Market Talk

- Small caps have been outperforming large caps for more than 10 years. “When it ends is anyone’s guess, but it’s hard not to argue that large caps are at least due for their day in the sun,” Bespoke says.

- Bull market? Stock funds’ flows don’t show it. Investors have been pouring money into mutual funds, but mainly into bond funds, despite stock funds’ heady gains.

- Apple’s (AAPL) market cap surpasses $200 billion, giving the company “a seat in a very exclusive club,” Tom Petruno writes. Only Exxon Mobil (XOM), Microsoft (MSFT), Wal-Mart (WMT) and Berkshire Hathaway (BRKA BRKB) have market values exceeding $200 billion.

- There are still two unfilled positions on the seven-member Fed board, which will increase to three when vice chairman Don Kohn retires in June. “There was a time I might have pushed harder for all three positions to go to academic experts, but the financial market crash has highlighted the need for a broad range of expertise on the Board,” Mark Thoma says.

- Google’s (GOOG) YouTube Ads go mobile, marking “another sign Google is serious about wringing more money” out of the web video giant, Peter Kafka says.

- Bond buyers poured $7.8 billion into high-yield municipal bond funds in 2009, essentially ignoring “precarious financial conditions” of states and cities, Barry Ritholtz notes. “The bet is that the cities will be bailed out, and their grab for higher yield will be safely rewarded. This is moral hazard writ large. Bailouts encourage irresponsible behavior, as there are no negative consequences.”

- BofA eliminates overdraft fees. “Maybe it’s not true that banks have to take advantage of customers in order to make money,” James Kwak says. “Yes, I understand that other fees may go up, or interest on deposits may go down, but if all this is doing is shifting costs from hidden fees to well-understood fees, that’s good.”

- Government advising banks not to increase dividend payments or buy back stocks as uncertainty surrounds the financial industry is a misguided plea, Clusterstock’s Vincent Fernando writes.

- Stock market’s rising…on light volume. Economy’s growing…mainly because of fiscal stimulus. What does it all mean? “This recovery will be uneven, disjointed and chocked full of surprises — not a great outlook for corporate planners or investment managers, but a far better environment that we saw this time last year,” John Curran says.

- Some employees are over-sharing on social-media sites, causing embarrassment and possible financial harm to small companies.

US stocks rise slightly, with the S&P 500 making a tepid stab at 1150 and the Dow actually spending a lot of time in the red.

DJIA inches up 3 at 10567, S&P 500 rises 5 to 1146, and rose as high as 1148.26, close again to that magic 1150 level that represents the January high and also has the bulls excited, imagining another leg in the rally lies above there. Nasdaq Comp gains 18 to 2359, as tech shares perform well. NYSE volume’s heavy. Crude rises too, edging over the $82/barrel mark.

Financials rise sharply, as investors seem to be betting something good’s coming down the pike for the bankers. AIG up another 11%, now up 50% in March alone. We don’t know for sure what’s going on, but there is a lot of bees buzzing around this particular flower.

The gains among financials were spread pretty broadly. Yesterday, the sector’s main winners were Citi, AIG, Fannie and Freddie, the well-known wards of the state. There’s a rumor floating around that the government would ban shorting in them, which UBS’ Art Cashin said “seemed wacky and unfounded.”

Still, he says, “a rumor is not responsible for who believes in it.”

So the credit markets, it appears, are opening up, wholesale inventories fell, but don’t tell the real story about consumer demand, and Greece wants to see all those warm gestures of “support” turn into something a little more concrete.

Unemployment benefits are supposed to provide a bridge for folks from the time they lose their job until they ultimately find a new one. But as the government keeps extending temporary jobless benefits and more folks join the long-term unemployed ranks, there’s a growing voice suggesting unintended consequences are developing from extended benefits. From The Washington Post:

Millions of Americans have been forced to rely on unemployment payments for extended periods as the nation struggles through its longest period of high joblessness in a generation, and critics are taking aim, saying that the Depression-era program created as a temporary bridge for laid-off workers is turning into an expensive entitlement.

About 11.4 million out-of-work people now collect unemployment compensation, at a cost of $10 billion a month. Half of them have been receiving payments for more than six months, the usual insurance limit. But under multiple extensions enacted by the federal government in response to the downturn, workers can collect the payments for as long as 99 weeks in states with the highest unemployment rates — the longest period since the program’s inception.

It’s important to note that the true underlying problem facing the labor market is fewer jobs exist because there’s less demand in the marketplace. And less demand means employers have less incentive to go out and bolster their workforces.

But extended unemployment benefits may also play a contributing role in keeping the jobless rate near double digits, David Henderson writes at EconLog.

He offers an example: someone who was making $40K a year and loses his job could get $25K a year on unemployment benefits. If that person is then offered a $30K job, there may not be enough incentive to take it, knowing they could hold out for a better job while still collecting extended jobless benefits.

“There’s nothing in this analysis that says you’re lazy,” Henderson says. “What it says is that, in economists’ usage of the language, ‘You’re rational.’ Here’s the test: Can you find people getting unemployment benefits who have turned down jobs?”

It has to be hard to quantify how many people collecting benefits are simultaneously turning down job offers. But, as with everything in life, there are always unintended consequences. Extending jobless benefits is still the right move, even when this analysis is considered, because for every person that’s essentially gaming the system, there have to be many more that wouldn’t survive without those steady benefits checks.

Bloggers Local 109 discusses the recent press coverage of Treasury Secretary Tim Geithner

Tim Geithner’s taken a beating in the blogosphere in recent months, as many expected him to be one of the Obama administration’s first fall guys.

But a funny thing’s happened recently – press coverage of the Treasury secretary has actually turned somewhat positive. The New Yorker recently published a piece praising Geithner, noting taxpayers may actually profit from his financial rescue package. At the very least, it could cost less than the savings-and-loan implosion of the early 1990s. The Atlantic also just wrote a favorable story, noting Geithner’s plan one year later has been cheaper and worked better than most initially imagined.

But all the positive coverage has prompted the critics to come out swinging for the fences even harder.

“I’ve seldom seen so much rubbish written by people who ought to know better in a single day,” Yves Smith writes in a 3,100 word blog post ripping what she calls the Obama administration’s “propaganda campaign,” which she says has reached a new level.

Smith isn’t the only one who’s peeved. She cites former IMF chief economist Simon Johnson, who in a similar tear-down notes there are good reasons why the government should never guarantee financial institutions. “You can’t run any form of reasonable market system when some big players hold ‘get out of bankruptcy free’ cards,” he says.

Smith’s demolition is too good of a read to sum up in a few quotes, so we’ll leave you with a tease of her masterpiece. Be sure to check the rest of her post, here:

The campaign to defend Geithner and Emanuel, both architects of the administration’s finance friendly policies has gone beyond what most people would see as spin into such an aggressive effort to manipulate popular perceptions that it is not a stretch to call it propaganda.

This strategy, of relying on propaganda to mask their true intent, has become inevitable, given the strategic corner the Obama Administration has painted itself in. And this campaign has become increasingly desperate as the inconsistency between the Administration’s “product positioning” and observable reality become increasingly evident.

This time it really is different!

I got rich in the dot-com bubble — for three months. Well, I should say richer. I didn’t actually get rich. And in the end, I got poorer. But I did catch the tail end of the bubble, and for a couple of months, I got the thrill of riding that tiger. It was kind of fun.

Back in 2000, Dow Jones switched their compensation plans, from a lump-sum bonus at the end of the year and a defined contribution plan, to a 401(K) with a company match and contribution at the end of the year. The new plan started on Jan 1, 2000. I’d never owned stocks before, and for three months, I remember going every single day to the plan’s website and watching the number rise.

We were actually giddy, we thought this was the best idea ever, we thought we were going to retire rich. The thing was going up exponentially, it seemed, every day. Of course, like so many other idiots, I was getting in at the top. But it felt great, right until March 10, 2000, the very top, the end of the ride. The bubble burst, my 401(K) cratered, and I learned a very valuable lesson.

The funny thing is, until I actually had money invested, I was extremely skeptical about the market. Kind of comes with the territory of being an editor. We all used to rail against the ideas floating around, that “this time it’s different,” that earnings don’t matter, that the Dow was going to 36,000. But once my own accounts started rising, well, well I was making money. I knew it was a scam. But still, I was making money.

But, in the end, it was all hype. Nothing was different. Earnings of course matter. And the Dow wasn’t going anywhere near 36,000. And, boy, the dot-com bubble was a simple matter compared to the financial meltdown of ’08. I know everybody’s kind of got disaster fatigue these days and is ready to accept almost any “truth” that’s being sold out there: that everything’s better now, job growth is going to explode on the scene, Tim Geithner’s a misunderstood genius.

But there are plenty of good reasons to remain cautious. Job growth has not appeared yet, and isn’t going to appear in any great numbers for a good long time. There simply isn’t any reason for employers to start adding hundreds of thousands of new workers, month after month. The states in these United States every day are finding themselves at the end of their financial ropes. And all Geithner did was throw an unlimited amount of money at the banks, because he could, because he ran the Treasury, then whitewash the whole thing with a rigged stress test.

Cripes, I could have done that.

Can anybody here add?

I haven’t posted much the past two days because I was working on an “Ahead of the Tape” column for the paper, which came out today, “U.S. Borrowing Costs Stay Stable. For Now.” Here’s a taste:

The budget report isn’t a market mover, one reason it gets released during market hours. In the short run, investors are more or less “comfortable” with large deficits, says Dan Greenhaus, Miller Tabak’s chief economic strategist.

Long term, though, is different. “The lack of a credible plan to reduce the deficit as a percentage of GDP will eventually weigh on investors’ minds, which could have implications for currency and debt markets,” Mr. Greenhaus says.

Erasing the deficit seems intractable, because much of it—like health care and Social Security—is mandated. Military spending isn’t, but isn’t likely to come down amid two wars. The next-biggest government outlay is interest on the debt. And that’s where the debt markets get, well, interested.

Low interest rates don’t just help the housing market. The government’s managed to actually pay out less in interest while the total amount of debt has risen with all these historically low rates. The real fear, of course, is that the bond vigilantes will start making the government pay up for its largesse.

Our colleague Deborah Blumberg touched on this in a story in Monday’s Journal. There’s an auction of 10-year bonds today at 1 p.m. ET, and keep an eye on how that one plays out. If you start seeing yields on auctioned debt higher than the debt trading in the secondary market, it will raise some eyebrows.

Early signs suggest we may be in for another fitful session for US stocks. Apart from last Friday’s rally, it’s been an aimless wander for about three weeks now as investors wrestle with troubles in Europe, indications of improvement in a variety of US economic data and ongoing doubts about the strength of the economic recovery with unemployment still high and few signs of hiring.

January wholesale trade data due at 10:00am. Stocks mixed in Asia overnight, slightly higher in Europe. US dollar index at 80.59, ran higher overnight, now giving back some of those gains.

S&P futures roughly flat, DJ futures up 2. Ten-year lower, yield at 3.71%.