Market Commentary

The most sweeping overhaul of US financial
June 28, 2010

The most sweeping overhaul of US financial regulation since the Depression has occurred.  What will be the unintended consequences?  Obviously the impact will not be known for months or perhaps years.  However at this juncture at least one unknown variable has now been partially quantified.  As penned many times human nature dictates that we fear the unknown more than the known.

Barring a substantial rally during the next three days, the markets are poised to register their first negative quarter since 1Q09.  The S & P has declined about 8.2% during the past 90 days on a multitude of fears.  Has all the bad news been discounted?

I think yes unless some new externality arises.  I reiterate a long held view the biggest risk facing the economy and the markets is perhaps Washington.   In other words political risk is greater than economic risk.

As also noted many times, I believe the President has awakened the American electorate, an electorate that is tired of spin and finger pointing, one demanding accountability and results.  The November elections can be seismic for any incumbent.

Equities were quiet Friday for the exception of financials which rocked as a risk variable appears to have been removed.  Will the advance continue?

As noted last week, second quarter earnings season is about to commence.  As per Bloomberg S & P profits are expected to rise by 32% vs. a 26% increase expected on March 31, thus suggesting a 13.4x forward looking multiple, the lowest PE since March 2009.  Will earnings surprise again on the upside?

At casual glance there appears to be a dearth of warnings thus suggesting the odds are greater than 75%.  Perhaps the lack of prewarned shortfalls is the result of productivity gains, gains amplified by the lack of employment growth. 

Speaking of employment, the week ahead is filled with top tier employment statistics, including the ADP Employment Survey, Challenger job cuts, and the BLS labor report.  As written last week, initial jobless claims suggest the headline rate will decline to around 9.6%.  Will nonfarm payrolls again surprise but this time rather on the upside?  At this juncture consensus is estimating an 110,000 decrease in nonfarm payrolls (the result of census workers) and a 113K increase in private payrolls.

Other data released includes personal spending/income, ISM, construction spending, and pending home sales.   All data points can move markets.

Last night the foreign markets were up.  London was up 0.19%, Paris up 1.10% and Frankfurt up 1.12%.  Japan was down 0.45% and Hang Sang up 0.17%.

The Dow should open nominally higher.  The G-20 nations pledged to reduced government deficits while continuing to nurture economic growth.  How will this statement be interpreted?  Can this august group accomplish this huge task.  Perhaps a seismic change in indeed occurring. The 10-year is up 5/32 to yield 3.09%.