WesCorp - Commentary

Update 1:30 p.m.:

With ten minutes to go in trading the Dow was down 320 points. The S&P was off 3.4% and below the key level of 1040. But some buyers came in very late to cut the losses back. I don�t know if it was coincidental or not, but at the time of the turnaround there was a headline that the House approved the extension of the closing date to September 30 for those homes sold prior to April 30. Perhaps traders misconstrued that as another home tax credit extension, although I fail to see what would be bullish about that. The Dow did manage to close off the bottom but lost 268 points. The S&P managed to bounce just enough to close back above 1040 at 1041.

Bond prices closed much higher on the day. The 2-year ended at .60%, the 5-year 1.77%, and the 10-year gained 19/32s to yield 2.95%. The 30-year bond closed at 3.93%. These are the lowest yields in over a year.

There are two events tomorrow that might go a long way toward determining how the quarter end closes. In Europe, a key one-year lending facility from the ECB to banks matures. Banks will have the option of rolling this over or not. What the markets will be watching is for which banks don�t have to roll this over and which do. If only a few banks have to re-up for the loans, that would be a good sign. Conversely, many rollovers would hurt.

At 5:15 a.m. PDT the ADP employment index will be released. This report of private payrolls will be closely watched for a clue about Friday�s Nonfarm Payroll number. The ADP has a spotty record of matching with the Nonfarm report, but last month the ADP was very close to the actual weak growth number of private payrolls.

Just yesterday morning, stock traders were hoping to close the gap and report stocks unchanged for the year. The Dow needs to rally only by 675 points tomorrow to achieve that goal. Maybe that should be the new goal for the third quarter.

Update 11:00 a.m.:

Stocks have made a couple of attempts at a comeback, but the best they've been able to do is get the Dow back to a 200 point loss. The hoped for bounce off the lows is proving elusive. The Dow is now down 260 points. Traders will be hoping for some help in the last two hours.

Very briefly, bond prices lost some of the early gains, and the 10-year and 30-year yields drifted back up to 3.00% and 4.00% respectively. But that just opened the door to another buying wave. The 2-year is now .60%, the 5-year 1.78%, and the 10-year is higher by 1/2 point to yield 2.96%. The 30-year bond is up a full point to yield 3.95%.

Update 7:40 a.m.:

The Dow hit a low of -284 points and is now -256. The S&P is down to 1045. These are the levels hit back on June 7 from which the market was able to rebound. Technical traders will be watching these levels closely. A close here or below would look pretty bad on those charts they watch. Volume has been relatively heavy.  Traders are feeling a lot like the mouse that found itself in a trap and says "keep the cheese, just let me out of the trap."

Bond prices remain higher, but it's doubtful yields can push lower from here right away.  The 2-year is .60%, the 5-year 1.77%, and the 10-year is higher by 15/32s to yield 2.97%.

Update 7:04 a.m.:

Stocks did open sharply lower (see Morning Comment), and the Dow very briefly touched -200 points in the first 30 minutes of trading. The index was down 175 points heading into the Consumer Confidence number. Consumer Confidence has just been released and what a horrific number. The index was expected to fall from 63.3 to 62.5, but the index fell to 52.9.  Job worries and income concerns remain the consumers' top problems.  Remember that 90-100 is a "normal" reading and 70 is a typical recession reading. But, let's not make too much of this index. Remember it's an opinion poll, not a true economic number.

The Dow plunged to -250 on the number and is now down 225. I think traders are no longer concerned about getting back to even for the year. The focus today and tomorrow will be escape.

Bond prices remain higher. The 2-year is .60%, the 5-year 1.77%, and the 10-year is higher by 15/32s to yield 2.97%. The 30-year bond yield is down to 3.97%.

Update 6:20 a.m.:

The Case-Shiller home price index for April rose slightly (0.44%) on a month over month basis and is up 3.81% on a year over year measure. Economists were expecting a slight month over month decline. But the spokesperson for Case-Shiller cautioned that this was likely an aberration due to the rush to meet the April 30 home tax credit expiration. Buyers were less price sensitive as the deadline approached, and there was a smaller percentage of homes sold which were categorized as "distressed" sales. Early indications are that the index will retreat in May.

This had no market impact. Dow futures are still pointing to a sharply lower opening, and bond yields are lower.

Morning Comment:

The road back to even on the year for stock prices before the end of the quarter got bumpier overnight. There was an economic report out of China that called into question some past growth reports as well as future growth indications. The Chinese stock market was down almost 5% and is now down 25% on the year. The euro also fell sharply overnight to well below 1.22 vs. the dollar, although it is currently trying to recover. But the euro is off even more against the yen and is now in the territory traders fear will trigger some liquidation of leveraged positions in assets bought through yen loans. Dow futures are down 113 points in early pre-opening trading. This could change by the opening bell, but it looks like a rough day is ahead.

Bond traders seem to have called this one right at this point, and prices are continuing to move higher. The 2-year is .62%, the 5-year 1.80%, and the 10-year is higher by 10/32s to yield 2.98%. The 30-year bond is higher by 19/32s to yield 3.97%. The 10-year note has not closed below 3% and the 30-year below 4% since April of 2009. Government bond funds will be the big winners in this quarter�s performance race. The yields on the 10-year and 30-year year are down roughly 75-80 basis points on the quarter. For the 30-year bond, that means a principal gain of 15% for the three months. Not bad.

A bit later we�ll get the Case-Shiller Home Price Index and Consumer Confidence. The confidence number looked like it might be important to trading today, but the events overnight will lessen any impact from that report.

This is in the category of �What are they thinking!� In a California regional newspaper yesterday, there was a story of the problems in completing short sales. There were numerous comments by realtors who say the banks are dragging their heels and losing good buyers and money to boot. One wanna-be seller was interviewed. He lost his job and could not get a modification. He ceased making payments and put his home on the market as a short sale. He got seven offers in six months and all were rejected, except for the last offer to which the bank had not responded.

The bank seized the home and his house sold recently at auction for $265,000. One week after the auction, he got a letter from the bank rejecting the last offer he submitted before the bank seized and auctioned the home. First of all, the letter he got indicated the area of the lender reviewing offers didn�t even know the home had been auctioned. Second, the letter stated the bank was rejecting the offer because it was �too low� and "unacceptable." The offer was for $315,000, $50,000 more than what the bank sold the house for at auction. You wonder how often this has happened and wonder how much worse banks are making the situation by sheer ineptitude.

Finally, the death of Senator Byrd might just derail the passage of the financial reform bill. The vote in the Senate was expected to be very close, and the lack of his vote might be the difference. I am not a fan of this bill as it does not address too-big-to-fail, but I doubt the bill will be improved after more chewing on in the Senate.

I�ll be back with updates.

Dwight Johnston