banks, hedge funds, etc. own the club-Med debt?  What entity has the contra party risk?

London was down 2.14%, Paris down 2.60% and Frankfurt down 2.21%.  Japan was down 0.54% and Hang Sang down 1.83%.

The Dow should open moderately lower on European concerns. The 10-year is off 5/32 to yield 3.37%.