Remain Calm! All is Well!

OK, perhaps things are not as bleak as a "burning ring of fire," but positive price action over the last few months has reminded me of our title's famous line issued by Chip Diller as pandemonium ensued at the homecoming parade in "Animal House." It was time for a correction.

The infamous "fat-finger" trade on Thursday that drove the Dow down nearly 1,000 points was a pure blessing for both BP and Greece in terms of PR. In a quick scan of Barron's over the weekend, I noticed too many articles beginning with the phantom stock market drop as their lead (Barron's is not the only publication to fall victim to this, to be sure).

In fact, it wasn’t until page 56 — buried well in the back of the paper — that BP was even mentioned. But until Thursday, Greece and the gulf oil spill were the only stories being discussed.

Now, thanks to Mr. (or Mrs.) Sausage Hands, investors actually feel some relief, even though we find the Dow off 628.2 points or 5.6 percent for the week (to a 2-month low), implied volatility up some 80 percent to 40.95 for the week (a 13-month high), 10-year bond yields down 23 basis points for the week to 3.43 percent (a 5-month low), the euro down 4.1 percent for the week to 1.2755 (a 14-month low) and ... well you get the point.*

It's amazing what a little mistake can do to change perceptions.

In a day or two when everyone has forgotten how ridiculously easy it must be for Ivy League-educated, Wall Street power brokers to type a "B" instead of an "M," my guess is most of these markets will retrace a significant portion of these moves — except perhaps the euro.

No, unfortunately, there is some real uncertainty around the larger economies there as to whether the healthy ones can (and will expeditiously) bail out the unhealthy. Too bad there is no monetary institution that could simply force a merger with JP Morgan or perhaps Germany (yikes!).

Turning to the stock market, there is still a significant amount of dry powder on the sidelines that will provide support, no matter the long-term value. With some $2 trillion of "extra" money in bank accounts (potentially being forced out with the coming expiration of FDIC insurance at many banks) along with nearly $1 trillion "extra" in money market mutual funds, there is likely a tremendous amount of buying power still sniffing around these markets for a bargain.

Remember, market prices only reflect where the last trade took place. They do not necessarily reflect the sentiment of an entire market and sometimes don’t come anywhere close to representing true value.

Take that, efficient markets theory!

Key Developments
The consumer continues to display some "oomph" as personal consumption rose 0.6 percent in March following a 0.5 percent gain in February. Anecdotal reports from the retail sector imply a slowdown in April, although a break in the action might be appropriate given solid strength indicators so far this year. Personal income growth has consistently lagged behind consumption, confirming my guess that a cultural shift towards a savings-based economy will not result from the shocks we have just survived.

Nonfarm productivity in the first quarter included a modest gain in hours worked even as this measure rose 3.6 percent. The increase in hours worked is important as it implies productivity may be somewhat sustainable and not simply the result of cutbacks in the labor force.

The jobs data were very positive including nonfarm payrolls growing by 290,000 and upward revisions to prior months. The increase in the unemployment rate from 9.7 to 9.9 percent was primarily due to workers reentering the workforce which could be construed as a positive sign. Unfortunately, the U6 report measuring both underemployment as well as unemployment rose from 16.9 percent to 17.1 percent — a hefty level that will not soon reverse to normal levels.

*Due to production timing, this article was written over the weekend. Since then, all markets have reversed somewhat — even the euro given Sunday night’s Hail Mary bailout package. But it remains to be seen whether investors are convinced this bailout will outweigh the accompanying moral hazard.



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