Financial, Tax Reform Paralyze Wall Street

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Includes: DIA, IEF, QQQ, SPY
by: The Housing Time Bomb

It was another bloody day in the markets yesterday as concerns around the economy along with the unknowns around financial and tax reform overwhelmed Wall St.

The DOW closed down 96 points and the S&P violated the much talked about 1040 level by closing at 1030. I am surprised with this price action. I expected to see a bit of a bounce yesterday after Tuesday's route.

The bulls did get a decent rally going overnight Tuesday as worries around the ECB debt seemed to have been abated as the ECB agreed to lend more money to the banks.

Then, yesterday morning, the market violently reversed after the ADP monthly jobs report was announced:

"ROSELAND, NJ -- (Marketwire) -- 06/30/10 -- According to today's


ADP National Employment Report(R), private sector employment

increased by 13,000 from May to June on a seasonally adjusted basis.

The ADP National Employment Report, created by Automatic Data

Processing, Inc. (ADP(R)), in partnership with Macroeconomic

Advisers, LLC, is derived from actual payroll data and measures the

change in total nonfarm private employment each month."

The expectation according to Bloomberg was a rise of 60,000 so this was a huge swing and a miss. The lowest estimate in Bloomberg's survey on the jobs number was 23,000 so no one was expecting anything anywhere near this bad.

This does not bode well moving forward folks.

Financial/Tax Reform

Stocks did manage to come back for most of the day as the bulls attempted to hold 1040 but the market once again unravelled late in the day.

There really was no catalyst for the late sell off. After hours however we got a sniff of what could have possibly triggered it:

Finally, Gov. David A. Paterson and legislative leaders have found something they can agree on: that hedge fund managers from Connecticut and New Jersey should pay the state of New York millions more in taxes.
As they grapple with a gaping budget shortfall, Mr. Paterson and the lawmakers plan to enact a tax change that will treat much of the compensation earned by the fund managers who work in New York but live outside the state as ordinary income.

However, industry observers say the move could open up fund managers to double taxation and take some of the shine off New York as a hedge fund destination, The New York Times’s David M. Halbfinger reports.

My Take:

Ouch! The pigmen didn't like this news. I did though:) It's about time these criminals who held the financial system hostage and demanded bailouts are forced to part ways with some of their billions.

The states are broke folks and they will now proceed to look underneath every rock in order to find tax revenues. The hedge funds are easy targets. NY is especially broke so I would be surprised to see this get passed.

Senetor Reid also came out late in the day and announced there would be no vote on the Financial Reform Bill until after July 4th.

Wall St didn't appreciate this news either. We all know the market hates uncertainty and these potential laws and regulations have the potential to cripple Wall St. Expect to see some shaky markets as Congress debates this issue because know one knows what this will look like.

I am skeptical because the bankers have had their way in DC to date. However, I do believe that as the economy continues to rapidly fall apart the politicians are beginning to ask themselves whether or not they need to take down the bankers before they get taken down by them.

AIG's testimony yesterday wasn't helpful for the bankers when their CEO came out and said he could have cut a better deal for the taxpayers if he didn't have a gun held to his head by the NY Fed forcing him to pay back the banks 100 cents on the dollar on their derivative bets.

Wall St is clearly becoming a huge liability for the politicians on both sides of the aisle. Obama's approval rating has now fallen below 50% and he is clearly going to be a 1 term President if he doesn't change his strategy.

It will be interesting to see how this financial reform develops, and I do not rule out the possibility of strong radical financial reform.

The President and the rest of DC know that the sheeple are getting restless. They all understand that heads are going to roll in November if the economy continues to get worse.

David Rosenberg

I wanted to share this economic report from my favorite economist. Some of the housing data in here is shocking. It now takes a builder around 15 months on average to sell a new house versus the historical average of only 2-4 months.

He calls housing BROKEN. I couldn't agree more.

Breakfast with Dave 062410


The Bottom Line

The market is spooked for a variety of reasons. Wall St is being attacked from all sides.

Additionally, the stock market is forward looking and it obviously doesn't like what it sees. Why would it? The economic data continues to worsen. Some traders are predicting that the economy lost 150,000 jobs in June. There are some Census losses in there so you need to be careful when you look at that number.

The bond market is keeping the 10 year below 3% which is extremely bearish. Basically this tells you that the bond traders are betting the economy will have little to no growth. Japan is the bet in bonds right now instead of a Greek like default. We will see

Why would the traders want to own bonds in this environment? Without growth the risks for inflation are low so owning the 10 year bond looks pretty good to them at a 3% yield (for now).

When it comes to the breaking 1040 on the S&P I think some caution is warranted here. We could see a head fake here before moving lower. Futes are down -2.75 after hours but it's very early. I still expect the bulls to make another run to get over 1040 here before we head south.

I trade from a macro perspective so I am not too concerned about a bounce. If you daytrade be careful over the next few days.

If we have another ugly day today there is a good chance we break down to 875 pretty rapidly.

Be careful out there!

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