Market Talk

It’s about 8:30 p.m. in Beijing right now. I’m sure Zhou Xiaochuan, the governor of the People’s Bank of China, is sitting back in his easy chair, with his feet up and slippers on, relaxing after a satisfying dinner that concluded another successful day out in the public eye, rumors of his disappearance notwithstanding.

Finally, we have an official denial from the Chinese government, the AFP reports. The central bank released photos of Zhou meeting with Japanese and Italian officials, and if you take Chinese officials at their words, well,that’s that . Bloomberg has a story about the Japanese finance minister saying he met with Zhou yesterday. It’s hard to imagine why a Japanese official would go along with some kind of Chinese cover-up of the disappearance of the head of the central bank, so you can more or less file this one away. Right?

Perhaps. Maybe Zhou didn’t blow $430 billion in some bizarre Treasury bet gone awry. Maybe he didn’t defect. Maybe he is going to work tomorrow, just like he does every day. But don’t think there aren’t screwy things going on in the Chinese financial sector that are every bit the volatile brew that was mixed here in the U.S.

I point you to two recent posts from the Journal’s China Real Time Report. First, Dinny McMahon writes about a curious essay by Bank of China Chairman Xiao Gang, unusually in English. It seems China’s top banking executives aren’t exactly happy with the way the banking system’s being run. Not that they’d ever come out and flatly say that.

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If there really is a bond bubble, it just got bigger.

US stocks under pressure even before an awful housing report, which only exacerbates the feeling that the economy is sliding back into the drink. Existing-home sales post a record drop, exacerbating concerns about the economy. That just turns up the heat some more for the Fed, which is confabbing this week out in Wyoming.

DJIA loses 134 (1.3%) to 10040, although it importantly holds after dipping under 10000. For how long is now the question. S&P 500 falls 15 (1.5%) to 1052, importantly holding at 1050. Nasdaq Comp loses 36 (1.7%) to 2124. Consequently, Treasurys rise, with 10-year yield hitting 2.49% and two-year hitting record low.

Stocks fell sharply in the morning, with the Dow slipping under 10000 to 9991 at one point. The S&P 500 got as low as 1047. At that point, the sell-off could have turned into a real rout, because while 10000 is merely psychological, the area between 1050-1056 on the S&P has some technical significance. Even while it held 1050, falling under 1056 is technically significant. That number represents a 61.8% retracement (a key percentage in Fibonacci circles) of the rally from the July 1 low of 1011 to the Aug. 9 high of 1129, our colleague Tomi Kilgore reported this morning. “That suggests a full retracement of the July rally is likely,” he wrote.

So expect more selling pressure, especially with that Friday double-whammy of the GDP revision and Bernanke’s Wyoming speech on tap. But, you know, bonds are in a bubble.

- Tone of Bernanke’s remarks yesterday didn’t deviate much from minutes of June FOMC meeting — surprising considering weak economic data that’s come out since then, Derek Tang writes at the Macroadvisers blog. Bernanke sounded “a bit out of touch,” he adds.

- Bernanke’s testimony lacked a sense of urgency, Paul Krugman says. “We really have to bear in mind that the Fed is failing in fulfilling its dual mandate, price stability and full employment…Bernanke’s answer to all this seems to be that the Fed is doing a lot. But it’s obviously not enough — the central bank is supposed to deliver results, not get an A for effort. And those results aren’t coming.”

- Financial Armageddon blogger Michael Panzner offers a harsh take on the earnings expectations game. “During ordinary times, a racket like this is simply a source of amusement,” he says. “Now, though, when it’s more important than ever for people to have an accurate read on where things stand, the beat-the-number scam is a pathetically cynical joke.”

- Netflix’s outlook calls for weaker revenue growth, especially as consumers shift toward cheaper plans, Dan Frommer notes at Silicon Alley Insider. Ultimately, NFLX may have to raise streaming fees, “or just deal with lower revenue per subscriber.”

- The fact that Exxon Mobil, Chevron, Royal Dutch Shell and ConocoPhillips are forming a JV to create a rapid-response force to deal with future oil spills is a great development, Barry Ritholtz writes at The Big Picture. “It gives a face-saving resolution to everyone, lets the White House declare victory and lets the oil keep on flowing,” he says. “This is an excellent announcement — now let’s see if they follow through on it.”

- Existing home inventory increased 4.7% from a year earlier, the third straight monthly rise and largest year-over-year increase since early 2008, Bill McBride notes at Calculated Risk. “This increase in inventory is especially bad news because the reported inventory is already historically very high, and the 8.9 months of supply in June is well above normal,” McBride says. “This was another a weak report…If months-of-supply increases sharply as I expect, then there will be additional downward pressure on house prices.”

- The Daily Beast’s Peter Lauria says there is “growing resentment” among some executives that Microsoft’s (MSFT) stagnant stock price is CEO Steve Ballmer’s fault. “Sources say the talk around Microsoft’s Redmond, Wash., headquarters — which has grown increasingly louder ever since Apple surpassed Microsoft in market capitalization — is that the company’s stock suffers from a ‘Ballmer discount’ and that the CEO is on the clock to significantly move the needle on its share price over the next two or three quarters or face a potential move to oust him,” Lauria says.

- Apple (AAPL) Operations VP Jeff Williams has been promoted to SVP and will oversee the company’s supply chain and ensure product quality. The move prompts speculation by the AppleInsider blog that AAPL was readying a succession plan for CEO Steve Jobs, who the blog says could be replaced by operations chief Tim Cook.

- If Microsoft’s Ballmer plans to send an email to employees about Thursday’s earnings announcement, he may want help from ToneCheck. The beta version of this new plug-in for MSFT’s Outlook mail program checks outgoing emails for emotional displays of, say, elation, humiliation, excitement and even fear, according to a blog post at PC World. Given Ballmer’s penchant for emotional outbursts and mounting criticism about his leadership of the software giant, he might be well-advised to test drive ToneCheck.

- “Tack on another month of no progress with weekly unemployment claims,” Mish says. “The 4-Week moving average is still hovering around the 450,000 to 460,000 level where it was in mid-December 2009.”

- China better have right intentions regarding its pledge for a stronger yuan. “The probability of a disastrous trade war will skyrocket if Congress believes they have been the victim of a classic bait and switch,” Tim Duy writes.

- “Adjustment in China and America will be slow, but that’s not unexpected or entirely a bad thing,” Ryan Avent notes at The Economist’s Free Exchange blog. “And the best news of all is that America and China have managed to arrive at this point without a major diplomatic fall-out.”

- Obama administration’s housing market stabilization efforts are yielding mixed results. Calculated Risk has the details.

- Digital music is a tough business to profit from, but MediaMemo blogger Peter Kafka says it still makes perfect sense for Google (GOOG) to jump in. A music store would enhance Android as well as give GOOG an “owned and operated destination” for music traffic. “My suggestion: Start simple. Copy iTunes’ pay-per-song model.”

- The fact that the “normally bank-friendly” Fed is pressing big banks to move faster in curbing risky pay practices is a step in the right direction, Yves Smith writes at naked capitalism. “Given [the Fed's] track record, I would not be terribly optimistic, but then again, I am surprised it has gone even this far. It would be great if it surprised me again.”

- May existing home sales dropped 2.2% to a 5.66M annual rate, well below the 5% rise to a 6.06M rate that economists were expecting. “We see more evidence that the next leg down in housing has begun,” Barry Ritholtz writes at The Big Picture.

- Investor sentiment can be a funny thing. “You couldn’t find a bull two weeks and eight percent ago but voila, as soon as the 200-day was captured and S&P 1115 traded underfoot, the equity enthusiasm was palpable, as evidenced by the recent collapse in volatility,” Todd Harrison says at Minyanville. “That’s the fatal flaw of technical analysis, right? Financial assets are ‘better’ higher and ‘worse’ lower, which is why I use them as a risk context rather than a catalyst.”

- Business Insider blogger Henry Blodget goes a bit sensationalistic in a recent post entitled “The Odds Are Increasing That Microsoft’s Business Will Collapse.” But in reality, Microsoft (MSFT) faces a “simple and less flashy situation,” BoomTown blogger Kara Swisher says.

- Looking for the important aspects to today’s existing home sales report? “The key is the inventory and months-of-supply, and if these two measures increase later this year as I expect, then there will be additional downward pressure on house prices,” Calculated Risk says.

- The IPO market never really made a comeback from the tech bubble a decade ago, and it’s telling that Facebook, Twitter and LinkedIn — some of the most successful tech companies right now — keep pushing off filing an IPO as long as possible, Eric Schoenfeld writes at TechCrunch.

The hot money’s been active in the home builders over the past year, but with the housing market starting to look weaker, with fears that a renewed drop is at hand, a volatile sector might get even more volatile. We look at that and give you an update on the yuan on today’s Markets Hub.

- “Either market volatility is about to increase substantially from current levels or options traders have overestimated future volatility,” Bill Luby writes. “If we have one or two more days in which stocks show average to slightly higher than usual volatility, expect the VIX to begin to move back down to a level that is a better reflection of those daily moves.” Indeed, VIX drops 9.7% to 34.61 as stocks close slightly lower, paring steep intraday losses.

- Threat of deflation isn’t as concerning as some folks like to believe, says David Beckworth. Even though the recovery has been sluggish and weak, don’t expect another collapse in spending. “Both current and expected spending are growing. It may be not be growing as fast as we want, but it is growing and there is no sign of an imminent collapse.”

- “The most important thing to know about the 1,500-page financial reform bill passed by the Senate last week — now on the way to being reconciled with the House bill — is that it’s regulatory,” says former labor secretary Robert Reich. “It does nothing to change the structure of Wall Street.”

- “Amazon (AMZN) for some time has talked up the success of its Kindle, including the claim that the device is the biggest-selling item on its site. But it is hard to avoid the conclusion that Chief Executive Jeff Bezos was trying to lower expectations at the company’s annual meeting Tuesday,” Martin Peers writes at WSJ’s Heard On The Street column.

- CNet reports Google (GOOG) offered Viacom (VIA) $592 million if the media giant agreed to license TV shows and films to YouTube. Details of the offer, made shortly after Google bought YouTube in 2006, were revealed in documents released by a Manhattan court where Viacom filed its $1 billion copyright lawsuit against Google and YouTube.

- “For a brief moment last fall, it looked as though the American housing sector might not be the persistent economic drag economists had feared,” the Economist’s Free Exchange blog says. “But the good times haven’t lasted.”

- Apple (AAPL) CEO Steve Jobs plans to deliver the keynote address at its Worldwide Developers Conference on June 7, but NYT Bits blogger Nick Bilton wonders how Jobs will wow the crowd, especially since many of his secrets have been revealed. “Product images and specs have leaked out of Apple before previous keynote presentations, but this time the amount of information was a relative gusher.”

- “With margin calls back on the radar screen for the first time since the financial crisis, it’s worth noting that margin debt has hit levels not seen since early in the crisis,” Brendan Conway writes at MarketBeat.

- Calculated Risk blogger Bill McBride delves deeper into yesterday’s existing home sales report and remains worried about increasing inventory and months-of-supply levels.

- Mounting tensions in the global financial system are evident in the increasing Libor rate. “The world’s big banks continue to grow leerier about lending to one another,” writes LA Times’ Tom Petruno. Three-month dollar Libor rate earlier highest level since July, though Petruno notes it remains well off levels seen during the financial-crisis in late 2008 when credit markets froze.

- Keep an eye on the huge shift from bullishness to bearishness throughout the last few weeks.

- John Hussman writes about a subset of market conditions that have historically been associated with sharply negative implications for stocks. “The combination of unfavorable valuations and collapsing market internals is a sharp warning to examine risk exposures carefully here,” he says.

- Job prospects are showing signs of life for college graduates. But make no mistake, they the labor market is far from thriving.

- European banks not for the faint-hearted investors. “It makes more sense to simply bypass these stocks until the story is over unless you are more of a trader or don’t mind very big swings,” writes Roger Nusbaum. The consequence for being wrong is greater with these banks. Obviously this will be too conservative for some folks but ultimately this is a know thyself question.”

- Facebook CEO Mark Zuckerberg addresses new privacy settings in a Washington Post op-ed, hoping to quell privacy concerns. But his memo seems like a “classic non-apology,” MediaMemo blogger Peter Kafka says. “He’s sorry that Facebook ‘move[d] too fast.’ That’s the kind of thing you say in a job interview if someone’s lazy enough to ask you to describe your biggest weakness — ‘Sometimes I try too hard.’”

- The fact that current and former AIG executives won’t face criminal charges seems baffling. But “if you rope your advisors like your accounting firm into signing off on your stupid or possibly even criminal behavior, then you get off scot-free,” Yves Smith writes at naked capitalism.

- Existing home sales increased more than expected, but keep an eye on inventory levels, Bill McBride notes at Calculated Risk. Inventory rose to 4.04M in April from 3.63M in March. It’s also an increase from April 2009, breaking a string of 20 consecutive months of y/y declines in inventory. “The increase in inventory is the big story.”

- Twitter announces it’s banning in-stream advertising from third-party developers, which “are not necessarily looking to preserve the unique user Twitter has created,” COO Dick Costolo writes on Twitter’s corporate blog. “We believe it is our responsibility to encourage creative product development and to curb practices that compromise innovation.”

- What are the implications of Twitter’s move to ban third-party ad networks? “Twitter has now reduced the number of companies trying to figure out their optimal business model from thousands to 1,” angel investor Chris Dixon says in a tweet.

- Intel (INTC) introduces a series of low voltage chips that could make the price for ultra-thin laptops more attractive and affordable, Digital Daily blogger John Paczkowski says, which “bodes well for the ultra-thin laptop which hasn’t had much success staking out a middle ground between the netbook and the laptop because its performance often doesn’t justify its price.”

- Some excellent explanations of the Lost finale.

US stocks under renewed selling pressure again as the latest worries across the pond center around Spain’s move to rescue a troubled lender.

The most recent concerns surrounding Europe come after the Bank of Spain rescued regional savings bank CajaSur over the weekend, suggesting sovereign debt woes could travel further. The move prompts Miller Tabak equity strategist Peter Boockvar to wonder what’s next for stocks.

“It will be the near term reaction to European budget cuts,” he says. “And whether bond investors are encouraged enough by them to buy sovereign new issues over the next few months to allow these countries to continue to finance themselves (and thus avoid tapping the bailout money).”

Concerns surrounding Greece and the broader European economy have weighed heavily on US stocks throughout the last few weeks as the market has entered into its first official correction in 15 months.

But the difference between a typical correction and something that spirals into something much worse is “faith that the bullish story hasn’t changed all that much,” writes LA Times’ Tom Petruno.

All that should matter near-term is whether new economic data and corporate profits continue to support the recovery thesis. This morning, the National Association of Realtors reported existing-home sales climbed 7.6%, to a 5.77 million annual rate in April, well above economists’ expectations as buyers took advantage of the first-time home-buyer tax credit. Prices and inventories also rose.

But stocks aren’t reacting positively to the good news and trade lower as European jitters continue to overshadow positive news on the domestic front.

“If recovery hopes fade amid (or because of) May’s barrage of depressing news, the bulls know they don’t have much else on which to build a case for stocks at these prices,” Petruno says

Dow down 47, but was off as much as 111 in earlier trading.

Can't call it a recovery until you get me back to work, brotha.

A mixed bag of economic data is weighing on stocks this afternoon.

Durable good orders provided some cheery news, rising in February for a third consecutive month. But skeptics dive deeper into the details and find reasons to worry.

Karl Denninger at Market Ticker says he’s concerned about three-month trends in shipments and new orders in two areas: computers and communications equipment, which are essential tools for adding white-collar jobs.

He notes inventory building is occurring and good for GDP, but if new orders don’t draw down that inventory, “it will quickly turn into a significant earnings drain in forward quarters,” he says.

“If the trends I am seeing in the durables report continue…broad-based macro deterioration should be evident to even the most-hardened pump monkey by June or thereabouts,” Denninger says. “The road ahead may be materially rougher than you have been expecting.”

Of course the three-month winning streak for durable good orders is garnering all the headlines this morning, which creates some optimism about the industrial part of the economy.

But it’s still unclear “how soon the recuperating process will spill over into the labor market,” James Picerno writes at The Capital Spectator.

“Either the recovery in manufacturing helps nurture an expansion in job creation, or the weak labor market puts a lid on the incipient mending in the industrial sector,” he says. “Today’s news on durable goods, along with other positive signs, indicate there’s reason to stay optimistic in spite of the rough period of late in the labor market.”

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- “Here we are, up 70% or so from the lows of over a year ago, and there is no uniformity of thought – which is probably a good thing,” Barry Ritholtz says.

- Treasury’s Geithner insists a resolution authority will help manage a failure of a large cross-border financial institution. “It simply will not,” former IMF chief economist Simon Johnson writes. “Mr. Geithner wanted to sound tough. But is he really coming out to fight? Or did he and his colleagues already throw in the towel?”

- Palm hopes distribution deal with AT&T (T) will boost sagging smartphone sales, but analysts aren’t so sure, John Paczkowski reports.

- “The home buying tax credit expires at the end of April and time is running out,” Miller Tabak’s Peter Boockvar says. “Bottom line, the next big test for this phase of the housing recovery is just ahead.”

- February existing home sales are proof the home buyer tax credit “has run out of gas,” Karl Denninger writes at the Market Ticker.

- Year-over-year decline in housing inventory is getting smaller. “This is something to watch,” Calculated Risk says. “This slow decline in the inventory is especially concerning with 8.6 months of supple in February – well above normal.”

- “Once upon a time, you could set your watch with the Google-Goldman super-tell duopoly,” Todd Harrison says at Minyanville. “As both are pointing due south today, it’s worthy of a mention.” Google (GOOG) drops 1.5% to $549; Goldman Sachs (GS) drops 0.8% at $174.83, but the Dow Jones Industrial Average rises 103 points.

- UK authorities arrested of six men, including an employee of hedge fund Moore Capital and another from Deutsche Bank, in what’s being billed by the government as a major crackdown on insider trading, WSJ reports.

- Solar stocks, which got hit hard during the bear market, have been really struggling during the recovery, Bespoke notes. For solar stocks over the last six months, “it’s not a pretty sight,” firm says. “Is now the time to buy or will solar continue to trade lower?”

- Jeff Saut, Barry Ritholtz, Bob Doll and Mike Santoli all correctly called the bull market, Josh Brown writes at The Reformed Broker.

- Microsoft (MSFT) doesn’t want to talk about the Courier, a rumored response to Apple’s (AAPL) iPad, but it’s willing to concede the blogosphere is a great way to read about it. All Things Digital says MSFT’s JobsBlog tells those looking for a job to check out “online chatter” about, among other things, “the upcoming Courier digital journal.” The JobsBlog links to a post on Engadget that claims exclusive pictures and details.

(UPDATE: Looks like someone at Microsoft’s (MSFT) JobsBlog might be in trouble. MSFT has now deleted a reference to its rumored Courier tablet from a JobsBlog post. “Hilarious,” All Things D’s Peter Kafka tweets. The post is still on JobsBlog but no longer mentions the Courier.)