Yesterday was a choppy day for the markets as traders were caught between conflicting news: Euphoria for the US bailout part 2 Vs Dodgy earnings and a gloomy outlook from the big tech sector. Such numbers are a timely reminder that the economic downturn is going to take its toll on margins, capital investment and profits. History suggests that stock prices don’t find much of a floor before the economy does. On average, the market only turns the corner with conviction four months before the low in the business cycle. We are some way from reaching that point yet.

Today’s Market Moving Stories

• Some contrasting sentiments expressed by two Federal Reserve board governors on the possible future path of U.S. interest rates. St Louis President Bullard said that “at the interest rates levels we’re now at, I don’t think that further moves would do much good”. This is the old pushing on a string argument. But Janet Yellen from San Francisco said that the U.S. “appears to be in recession” and policy is “decisively focused” on mitigating “the dark scenario on the downside risk” to the economy.
• Money market interbank interest rates are still not falling by much. This is despite the entire medicine cabinet being thrown at them by central banks. These rates remain the acid test of whether the patient is responding to the treatment.
• The NY Times has a great account of the drama behind the US bailout part 2. Seems it was a case of no more Mr Nice Guy.
• Now is as a good as any to check out Nouriel Roubini horror speech on the outlook post bailout 2.
• CNBC’s Charlie Gasparino has lost the plot blaming the stock market crash on fear of an Obama presidency!
• The ABC survey of US consumer sentiment dropped like a stone to –43.

The Latest From The European Banks
Throughout Europe, banks were back in the headlines:

• Fortis shares were relisted and then promptly suspended.
• The hard pressed Belgium government had to scotch rumours that Dexia was next up for nationalization.
• Another Belgium bank, KBC, posted some horrible numbers and guidance.
• Sweden’s Swedbank looks like it is going to be split up between Danske and Nordea.
• The Icelandic stock exchanged opened down 76%. If you’re feeling charitable you can Adopt An Icelander.
• A small run on Russian banks this morning. This scramble for cash was sparked by the Central Bank stunningly hiking the lending rate from 8 to 10%. Local banks are limiting withdrawals which is always a recipe for disaster.

Against this background one has to ask the question: How long can Ireland remain in denial and not face up to the fact that it’s domestic market is over-banked?

Everything Counts in Large Amounts
The U.S. full year 2008 budget deficit could now top a whopping $455bn. No wonder U.S. Treasury yields have been under pressure as there is going to be a lot more issuance at the Federal level.

Some commentators are opining that this will cause crowding out at the corporate level. Bear withme and I’ll explain why. Most investor’s portfolios have a certain allocation for stocks, bonds, cash, commodities, real estate etc. Now if the Federal government has to issue a lot more bonds, then this will do two things:
(1) Push up yields i.e. the cost
(2) Take a larger chunk of the monies set aside in portfolios for bond purchases.

The outcome of this would be that there would be less “room” for investors to buy corporate paper. The paper would be more expensive to issue as it comes to the market at an increased historic “spread” over where the government can issue. Under “normal” circumstances of course companies could simply issue more shares. But given rights issues are akin to the Ebola virus at the moment, funding costs for companies (if they can get the funding done at all that is) will be increased. This is at a time when margins and profits are being crimped by the looming recession.

Data and Earnings Today
There is a whole host of data from the US today. First up are the weekly mortgage applications at noon. Then at 13.30, PPI, retail sales and the Empire State manufacturing survey are released. Later at 15.00 business inventories are out. Weekly crude inventories are due at 15.35. To top all of this off, the Fed’s beige book (watch for talk of tightening lending standards) will be released at 19.00.

Watch out for earnings from Abbott Labs, Coca-Cola, JP Morgan, Wells Fargo and eBay today.

Ever Wonder What Might Happen If A Banker Went Begging On Wall Street

Disclosures = None