Despite Warnings, Markets are Sanguine Ahead of Payrolls

Good Evening: The U.S. capital markets have done little since I penned a tongue-in-cheek apology to Fed Chairman Bernanke, and today was no exception. Thursday’s smallish advance in stocks, bonds, and the dollar — mostly on low volume — continues a trend that’s been in force for a couple of weeks now. Yes, Thursday’s languid activity is quite normal on the day before a nonfarm payrolls report, but it seems as if all the markets are waiting for a catalyst. Perhaps the Labor Department will oblige with a surprise tomorrow, but the figures will likely be muddied by February’s fairly unusual weather. The ongoing dust-up in Europe over the financial situation in Greece may provide another reason for market participants to regain a sense of conviction, but it’s too soon to tell if the nascent optimism over a potential EU rescue will actually pan out. According to Charlie Munger, Bill Gross, and Mark Steyn, however, we Americans would be well-advised to stop clucking about Europe and put our own house in order.

A 2% drop in Chinese equities overnight generated very little angst in other markets, and U.S. stock index futures edged into the plus column ahead of this morning’s open. That a Greek bond sale went fairly well probably helped the psychology among market participants, but Thursday’s economic data may have helped somewhat, too. Chain store sales, jobless claims, the Monster employment index, and nonfarm productivity all came in better than had been expected, while only factory orders and pending home sales fell short of expectations. Guesses for tomorrow’s jobs report are all over the map (ranging from – 150K to + 50K), so I’ll add my own forecast to the pot. + 1 job in February is the guess I submitted to yesterday, though I’m sure the BLS would want to protect its legendary imprecision by rounding up such a result to +1000.

Stocks rose 0.5% at the open, only to fall back to unchanged in short order. The rest of the session was spent meandering in positive territory before the indexes benefited from a minor push in the final hour. The major averages finished with gains of approximately 0.5%. Two aspects of the recent market action are worth pointing out, though. While the Dow and S&P 500 are still well below their January peaks, the advance/decline line has recently set a new high, and both the Midcap 400 and Russell 2000 have set new, post-crash highs. Volume figures don’t confirm this positive price action, but the major averages often try to work higher when the little stocks are leading the charge like they are now. Bonds rose today, leaving the 10 year yield at a three week low. The dollar rose and commodities fell, leaving both just about unchanged over the past two weeks. The CRB index was 1% lighter by day’s end.

Basically, It’s Over

Whether with investment management or life itself, it helps to return to basics when things go awry. Charlie Munger is more than just Warren Buffett’s longtime business partner at Berkshire Hathaway, he is an author and philanthropist in his own right. The piece you see above is his attempt to distill and simplify what used to make America great, as well as provide a sense for how it can regain that greatness. Like most parables, it skips many details in order to make a larger point. But it’s worth reading, if only to give us another reason to push our leaders toward a path that avoids the fate now facing Greece and the other PIIGS in Europe.

Don’t Care

Governments need to return to fiscal sanity or the bond markets will do so for them, says PIMCO’s Bill Gross in his latest “Investment Outlook”. Mr. Gross may embrace the Internet, Twitter, and even Podcasts to get his points across, but he evidently doesn’t like to do so in the analog forum known as the cocktail party. “Don’t Care” is the perfect title to remind fixed income investors the world over that bond vigilantes still operate in the global marketplace, though I wish policy makers would pay heed to his warning that there are limits to bailing out a debt crisis by taking on more debt. Mr. Gross doesn’t care whether it’s Greece, the U.K. or even the U.S. when he states that sovereign balance sheets can only be stretched so far before the bond market demands more compensation for the inflation and/or default risk. He makes a good point, but with U.S. 10 year yield at 3.6%, it appears that all too few vigilantes stand with him these days.

Our own Greek tragedy

“To hell with the Greeks!” These words come not from a truculent German finance minister, nor do they spring from a wealthy French citizen hoping to avoid paying for a bailout of his Greek neighbors. No, this is the heartfelt stance of a Greek-American friend of mine, one who has close family members still living in the cradle of democracy. “Hey, they don’t like to work and they hate paying taxes even more”, he continues, “I hope they get what they deserve”. As you will read in the article above, my Greek-American friend has a kindred spirit in Mark Steyn. Mr. Steyn’s piece will resonate with others, too. Since these commentaries are meant to be non partisan, I hope readers will look past what may be construed as digs against the party currently in power in Washington. I hope folks instead focus on the larger point — that it doesn’t matter whether your capital city is Athens, Lisbon, London, or Washington. Politicians can’t keep making promises our citizens can’t afford to pay.

Across the Atlantic, the constraints of debt mentioned by Mr. Gross first hit Iceland. Ireland was next, and now it’s Greece’s turn to discover what crisis-imposed limits look like (and, more importantly, feel like). No matter what deal the EU cuts with Athens, Spain, Portugal, Italy, and — eventually — the U.K. will find out about limits, too. Mr. Steyn says those of us on this side of the pond shouldn’t miss the lesson. Let’s just hope he’s wrong that we are paddling furiously to catch up with Greece to follow them into crisis. Unfortunately, many think crisis is the only way a modern democracy can imposed discipline. I hope not. Paddling a canoe toward a waterfall is not my idea of risk management. Can’t we just ask leaders in both parties to be more responsible? As Mr. Munger says, unless we return to basics, “basically, it’s over”.

— Jack McHugh

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