Market Talk

Okay, so yesterday the world was about to spin off its axis, the end-times were nigh, disaster seemed afoot. Even Charlie Sheen was putting on a credible stage show.

Today, not so much.

US stocks recover after yesterday’s sell-off, with Johnson & Johnson leading the Dow higher after a well-received earnings report. Given how quickly stocks shook off that S&P warning, which yesterday seemed a globe-rattling event, you wonder if yesterday’s sell-off in the stock market had as much to do with S&P’s report as it did with an overbought market.

DJIA gains 65 (0.5%) to 12267, S&P 500 rises 7 (0.6%) to 1313, Nasdaq Comp adds 10 (0.4%) to 2745. NYSE volume’s low. J&J, Caterpillar comprise about half of the Dow’s gains. J&J, Goldman both see earnings slide from a year ago, although the Street rewards the former and punishes the latter.

Gold touches $1,500, closes a hair beneath there. Crude’s above $108/barrel again. Yen remains pegged above 82 to the dollar, but watch if it breaks below there (moves down in the yen represent strengthening.) We’d be getting back to the range that sparked the yen’s wild March 16 rise and subsequent G7 intervention.

Slate of post-market earnings includes IBM, Yahoo and Intel.

Despite the recovery today, the technical damage yesterday was material, as our colleague Tomi Kilgore points out:

The S&P 500′s bounce was encouraging for bulls, but it didn’t quite erase the negative overhang created by Monday’s tumble. The S&P 500 up 7 at 1313, but below resistance at the 50-day moving average (currently at 1315). While the index stays below the 50-day MA on a closing basis, the preferred stance will be sell on rallies, as Monday’s slide stirred up technical chatter about a possible longer-term “double-top” reversal pattern (February top of 1344, April top of 1339). That won’t be confirmed unless the index falls below the March low (1249), but the longer the index closes below the 50-day MA, the more likely it becomes.

Now, for sheer lunacy, absolutely nothing tops this story from the Orlando Sentinel about a central Florida unemployment bureau and its latest plan to, well, fight unemployment: they’re giving out “superhero” capes.

It sounds like a bad Saturday Night Live sketch, but we’re not kidding. Here’s the website of the Workforce Central Florida, which launched a marketing campaign to “help us fight Dr. Evil Unemployment.” It’d be hysterical if it wasn’t so sad. Nothing quite says “we’ve hit the wall” than this effort.

Big show today, markets trying to rebound after yesterday’s sell-off, earnings from Goldman and J&J as well as a look at this afternoon’s earnings, and author, economist and sometimes actor Ben Stein comes on to talk about the U.S. debt issues, the future of the economy and the importance of diversification.

I’m a day late with this, but I wanted to give a shout out to Josh Brown, who gave me props on my recent column that looked at whether political gridlock is actually good for stocks.

Gridlock is widely assumed to be good for stocks because a divided government is less likely to pass new legislation or regulations, which is viewed positively for businesses and, therefore, stock prices. But S&P crunched some numbers and found that gridlock may not be as great as it appears. From my “Technically Speaking” column:

Sam Stovall, chief investment strategist at Standard & Poor’s Equity Research, said research dating to 1900 shows stocks have actually performed worse in the two years following midterm elections when gridlock ensued as opposed to an environment under a unified government.

Mr. Stovall compared three different political scenarios following midterm elections: total unity with one party in control of the White House and Congress; partial gridlock with a unified Congress and a different party in the White House; and total gridlock with a split Congress.

“From a very simplistic perspective, the resulting equity market strength in this scenario appears logical,” Mr. Stovall said in a recent note. “Under a unified-party government, if the president proposes legislation, it will likely be rubber-stamped by Congress, thereby stimulating the economy, increasing output, and raising corporate earnings and propelling shares higher.”

The Standard & Poor’s 500 has averaged a 7.6% gain in the 67 years since 1900 under total unity. By comparison, the index has averaged a 6.8% return in the 32 years under partial gridlock. And under a total gridlock scenario, like the current situation, the S&P 500 has averaged only a 2% gain.

Under total unity and partial gridlock, the S&P 500 has performed better under a Democratic administration when compared to Republican leadership since 1900. But in a total gridlock scenario, the market has performed better under a Republican president than a Democrat.

To be sure, Mr. Stovall notes there is a small sample size to draw conclusions from the total-gridlock scenario. There have been only 12 years since 1900 under total gridlock, so the data may be skewed.

But he remains confident that the popular notion regarding gridlock needs to be reconsidered.

Still, the benchmark indexes are up 3% this week as investors are applauding the election results and the Fed’s QE2 announcement.

Don’t jump the gun just yet: It’ll take more than a week to determine if gridlock is actually good for stocks or not.

- Big Picture blogger Barry Ritholtz addresses the ongoing inflation/deflation debate. “Deflation is a fact. It is happening now, it is real, and we see it in the actual data,” he says. But the first hint of inflation will come from the bid-to-cover ratio on Treasury bond auctions. “That will be your early inflation warning. But now? It’s nowhere in sight.”

- Initial jobless claims are still “stubbornly high” at 457,000, Miller Tabak’s Peter Boockvar says. “GM not shutting auto plants as is typical this time of the year is still a distortion but it is surprising that claims aren’t lower because of it,” he says. “Thus current levels still remain a concern at this stage of an economic recovery.”

- And what’s worse, jobless claims have essentially been stuck in neutral during the last eight months, The Economist’s Free Exchange blog notes. “Claims are stuck at an historically high level. Perhaps that merely reflects some new structural dynamic in the labor market, but it mainly seems suggestive of continued economic weakness.”

- While the advertising industry was crushed during the financial crisis, recent signs have pointed to a comeback. “But it’s not back everywhere. And it’s probably not as strong as you think it is,” MediaMemo blogger Peter Kafka cautions.

- RIMM’s rumored new operating system “should have released years ago, one that should give its devices a bit more appeal in a market increasingly enamored of super-smartphones,” Digital daily blogger John Paczkowski says. “So if the 9800 is announced next week along with a rumored mid-August ship date, RIM will have taken its first big step in addressing the competitive issues that are tarnishing its growth prospects.”

- Moody’s, S&P and Fitch have recently refused to allow their ratings to be used in bond registration statements, fearing they’ll be exposed to new liability from the financial reform legislation. “You can file this one under D for Despicable,” Joshua Brown writes at The Reformed Broker. “Let me put this in schoolyard terms: The ratings agencies are playing chicken against the US economy. The message is to insulate them from responsibility or else they’re taking their marbles and going home.”

- Investing is “an uphill climb against human nature to be bullish when conditions are poor,” the Dorsey Wright Money Management blog says. “To buy when the outlook is dim takes a real leap of faith — and a steadfast optimism that things will improve over time. When things seem like they can’t get any worse, it just might be because they really can’t get any worse–and are about to get better.”

- Payrolls typically lag durables by four months. “Now, the year-over-year change in durables probably peaked a couple of months ago at 19%,” Invictus writes at The Big Picture, noting comps are going to start getting harder to beat. “I fear the hour is growing late and we’re rapidly running out of time as the labor market continues to struggle. I see nothing stimulative on the horizon as far as employment goes.”

- Avis goes to war for Dollar Thirfty. NYT’s Deal Professor Steven Davidoff has the details.

- “Erasing years of academic progress, state education officials acknowledged that hundreds of thousands of children had been misled into believing they were proficient in English and math, when in fact they were not,” WSJ says.

- It’s getting scary across the pond. “The question now is how far this will spread,” Paul Krugman writes. “I’m looking at the spread between Italian and German bonds. It’s getting a bit scary out there.”

- “The US Treasury market is in an interesting place where we have seen a flight to safety this week and a Fed that may keep rates low forever on one hand and an improving economy, rising commodity prices and a financial situation in the US that doesn’t look much different than Greece on the other,” Peter Boockvar says.

- Most troubling aspect of S&P’s downgrade of Greece isn’t that the country’s debt has been slashed to junk. “The real problem is that the losses on default are likely to be far steeper than is typical for sovereign borrowers,” Yves Smith writes at naked capitalism.

- Maybe there’s no need to overreact regarding European’s increasing debt woes, The Economist’s Free Exchange blog says. “The situation is salvageable, and for now the right outlook is one of concern rather than panic.”

- Do CDOs have social value? James Kwak, Arnold Kling and Frank Partnoy discuss at NYT’s Room for Debate blog.

- At yesterday’s Senate hearing, Goldman Sachs (GS) CEO Lloyd Blankfein “trod the fine line between not being apologetic and actually saying ‘it’s capitalism, stupid’ and the more junior executives interrogated did not say anything blatantly incriminating,” former IMF chief economist Simon Johnson observes.

- Peter Kafka live blogs H-P’s conference call in which the company explains why it’s buying Palm.

- “The Nexus One may not be a bestseller, but perhaps that’s beside the point,” PCWorld’s Jeff Bertolucci says. “The phone has served as an Android demo unit, one that shows handset and app developers what the Android platform is capable of. Indeed, more manufacturers are introducing Android devices — a development that will certainly boost Google’s mobile market share.”

- NYT’s Bits blog wonders whether Gizmodo has any chance of winning the iPhone battle.

- AOL’s turnaround still isn’t here, evidenced by 1Q revenue falling 23% and ad sales dropping 19%. Not a good sign, especially since both Google (GOOG) and Yahoo (YHOO) posted significant revenue growth. But, as Kafka points out, AOL CEO Tim Armstrong still has a grace period to rebuild the company before investors expect to see tangible results.

Better get ready, Mama, there's a storm coming.

This is what can happen when you think jawboning can replace concrete policy. While European leaders have talked, and talked, and talked, without actually doing much of anything about the escalating Greek crisis, the rest of the world has watched, and waited, and worried, and wondered if this was all going to be settled and contained before it spread to the rest of Europe, and God knows where else after that.

Contagion 3, Jawboning 0.

“It’s not a question of the danger of contagion; contagion has already happened,” Organization for Economic Cooperation and Development Secretary General Angel Gurria said in an interview with Bloomberg television in Berlin today. “This is like Ebola. When you realize you have it you have to cut your leg off in order to survive.”

The ratings agency S&P threw a Molotov cocktail into the serene marketplace yesterday, downgrading both Greece and Portugal. Not content with bolstering their battered reputation with those moves, S&P tossed another grenade today, downgrading Spain. The only “PIIGS” members left unaffected are Italy and Ireland. But they may not remain so.

More downgrades are coming, says BBH’s Win Thin, as ratings agencies are “on the warpath and unlikely to relent any time soon.”

So far, over here the reaction has been almost nonexistent. Stocks have been volatile, and fell on the news of the Spanish downgrade, but are back to their morning highs. Of course, U.S. investors are waiting to hear from the Fed at 2:15 p.m. I wonder what’ll happen after that, especially with the dollar up sharply as the euro sells off. The euro is threatening the $1.31 level; $1.32 was seen as a line in the sand.

“We have gone past the point of no return,” said Jacques Cailloux, chief Europe economist at the Royal Bank of Scotland, as reported by Ambrose Evans-Pritchard in the Telegraph.“There is a complete loss of confidence. The bond markets are in disintegration and it is getting worse every day.” And that was before the Spanish downgrade.

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It pains me to write this headline. It truly does. But it’s hard to argue the facts.

From an injury-ravaged 2009 season, to a lackluster offseason without any splashy transactions and diminished expectations heading into Spring Training, Mets fans don’t have much to get excited about.

And from a financial aspect, there’s more bad news surrounding the franchise. The New York City bonds issued to build the new Mets stadium – Citi Field – have been downgraded to junk by S&P and Moody’s.

NYT’s Floyd Norris has the details:

Standard & Poor’s and Moody’s have finally discovered something New York baseball fans figured out last summer. The New York Mets are junk.

O.K, that is not fair. But the New York City bonds issued to build CitiField have been cut to below investment grade by the rating agencies. The agencies blame the cuts not on the Mets’ woeful performance last year but on the standing of the bond insurer Ambac, which guaranteed the bonds.

Ambac is all but broke, with ratings in the nether worlds of junk.

The part of this that is most amazing is that the bonds were sold in 2006 and 2009. That investors would regard an Ambac guarantee as worth something in 2006 is understandable. But by 2009 it was pretty clear the firm was in trouble, even if the rating agencies were slow to announce it.

Paying for these guarantees certainly looks questionable. But maybe the moves aren’t surprising considering the Wilpon family , which own the Mets, was also invested with Bernie Madoff, Norris notes.

“So it is clear their financial clairvoyance may be no better than their ability to pick and sign the stars of tomorrow in the annual draft,” Norris says. “At least they managed to sell the stadium naming rights before that market caved, even if the buyer did need to be rescued by the government so it could keep paying the money.”

On top of all that, the Phillies have appeared in two consecutive World Series and the Yankees are defending champions.

Mets fans really can’t catch a break.

With a little more than half of the S&P 500′s components checking in this earnings season, 4Q operating earnings, according to S&P, are coming in at an almost absurd 481% increase over last year’s 4Q (the only time the group ever produced a loss, incidentally.)

On an “as reported,” basis, including charges and the like, earnings are up 148% over last year.

However, sales are up only 6.6% from a year ago. The sales gains are “not impressive,” S&P’s senior index analyst Howard Silverblatt says. “Sales are contingent on both corporate and consumer spending, both of which are shaky.”

Capital expenditures by corporations, he notes, fell 22% in 2009, and although there are hopes they rise in 2010, there were hopes in 2009, too. “The general hope over 2009 was that information technology has to benefit from that; oddly enough when 2009 did not produce the results, the sentiment continued based on the belief that the spending eventually has to be made.”

It’s notable that in Microsoft’s earnings release, the company noted it hasn’t seen any discernible increase in enterprise spending and isn’t even hopeful that an increase is on the way.

So, again those profit-growth rates are coming mainly as a function of cost-cutting, which in large part translates into layoffs (which also alleviates the need to new capital spending, by the way. Nice how that one works; if you don’t have more bodies in the office, you don’t need new desk, chairs, filing cabinets, computers, phones, training manuals, etc.)

“While the situation continues to improve,” Silverblatt says, “it is just baby steps on what appears to be a long, slow recovery, which given the current economic and political environment, is sure to be more than a bit bumpy.”