WesCorp - Commentary

Update 1:05 p.m.:

After what was actually a pretty, dull ordinary day, the stock market heated up in the last hour. Stocks had traded most of the day up around +80. Stocks had weakened a bit heading into the last hour as the euro traded just below 1.22 again. Still, the Dow was 50 points higher heading into the last hour. At the thirty-minute mark, the Dow had plunged to -85 points. The euro had weakened further, especially against the yen, and traders sold. The Dow did stabilize in late trading, and the Dow lost 69 points at 9974. That�s roughly 200 points below the morning�s high. This was the only the second close below 10,000 in 2010. The only other sub-10,000 close occurred on February 8 at 9908.

In the Morning Comment as stocks were rallying I said, �what happens one day, or even one morning, has little to do with what will happen next." Am I a genius? A seer? Well, there's that. But all you really have to do to figure out things like that is to watch this silly market for a few days. It comes easy.

The euro weakness was related to a Financial Times story that the Chinese were �reviewing� their euro bond holdings. Traders immediately presumed that the Chinese might sell euro bonds and subsequently euros. In the past couple of years, these China-might-sell rumors have almost exclusively been aimed at the possible sale of U.S. bonds. None of these rumors ever came to fruition. This one regarding the euro won�t either. Without a doubt China might be reviewing its holdings and are rightly concerned, but this doesn�t mean they will sell. The worst this might mean is that China might reduce future purchases. They have billions to spend every month in some foreign currency. But speculative traders act like traders, which mean they get spooked easily.

Bond prices still closed lower on the day, but the losses were pared way back. The 2-year ended at .82%, the 5-year 2.03%, and the 10-year lost 11/32s to yield 3.20%.

Tomorrow�s economic news will include the first revision to 1^st quarter GDP. A revision from +3.2% to 3.4-3.6% is expected. There isn�t much interest in that report of old news. There will be more interest in Weekly Jobless Claims. Claims had a surprising jump last week to an uncomfortable 470k level. Economists and traders are hoping to see claims fall back to 450k.

I know I don�t need to say it again, but the only thing that really matters is what happens in Europe and to the euro overnight.

Update 10:05 a.m.:

The Treasury's 5-year note auction went relatively well given the current selloff in bonds. The number of bids received was a bit above the average and foreign demand was in line with recent auctions. The bond market had no reaction to the results, and prices remain at the lowest levels of the day as stocks are staying positive. The 2-year is .87%, the 5-year 2.10%, and the 10-year is lower by 26/32s to yield 3.25%.

The Dow has been very steady at +80 and quiet. As long as the euro holds, stocks should as well. Volume is light.

Update 9:25 a.m.:

There has been some volatility today, but on a comparative basis the market has been very quiet. The Dow hit a high early of +135 points. But the euro weakened from over 1.23 and briefly traded below 1.22. This caused the Dow to fall to +25. Of course then the euro rallied back above 1.22, and the Dow has rallied back to +80. In other words, stock traders are back to being the dog wagged by the tail. Volume is light.

Bond prices remain near the opening levels. The 2-year is .85%, the 5-year 2.07%, and the 10-year is lower by 21/32s to yield 3.24%.

Update 7:05 a.m.:

While stock analysts are notorious for intentionally setting the bar low for corporate earnings expectations simply to be certain the estimate is exceeded, economists occasionally prove they can play that game too. Economists forecast a 3.4% gain for New Home Sales in April. This was absurd of course because April was when the mad rush peaked to buy homes before the home tax credit. The annualized pace of sales rose from 439k to 504k, a gain of 14.8%. Makes for a great headline regardless. What will be much more telling is what happens over the next three or four months without the government kicking in a contribution.

Stocks opened higher as expected and has slowly added to gains. The Dow is now up 101 points. The Dow was up 100 before the New Home Sales number, so that wasn't really a factor. Be careful though. The euro has slipped below 1.23 vs. the dollar. Should the euro accelerate to the downside, nothing else would matter.

Bond prices are very close to opening levels. The 2-year is .82%, the 5-year 2.06%, and the 10-year is lower by 23/32s to yield 3.24%.

Morning Comment:

The rebound in U.S. stocks yesterday, while it fell just short of turning into positive territory, was more than enough to lift stocks around the globe last night and this morning. European indexes are all up around 2%. There was no news overnight other than Italy announcing some budget cuts. The euro is stable over 1.23. Some spreads have retreated as well. While the 3-month LIBOR remains higher at .54%, the 2-year swap spread has tightened by over 5 basis points. Dow futures are higher by 97 points in pre-opening trading. So, all is right with the world again.

The rebound yesterday was as purely a technical bounce as you can get. Stocks plunged to the February lows and traders bought hoping those lows would hold. Enough traders believed that and the buying caused the bounce. Today, those traders are looking for some bigger gains. There is a lot of talk of how �oversold� the market is and how positive it was the market bounced yesterday. That is true, but I don�t think the old rules apply in this market. Technical trading hasn�t worked in either direction. The market didn�t correct on the way up as normal, and didn�t hold on the way down at various points it should have. What happens one day, or even one morning, has little to do what will happen the next.

Bond prices are down sharply on the equity rebound. This comes after a four to six-week run that has seen two-year rates fall by about 30 basis points and 10-year rates plunged about 90 basis points from high to low. That�s quite a run, and the bond market needs to back and fill. The 2-year is .84%, the 5-year 2.07%, and the 10-year is down 25/32s to yield 3.25%. The Treasury will auction a new 5-year note today. This one could be rough with the market in retreat mode.

Durable Goods Orders have been released and orders rose more than expected. Ex-transportation orders (airplanes) fell by 1% vs. the expected +.5%. But, there were big revisions higher to the previous month. This economic series is highly volatile with lots of noise and means little on a month-to-month basis. We�ll get New Home Sales for April at 7:00. Those should be up big.

I�ll be back with updates. This should certainly be a quieter day with a much different start than yesterday.

Dwight Johnston