Market Talk

Don't worry, Ben. Nobody's going to make you do anything hard.

Ben Bernanke’s getting plaudits from the fiscal austerity crowd, like my colleague Evan Newmark’s column today, for his comments today about the state of the federal government’s finances. The central bank chieftain warned Congress that the federal debt — now $13 trillion and counting — was on an unsustainable path, and that the economy wouldn’t grow fast enough to cover the debt payments. If Congress doesn’t come up with a plan now, there will be “sharp, disruptive shifts” in spending and taxes.

It’s the same warning Congress has been hearing for years. Decades probably. It’s always true, never heeded. But, and maybe I’m crazy here, it seems to me the Fed chair is in a rather unique position to influence Congress with more than mere words.

He could raise rates.

If Bernanke really wanted to make a point to Congress, he shouldn’t waste time with testimony that nobody but stocks traders follows anyhow. He should just start raising rates. One of the biggest but least appreciated benefits (at least, outside the Beltway) of the Fed’s zero-interest rate policy, the ZIRP, has been that Congress’s funding costs have gone down, allowing them to finance ever greater deficits. Bernanke could change that math in about a second.

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The stock market’s at a relatively critical point, and if the bulls are going to take the market back after last month’s selloff, they’re going to need to see some strong data, particularly from the jobs market. We discuss on today’s Markets Hub whether or not they’ll get it.

- The Apple/Adobe war over Flash jumps to a new level: Apple (AAPL) CEO Steve Jobs uncharacteristically pens a post weighing in on his decision not to support Flash.

- Adobe’s (ADBE) CEO responds.

- Hewlett-Packard (HPQ) acquiring Palm prompts Digital Daily blogger John Paczkowski to ask: “Why spend $1.2 billion on a company whose downward spiral has been the talk of Silicon Valley for the past year?” The answer is relatively simple — H-P wants its own operating system, which is exactly what Palm has to offer.

- What does the Fed’s “extended period” really mean? NYT’s Economix and Calculated Risk weigh in.

- Hewlett-Packard (HPQ) is taking a page out of Apple’s playbook: It wants an operating system it completely controls without relying on Microsoft’s (MSFT) Windows. Unfortunately, Dan Frommer at Silicon Alley Insider isn’t optimistic about the plan.

- Greece fizzles…But the Dow sizzles.

- “The uptrend remains in place, and until it is broken we maintain an upside bias,” Barry Ritholtz says. “We are not at the sorts of extremes yet that make the contrarian in us scream ‘sell.’”

- Why do markets pay any attention to ratings agencies?

- Initial jobless claims dropped 11,000 to 448,000 last week. “If you’ve been following the soap opera with this data series you know that we’ll need to see something more dramatic before the central bank changes its monetary tune of standing pat,” James Picerno writes at The Capital Spectator.

- Paul Kedrosky looks at stocks vs flows relating to consumer solvency.

US stocks close higher, shrugging off another credit downgrade in Europe, as investors were happy to hear the Fed will keep short-term interest rates near zero for an “extended period.”

DJIA closes up 53 to 11045, after a brief foray under the 11000 mark. S&P 500 jumps 8 to 1191 and Nasdaq Comp rises 0.26 to 2472.

Stocks plunged yesterday on renewed contagion fears after S&P downgraded Greece and Portugal. But today the market took S&P’s downgrade of Spain in stride. Financials and energy were S&P 500′s biggest gainers; consumer discretionary the only sector to finish in the red.

After the closing bell, news broke that Palm finally found a buyer, although the acquirer comes as a bit of a surprise. Hewlett-Packard (HPQ) announces plans to acquire the embattled smartphone pioneer for nearly $1 billion.

H-P is paying $5.70 a share, a 23% premium to Wednesday’s closing price. Including debt, the deal is valued at $1.2 billion. Hewlett-Packard will be getting WebOS software, which can set it apart from the rest of the Google (GOOG) Android-using pack.

Palm shares soared 28% to $5.93 in after-hours trading, topping the offer price and suggesting investors may be looking for additional, higher bids. Palm garnered some interest from Asian technology companies, including Lenovo (LNVGY) and HTC (HTCXF), but it was never clear how legitimate their interest was.

(Roger Cheng contributed to this post.)

So the Fed sat on its hands, again, and did nothing with interest rates, meaning the Fed extends the record low fed funds rates of 0-0.25% for another month or so (although as far as the Street’s concerned, it’s at least another six months (and, of course, the Fed can actually raise rates any time it wants. But don’t expect it to.))

But, really, think about this. What does it really say about the Fed’s real opinion of the economy that it once again feels compelled to keep interest rates pinned to the floor? Is that any kind of a sign of confidence? Not to me.

Newswires’ Michael Derby and Kathleen Madigan report:

As expected, the Fed has maintained its 0% to 0.25% overnight target range. Fed also says it will keep rates very low for an “extended period.” Policy wise, this is a status quo Fed meeting.

The Fed has essentially done what was expected. They’ve left rates steady and have no plans to change rates any time soon. The economic outlook has been upgraded a bit and officials are more hopeful over the state of hiring. But Kansas City Fed President Thomas Hoenig doesn’t like what the Fed’s doing, dissents again.

Still, nothing is in this policy statement that would dislodge existing views of what will happen with monetary policy, so don’t expect to see rates changed for some time.

The Fed also upped its assessment of labor markets in today’s FOMC statement. It said the labor market “is beginning to improve,” better than “is stabilizing” wording in March 16 announcement.

Job growth is seen as key to Fed changing policy stance. Statement also says household spending “has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.”

Dow industrials were recently up 64.

We're just giddy over the market's certainty.

For Main Street, there are still considerable uncertainties out there. Wages, sans government transfers, are stagnant. Good-paying jobs, the kind that aren’t temporary for example, remain scarce. Taxes are almost certainly going up – at some point and by some amount.

But for Wall Street and the investor class, the times couldn’t be better, University of Oregon economics professor Tim Duy says.

The economy’s sitting in a “sweet spot” right now as far as the Street’s concerned, as the recovery is moving “fast enough to push corporate profits upward, not fast enough to attract the attention of the Fed,” Duy says.

“The combination of steady, solid growth with low interest rate and no inflation is about as good as it can get for Wall Street — the sudden work ethic on the part of SEC officials notwithstanding,” he notes.

And with the Fed still holding to its “extended period” pledge so far as keeping interest rates pinned to the floor, investors are experiencing “considerable certainty” in the near-term, Duy adds. “And that certainty is a valuable commodity.”

Yes, he has a point that near-zero interest rates combined with solid growth and high unemployment creates a great environment for stocks to push higher. But, as the stock market keeps running up, we can’t forget the only thing certain about the market is its uncertain nature.

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Looks like bright times ahead

Our colleagues at The Wall Street Journal join a growing voice pointing to a strong economic recovery. On today’s front page, Mark Whitehouse details evidence that the recovery could occur faster than anticipated.

Shoppers turned up in surprising force at U.S. stores, auto dealers, restaurants and elsewhere in March, adding to a growing sense that the recovery could prove faster than anticipated.

Combined with a rebounding service sector, rising financial markets and new efforts to forgive mortgage debts, March’s 1.6% surge in retail sales is tempting forecasters to upgrade their assessments of the economy’s ability to restore the 8.2 million U.S. jobs lost since the recession began.

The renewed consumer and business activity also helped propel J.P. Morgan Chase & Co. to a 55% profit gain in the first quarter, increasing optimism among investors that banks, too, are rebounding from the crisis that floored the industry.

“There’s a growing risk that we’re underestimating the strength of the recovery,” said Stephen Stanley, chief economist at Pierpont Securities, noting that deep recessions tend to be followed by steeper recoveries. “If the economy pops, it’s going to be faster than anyone is forecasting.”

He also points to a recent WSJ economic-forecasting survey, which showed three out of four economists expect their growth forecasts over the next year and a half will prove to be too low rather than too high.

It appears consumers are willing to open their purse strings more than previously expected. Whether this action is sustainable remains in question, especially with the unemployment rate perched at 9.7%.

But as the stock market keeps hitting fresh highs, and as stories keep circulating describing the strength of the rebounding economy, Miller Tabak equity strategist Peter Boockvar asks the question on everyone’s mind: is this recovery real or not?

“I can’t keep but wondering how much of the improvement in all of the above is due to zero nominal and negative real interest rates and how much is due to the natural order of the economic cycle,” he says. “There is no question it is a combination of both but is a zero interest rate environment a proper gauge of what’s real and what’s artificial, what’s organic growth and what’s juiced by easy money all over again.”

Only time will tell, especially when the economy “has to be left on its own without the crutch of cheap money.”

Chart courtesy of WSJ.

(Photo credit: Wikipedia Commons)

- S&P 500 posts biggest gain in more than a month. But keep an eye on the index at these levels as it may face sturdier chart resistance ahead, Bill Luby cautions.

- US Dollar’s uptrend hits a bit of a rough patch this week.

- The economy’s still too lame for Bernanke to hint at rate changes.

- It’s hard to ignore that Elevation Partners has invested about 25% of its $1.8 billion fund in Palm. “Basically, if you invest 15% or more of your portfolio in a single company, you are just begging to be knocked to the ground,” Dan Primack notes at PE Hub.

- Spending more on prescription-drug commercials doesn’t necessarily mean TV viewers will remember your ads.

- Abercrombie’s wacky 8-K raises some eyebrows.

- Google (GOOG) offers small fix for Twitter Search, allowing users to sift through archived tweets and pull results from a particular time period. “That’s not nearly enough to fix Twitter search, but it is cool,” Peter Kafka says. “And probably useful, in some situations.”

- “We got into this mess because we had an over-financialized economy, with finance making a share of profits out of all proportion to its actual economic contribution,” Paul Krugman writes. “And now it’s baaack.”

- S&P 500 year-to-date gains bode well for the remainder of 2010.

- Greece’s tedious tale needs an ending. “Markets are officially bored of Greece — and that’s a bad place for it to be right now,” FT”s Alphaville says.

So the market’s hit a bit of a snag. After coming within one point of the 1200 mark on the S&P 500 yesterday, the market’s taking a step back today.

Some of it could be attributed to the dollar, which has worked off a lot of its earlier weakness, sapping the risk trade. Rumors started flying around mid-morning that Fed Chairman Bernanke would use his appearance before Congress’ joint economic panel to change the wording of the Fed’s rate outlook, effectively “resetting” market expectations about when rate hikes might be coming.

The rumors haven’t come from any definitive sources (at which point, of course, they would stop being rumors,) but still, in a top-heavy market, stuff like this can have an outsized effect. The Dow dropped as much as 58 points this morning before recovering somewhat. While still lower, it’s only off about 13 points. The S&P is down 5 at 1191.

Even if Bernanke says some “actionable” tomorrow, We’d be surprised if the Fed embarked on a rate-hike regime. And even if they did, starting at zero, it will take a long time, given the way the Fed operates, before rates are in even a neutral range, forget about something constricting. Indeed, at this rate, we may get another ice age before the Fed has interest rates at a level that would constrict activity.

Meanwhile, back in the world, this morning’s trade deficit report wasn’t very bullish; neither was the NFIB’s small-business survey. And Alcoa’s down after posting merely in-line earnings last night; not a good sign for a market that expects to be dazzled by earnings season.