Market Commentary

Stocks were again hammered on European concerns
May 21, 2010

Stocks were again hammered on European concerns.  As written several times if the issues were as great as some fear I believe the Dow would be around 6500.  To state the obvious everyone is extremely nervous about the apparent lack of European unity.  While all will acknowledge the amount of Greek debt outstanding is a relatively small, most thought the subprime crisis was “contained” and should pose no risk to the economy or financial system.  As we all know the financial system and perhaps society has been entirely transformed by this miscalculation.

As widely discussed there are some eerie similarities including the widening of spreads, albeit this time in LIBOR and other European benchmarks, the result of hesitant and fearful trading between European banks.  The question at hand is who owns the Greek debt?  What is the amount of credit default swaps are outstanding?  Who wrote these swaps and if Greece does default does the writers have the where with all to cover all claims?  What about contra party risk?

As written yesterday it is my understanding the German parliament votes today as whether or not it will approve its part of the $1 trillion bailout.  Most think approval will occur but at a steep political cost.

Commenting about this week’s decline, in my view this week’s decline has been orderly.  I think it is/was exacerbated by the stop orders, orders triggered when key technical trading levels were violated.  Moreover what impact does/did option expiration have upon the markets as well as the financial reform bill snaking its way through Congress?

As noted several times I had anticipated the averages to be “choppy,” remaining in a trading range of 10250-11000.  My stated reason for this “choppy” trading is/was fearing the inevitable change in monetary policy as the economy accelerates.  I got the immediate direction correct but not the catalyst.

Will the decline stop around current levels?  While I am not a technical analyst I believe there is “considerable” support around the 9850 level.  Since 73% of trading [Bloomberg] is now the result of black box/quantitative trading, I think these technical patterns must be recognized.  Obviously at this juncture the answer to the above question is dependent upon Greece.

What will happen today?

Last night the foreign markets were down.  London was down 1.98%, Paris down 1.93% and Frankfurt down 2.33%.  Japan was down 2.45% and Hang Sang down 01.7%.

The Dow should open nominally lower as the European equity slump deepened amid fears the region’s debt crisis is worsening.  As stated several times, even though spreads are raising in the European bank debt trading market, I think liquidity is not an issue given the strong probability the $1 trillion bailout will become reality.  He concern is about solvency three years hence. 

As per CNBC Spain passed legislation that it will freeze government spending for three years and the French government is considering similar legislation.   A Spanish public works union has called for a strike to protest such austerity measures.   The 10-year is up 9/32 to yield 3.18%.