“Never look back unless you are planning to go that way.”
Henry David Thoreau
Wall Street Java
May 19, 2010
News Affecting the Market
30-year Senate veteran Arlen Specter lost his party's Pennsylvania primary to Representative Joe Sestak yesterday, in what is seen as symbolic of a widespread sentiment among voters. Specter, a Democrat-turned-Republican-turned-Democrat, probably would have lost his seat regardless of party affiliation, given the anti-incumbent mood among voters.
Scientists have observed giant oil plumes in the deep waters of the Gulf of Mexico, including one as large as 10 miles long and 3 miles wide. Some see this as evidence that the leak could be substantially worse than estimates from the government and BP. Scientists also say that the plumes are depleting the oxygen dissolved in the water, which could kill off much of the sea life near the plumes. Some scientists now estimate the leak could be flowing at a rate of as much 3.4 million gallons a day; a figure about 16 times that of official estimates.
There is a general flight to safety as investors react to the latest news that Germany will ban speculation on certain government bonds and banks. German regulators banned investors from naked short sales – betting against stocks they don’t own - for 10 banks and insurers, as well as default swaps on European government bonds starting today. For investors, this means they will not be able to hedge their bets. Germany’s decision is based on the belief that speculators have been responsible for severe declines in some securities in the past. Investors, however, see the move as a vote of no-confidence on European assets.
The Dow fell by 114 points yesterday and futures indicate another triple digit decline at this morning’s opening bell. Consumer Discretionary stocks and the energy sector continue to lead the decline and bank shares look like they will suffer today as well.
Asian stocks also moved lower; by a small margin in Japan, but more severely in China, where the indexes finished down by about 2%. Resource stocks and exporters tied to Europe were the worst performers on the session.
The German policy on naked short selling came out as Chancellor Angela Merkel opened debate in Parliament there regarding the German role in Trillion Dollar European rescue plan. Merkel said Germany will lobby other European governments to introduce a tax on financial markets, and for ratings companies to come under European supervision. She went on to say that Germany will act alone, when necessary, and some see this as an illustration of the lack of cohesiveness in the European Union.
Stocks are falling in the European markets this morning, with the major indexes down by nearly 2-3%. Bank shares are seeing the greatest decline with several falling by as much as 5% in early trading.
The short-lived upswing for commodities has lost momentum and the market is generally lower today. Crude oil has fallen sharply, by more than a Dollar, to just over the $68 mark. The price support level for oil could be as low as $65 if sentiment remains skeptical toward the global economy. Gold continues to fall, as well, with a drop of about $19 this morning to $1204. A combination of profit taking, a rising Dollar, and lack of clarity in the equity markets, have all contributed to the sharp pullback in gold. The Dollar is higher on the Pound and Euro but continues a sharp decline on the Yen.
Today’s economic calendar includes Mortgage Applications, the Consumer Price Index, and Real Earnings data. On the earnings side, we will have reports coming from Applied Materials, BJ’s Wholesale Club, Deere & Company, Hormel Foods, Limited Brands, Polo Ralph Lauren, Target, and a few others.
Washington and Public Finance Update
Senate Majority Leader Harry Reid has filed a motion to set up a vote on legislation that would overhaul financial regulation even though lawmakers are still debating several amendments to the bill. One key debate centers on a proposal that would force banks to spin off their swap trading desks. In any form, the regulatory overhaul will be the broadest since the Great Depression.
In an attempt to keep the general reform bill moving ahead, Senate Banking Committee chairman Chris Dodd has offered an amendment to the bill that would delay Over-the-Counter derivatives regulation for two years, while regulators study the impact of the proposed rules.
The U.S.-China Strategic and Economic Dialogue will recommence in Beijing on Monday. This will be the second time the annual U.S.-China conference has convened since the Obama administration took office, but a lot has changed since last year. At that time, Chinese diplomats came prepared to blame the US financial system for the global crisis. This time, China is dealing with its own concern, which is, ironically, how to rein in an overheated economy. The last parley opened with discussions of climate change which produced little result.
China was, at the time, leading the debate as to the sustainability of the Dollar as the world’s reserve currency; touting the Euro as a possible alternative. That position is surely weakened at this point.Negotiations with Iran will also be a likely topic of discussion as will North Korea. In any case, the summit will be well worth following, as representatives of two massive and diverse economies meet.
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