Market Commentary

Stocks closed essentially unchanged
June 17, 2010

Stocks closed essentially unchanged following a moderate early morning sell off predicated by rumors that Spanish banks were facing a liquidity crisis.  Equities were also spooked by lower than expected profits for Federal Express; a company some believe is a bell weather of macroeconomic conditions. The Spanish banking rumor was quickly dispelled causing values to return back to prior day levels thus suggesting debt concerns are still the predominate fundamental macroeconomic variable.

As written several weeks ago I believe Europe is no longer facing a liquidity crisis but rather a solvency issue.  The $1 trillion ECB/IMF/FRB bailout should/will stem liquidity concerns.  Solvency concerns however will not be answered for another two or three years.   These concerns can be a slow moving train wreck if meaningful fiscal reform is not enacted.

I must write because of the events of fall 2008/winter 2009 all are hyper sensitive about another credit freeze.

It is against this backdrop why I believe the odds are greater than 50% equities can stage an advance that challenges its 2010 highs.  I think European bank liquidity is not a rational concern.  Earnings should again exceed expectations for a myriad of reasons including greater than expected economic activity and massive productivity gains, the result of tepid hiring

While I will acknowledge May’s housing starts/permits were disappointing [593K vs. the 648K estimate], such volatility should be expected given the expiration of the home buyers tax credit.  At the conclusion of last summer’s cash for clunkers program, auto sales followed a similar trajectory with many stating sales were robbed from the future.

As we all know and as evidenced by yesterday’s stronger than expected Capacity Utilization and Industrial Production data, autos are a primary reason why the manufacturing sector is today exhibiting great strength.  Will housing do the same?

As written many times about 1.5 million homes need to be built to meet innate demand.  Housing starts have been below this magical number since December 2006 and under 650,000 since November 2008. 

While I don’t think housing starts will rise above the 1 million mark in for seeable future, I do think a rebound to around the 650,000-700,000 is indeed realistic.  This level is analogous to today’s new car sales of around 11.5 million to 12 million.  [Note:  This is down from approximately 17 million cars sold annually from 2002-2007, a level that many then deemed as “innate demand” but up from the 30 year low of 9.1 million units of February 2009 and post Cash for Clunkers nadir of 9.2 million achieved in September 2009]

What will happen today?  The Philadelphia Fed, LEI, CPI, weekly jobless claims are released.  All data can impact trading.

Last night the foreign markets were up. London was up 0.78%, Paris up 0.64% and Frankfurt up 1.13%.  Japan was down 0.67% and Hang Sang up 0.38%.

The Dow should open moderately higher as a Spanish bond sale eased concerns the government will struggle to finance its deficit.  The 10-year is off 2/32 to yield 3.27%.