Sunday, July 18, 2010

Friday's market accentuated the negative, didn't mess with Mr. In-Between

On market days like Friday all of the negatives come into clear perspective. On significant positive days in 2010 the reasons for the pop seem less tangible, as in the market was oversold. Is this simply some experience embedded 21st century mental trait that avoids the risk of positive constructs for fear of being seen as a fool, or is it a uniquely American embrace of a country's decline.

Whatever the thought process that drives this, dissecting Friday's market fall does not seem complicated. The bond market is leading the way. On April 1 the 10 year treasury was yielding 4.01% after a spate of optimism about reviving economic growth. On Friday the yield on the 10 year was 2.92%, a phenomenal drop in a three and a half month period. The bond market is pricing in significantly slower growth based on recent economic data including disappointment in top line growth at some major corporates and CPI "growth" of negative .1% in June. Economists are now forecasting, on average, inflation of just 1% for full year 2010 raising both the prospect of slow economic growth and the question of whether economists ever get sick, have kids in college, or shop at Whole Foods. They deal in aggregates and not in real lives.

With the bond market emphatically saying no confidence, 489 of the S&P 500 declined on Friday. That about as broad based as you can get. The major reason discussed during the day was revenue shortfalls at BofA, Citi, and GE. Just beneath the surface was the troubled digestion of the finally passed and comprehensively vague Financial Reform bill, signaling that the search for any clarity of regulation and enforcement is just beginning. Barney Frank then weighed in with ideas for more regulatory bills already being considered, some punitive and some overdue such as addressing the status and management of the political hot potatoes Fannie and Freddie.

Two other issues are apparent here. First, despite some modest federal stimulus, infrastructure spending is dropping like a stone. Valmont Industries has been a high performing manufacturer of poles and towers for street lighting, traffic lights, cell phone towers, and other construction projects. Sales of these utility structures were down 48% from the year over year quarter and, if memory serves correct, the middle of 2009 was not remotely a robust period. Governments, federal, state, and local, are cutting back on infrastructure spending. That's a worry for near term earnings, employment, and investment in future growth. Second, small cap and mid cap companies are rolling over existing debt at more demanding terms as lenders are able to demand increased security and pricing due to less competition and a heightened conservative approach as new regulations create uncertainty. That new credit availability is constrained is well documented but the fact that rolling over existing credit extensions is more dicey for companies and their shareholders is less well known.

The market is by any measure again reaching oversold territory, but psychology has taken a turn for the worse. In these days of extreme volatility predictions are a challenge but it's obvious that the market needs a positive catalyst near term to overcome Friday's action. Maybe the heat will abate and the Rapture will come, forcing vacationing head traders back from the east end to buy, buy, buy.


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