Market Talk

Another wild day in the stock market, as indexes gyrate wildly once again, with the Dow putting in its worst week since the bull rally got started back in March 2009 amid growing fears that Greece’s debt crisis is spiraling into something much worse for Europe and the rest of the globe (and that’s not just hyperbole.)

DJIA loses 141 today, down 1.4% at 10380; index lost 5.7% in the week, the worst since the week of March 6, 2009, and is down 7.4% since hitting a high in April. S&P 500 loses 17 today, closing at 1111, Nasdaq Comp drops 54 to 2266. The Nasdaq’s 10% drop from the April highs put it in correction territory.

It’s especially telling that the bulls couldn’t rally despite getting the best jobs report since before the recession started. The economy added 290,000 jobs in April, and only about 60,000 of them were from the Census Bureau, meaning the private sector added 230,000 jobs. That really is the single-best piece of data we’ve gotten since the whole recession started. But it positively run over by the Europe story.

And it’s no longer just little old, we-invented-democracy Greece anymore. The Greeks are going to have a long, hard depression with a lowercase D, but the real story now is the renewed credit crisis that washing over the borders. It’s the European banks that are exposed to Greek debt, and the fear that out of fear they will stop lending to each other.

This is something that needs to be stopped now, before it gets out of hand. Because we saw over here in 2008 how quickly this kind of stuff can spiral out of control.

The bank connection is  how this thing jumps the pond, because while U.S. banks may not be directly exposed to European sovereign debt, they are directly exposed to European banks, and if the credit mechanisms over the seize up, there good reason to fear the same could happen here.

The market desperately needed a good number out of the jobs report this morning, and it got it. But it didn’t help anyhow. Events in Europe are driving the action on both sides of the Atlantic (and the Pacific, for that matter.) The whole thing is crying out for somebody to plug the holes. Whether somebody in Europe steps up and fills that hole, though, well, that’s another question.

Markets across asset classes and national borders have been wildly erratic today, and the longer that condition persists, the weaker the “fat finger” or computer glitch explanation for yesterday’s meltdown gets.

Whatever the trigger was, a bad trade, an outlier kind of spike somewhere, there were God knows how many sell orders programmed into the market’s computers. Yesterday afternoon may have been a one-off, but it was also one of those flashes of illumination, where for a bright instant you see all those vicious creatures hiding in the dark, waiting to devour you.

What markets need right now, more than good data, more than liquidity, more than an end to Greek riots, is leadership. Somebody, somewhere, in a position of responsiblity, needs to stand up and stop this thing before it goes any further. Heading into this week, it was all about the risk trade. Heading out of it, it’s all about the fear trade.

There isn’t much the U.S. can do, directly. Our problems aren’t driving this. It started in Greece, but since at the heart of this whole thing we’re still talking about a credit problem, it’s quickly washed over Greek borders. Let’s be clear here. The global recovery, and especially the recovery in the developed world, is still a fragile thing. Nobody can afford to flirt with another seizure in the credit markets. But there’s a lot of chatter about that happening among European banks. And if European banks seize, well, in an automated, interconnected world, you saw yesterday just how fast things move.

Toward the end of his book “The Quants,” Scott Patterson quotes one exec at a company that supplies services to high-frequency trading firms: “My concern is that the next LTCM problem will happen in less than five minutes.”

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The jobs report was great. Economy added 290,000 jobs last month, much higher than expected. Census hiring accounted for only 66,000 of the new jobs. And March was revised upward to 230,000. What’s not to like?

Are two straight months of 200,000+ job growth a sign that the labor market has finally RSVP’d to the recovery party? Maybe still too soon to tell, especially since those numbers represent only a small dent compared to the 8M jobs lost during the Great Recession. Still, it’s a step in the right direction.

Pessimists will point to the jobless rate jumping to 9.9% from 9.7% in March, but part of that is due to the increasing work force and the way the survey is conducted. Labor force jumped by more than 800,000 and only 550,000 found work. This increase of people re-entering the labor markets is normal after hiring has returned. People who were discouraged now think it will be easier to find a job.

Temporary help payrolls rose 26,200 in April and are up almost 250,000 over past year. Temp help slots tend to rise before full-time permanent jobs are added to economy.

The only big drawback to this report is long-term unemployment remains a big burden for the economy. The average length of unemployment rose to 33.0 weeks from 31.2 weeks in March, and 45.9% of the unemployed have been without a job for more than half a year.

The April jobs data, combined with the revised March report, represent “a strong signal that the economic recovery is becoming self-sustaining,” Paul Ashworth writes at Capital Economics. “In short, it could well be a game changer.”

And what’s more impressive is the breadth of job gains, he notes, as nearly every major sector added jobs. “If the economy continues to create more than 200,000 net jobs a month then the
unemployment rate will begin to fall and the downward pressure on wages will eventually ease.”

Unfortunately, any cheer from the jobs report is falling by the wayside as the fear trade has kicked into another gear this morning. Dow industrials are jumping all over the place, rising as much as 59, falling as much as 279 and were recently off 100.

No one seems to know what’s going on or who to blame. Fat fingers were the scapegoats yesterday, but maybe this is just a good old fashioned correction.

“A week ago investors were anxious about not taking enough risk and today they are on the verge of panic,” says, Lawrence Glazer, managing partner at Mayflower Advisors in Boston.

The fear is not necessarily about European debt, he says, but European banks and global access to credit and a contraction in lending.

“It is understandable that investors have put their risk appetite on hold based on the market volatility, but many of the higher quality investment grade credits in the US are multinationals with significant exposure to Europe.”

(Kathleen Madigan and Kellie Geressy contributed to this post.)

Earnings season is over, for us at least. While the market was in the middle of its insane meltdown, nearly 800 points in like 20 minutes is pretty insane, John and I were under the gun, too, but to get this column done on deadline. We got it done, the market recovered, kind of, sort of, we think, and well, if anybody still cares about earnings season, here is the Upshot’s, well, upshot:

U.S. corporate profits vaulted back last quarter, supported by increased consumer and business demand, stripped-down overhead and walk-in-the-park comparisons to last year’s dour first quarter.

As the first-quarter earnings season winds down, the superlatives are hard to dismiss: Profit growth for members of the Standard & Poor’s 500-Stock Index is expected to rise a stunning 87% compared to year ago results, and effortlessly eclipse the previous record of a 35% year-over-year gain in the second quarter of 1993.

Tight cost control continues to be key to this earnings growth. With companies running so lean, it’s easier for a larger portion of revived sales gains to fall straight to the bottom line. Sales, though, are rising at a far less impressive rate than profits, and that is a concern for future quarters as corporation’s ability to shave more costs wanes.

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Newswires’ David Benoit reports:

Maybe Procter & Gamble (PG) should have changed the giant ad on the front of the NYSE this morning to say “thank you traders” instead of “thank you moms.”

The front of the storied exchange is covered today in one large pink Mother’s Day card from PG, as the company’s executives are ringing the closing bell to “help celebrate Mother’s Day.”

After the NYSE managed to slow down the plummet in PG electronic shares by implementing good old-fashioned human trading, think the executives will be patting more than a few backs while there today?

(Photo credit: David Benoit)

Newswires’ Senior Editor Gabby Stern reports on Goldman’s annual meeting:

Goldman Sachs (GS) CEO Lloyd Blankfein has acknowledged – at this morning’s annual meeting – that the SEC fraud charges against the investment bank raised questions “that have gone to the heart of our most fundamental value: How we treat our clients.” Investors could interpret this as a sign Goldman intends to fix its wobbly reputation – hammered by allegations the bank wasn’t transparent with customers. One avenue would be a quick face-saving settlement with the SEC, as Fox Business and The Wall Street Journal have reported is in early discussions.

For instant analysis, check the live blog from WSJ’s Deal Journal, with reports from inside the auditorium from colleagues Joe Bel Bruno, Brett Philbin, Sue Craig and Peter Eavis.

We’re on overload this morning here at Market Talk. So much going on, not sure where to begin. Great jobs number, up 290,000 in April, although the jobless rate ticked up 9.9%. Politically, that’s not so good. But from an economic point of view, the higher jobless rate shows more people are entering the workforce, a positive development.

And the stock market has to be due for a bounce after the Dow’s 1,000 point intraday drop and 348-point closing drop, right? Ehhh, think again. Dow’s see-sawing in the first half hour of trading, struggling to gain traction in either direction and was recently off 28 points.

Here’s a smattering of snippets we’ve published on the wire describing what strategists, analysts and bloggers are expecting after yesterday’s historic session:

- So, should you dive right back into equities? Maybe hold off for now, as selling on rallies is likely to be stronger than buying on dips, says Citigroup strategist Tobias Levkovich. “When studying significant one-day drops in the S&P 500 over time, we cannot find strong evidence of sharp snap backs that reward investors for taking on more risk,” he writes, noting it seems improbable that investors will be very bold right now. “Given the sharpness of the trading swings, we suspect that investors may be unwilling to jump right back into equities until incremental signs of stability emerge from either sovereign risk factors or a series of positive economic data points.”

- Whatever caused yesterday’s selloff, there are too many big worries for the risk trade to keep up its strong 2010, CreditSights writes. Firm recommends investors “take a more defensive stance in the face of a confluence of negative developments.” Amid the Dow’s near 1,000-point slide and riots in Greece, it would be easy to forget: We’re now at a point where Fed and ECB support was supposed to be coming to an end. Australia is already tightening and Canada is threatening to. There’s Goldman’s civil suit, a possible hung Parliament in the UK, financial reform uncertainty in Washington, and oil continuing to gush in the Gulf of Mexico. Plenty of factors that have “stacked the cards against the year-long rally.”

- Just like a heart-surgery patient doesn’t get right up and run the 50-yard dash, the stock market is going to have to convalesce a little bit, Raymond James Chief Investment Strategist Jeff Saut says, adding he doesn’t think a recovery will be V-shaped. He thinks yesterday’s plunge was it for a correction, and is advising clients to lift their downside hedges and go long again.

- “This is not normal trading behavior,” Barry Ritholtz writes at The Big Picture, in the understatement of the day. “I suspect after this weekend, we will learn whether this was a high frequency trading (HFT) error, or a futures/e-mini error, or some other factor. In the meanwhile, steer clear of conspiracy theories and PPT excuses. On a related note, I am not happy with the exchanges breaking trades. If you want buyers to step into the fray when the markets collapse, they need to know those trades will stand.”

“This is obviously a big panicked reaction. It could last for days or be over by tomorrow but recognize it for what it is, a panic,” portfolio manager Roger Nussbaum writes at his Random Roger blog. “We have been through them before and you will go through them again. The S&P 500 will be at 1200 again even if it gets there by way of 900. This is exactly what I am talking about when I say to pre-plan for this sort of thing both emotionally and tactically if the latter is appropriate. An emotional response is completely unnecessary.”

(Brendan Conway, Kerry Benn and Paul Vigna contributed to this post.)

US stock futures looking better this morning — a half hour ago it was “stronger,” but now it’s just “better” — as Wall Street has to quickly put yesterday’s bizarre plunge behind it. But you also have to separate yesterday’s midday plunge from the rest of the day and week, because if all you focus on is the 1,000-point drop, you’ll miss the big picture here.

The plunge was spectacular, and it’s getting all the headlines, but it obscured the fact that the Dow was down sharply before it happened. The market’s in the midst of a selloff, driven mainly by concerns about Europe’s credit crisis, but also by the weariness of this now long-in-the-tooth rally. Not that anybody listens to the naysayers at times like, well, times like the times before yesterday afternoon, but this market has been overvalued and overbought for some time. If you don’t think an 80% jump in a year is excessive, God bless your bullish soul, but you’d still be wise to set up a couple of defensive positions.

Europe on firmer footing this morning, euro back near $1.28, although the major stock indexes are down. Big item on today’s docket is the jobs report at 8:30 a.m. Keep an eye on those Census jobs. S&P futures up 3.50, DJ futures up 28. Ten-year yield down to 3.49%.