Yesterday the DJIA traded quietly most of the day, down about 30 points; in the final hour however selling increased to push the key index down 104 points and closed under 10K for the first time since last November. No follow-through this morning as the choppy trade continues. A long day left, and we wouldn't bet that the key indexes will end the day higher by the close. Meanwhile; not much for the bond and mortgage markets to do today. Treasury begins the auctions at 1:00 with $40B of 3 yr notes and the auction is likely to be well bid.
For the second day Washington is closed with additional snow piling up, talk of another 12" after 32" over the weekend. Brings into question whether Bernanke will testify tomorrow at the House Financial Services Committee, his required semi-annual report to the House and Senate on monetary policy. Whenever he does make it the Committee will be drilling him on the Fed's ability to manage the banks and questions about the bailouts. Congress smells the possibility to get their hands into the Fed's business and will seize any opportunity to make the case.
The only data point today; Dec wholesale inventories at 10:00, expected to be +0.5% came in at -0.8% with sales up 0.8%. No reaction to it.
The world continues to be roiled by the debt problems in Greece; not just a problem for Greece but a problem for the entire global financial system. John Mauldlin writes in his Outside the Box column: "Further, and more important to the rest of Europe and the world, the results of a Greek default would be financial turmoil. 250 billion euros (and maybe 300!) of Greek debt is in international bond funds, pension and insurance companies, and above all at banks. Think German banks. Already undercapitalized banks. Also, think of all the investment banks who have been selling relatively cheap (given the apparent risk) credit default swaps on Greece, in an unregulated market, exposing their balance sheets. What should be a simple, if sad, matter for the Greeks, becomes a problem for the world, just as subprime debt in the US caused a world credit crisis. And the risk of contagion from Portugal, Spain, et al is serious. 2 trillion euros of debt could get downgraded by the bond market in very short order. It could be a replay of the last credit crisis, just with new actors as the prime problem."
The equity markets are wrestling with the unsure economic outlook for the rest of this year. Most talk so far isn't showing much concern that growth will not increase, most now see the equity market decline as an overdue correction, thus not much concern. Scary when markets are so complacent, generally complacency leads to problems as it did in the sub prime meltdown that about sunk the global financial system. Most of the US equity market rally was driven by the improvement in Asian economies and that it would spread to the US, but is that a mis-placed bet? Across many manufacturing sectors in Asia business has been boosted by the need to replenish inventory within the supplier chain. Inventories had been rundown to almost zero levels for balance sheet reasons in 2008's 4th quarter and last year's first quarter. This round of inventory replenishment has about now run its course. What lies behind this development will determine the course of the global economy in the first half of this year.
The bond markets are equally concerned with the economic outlook but so far traders are willing to simply go along with the equity markets' thoughts. If the economy struggles we will see the stock market decline a lot more than the simple 10% correction expected. Our outlook for the economy isn't as bullish as the overall consensus; housing, consumers and unemployment; the three areas that will keep the economy from rebounding much. Whether interest rates will decline depends on whether we see a panic develop; panics come without much notice, that's why there is panic. In this case the panic would come from a huge change in sentiment on the economic outlook which is now almost 100% bullish. According to Larry Summers; Pres Obama's chief economic advisor, "a statistical recovery but a human recession".
