Wednesday's Brew - Feb 28

Enjoy your fresh coffee with our summary and analysis of the market activity of the day and a medley of important information you should find useful. Well, we're almost through the trading day and the S&P 500, Dow Industrials and NASDAQ composites are all flirting with a 1% gain. While we predicted the recovery, there were three catalysts we thought threatened to extend yesterday's losses through today, but each proved benign.

OVERSEAS MARKETS

After yesterday's collapse in China and spread of weakness to the U.S., global markets felt the wave of repercussion today from Japan to England. The NIKKEI 225 fell 2.85%, while the Hang Seng slipped 2.46%. Still, the mainland Chinese market recovered after the Chinese government indicated that it had the interests of the financial markets in mind. The Shanghai and Shenzhen 300 Index rose 3.54% as a result.

The broad reaching DJ STOXX 50 fell 1.8%, but we expect it to recover tomorrow, considering the recovery in the U.S. The FTSE 100 slipped 1.8% as well.

In India, the government released its new budget report, which the market had anticipated might have a negative impact on shares. We were also concerned that it could provide a catalyst for a second leg lower today, due to rumors that it might include a new restriction on cement exports. The report was not as bad as we thought it could have been, and India's BSE SENSEX 30 slipped just 4.0%. Heck, our market falls a couple percentage points and there's a big hoopla, and the Indian market falls 4.0% and we call it "just 4.0%." The report included an increase of helpful subsidies for farmers, but also expressed inflation concerns. The government indicated its will to contain troublesome inflation, and this likely played a role in the greater decline of the Indian market today.

ECONOMIC DATA & ANALYSIS

We attentively awaited this morning's GDP revision, because we viewed it as a potential catalyst to take the market another leg lower. When fourth quarter GDP was reported up 2.2%, just shy of Bloomberg's consensus view for a 2.3% rise, we knew the path was clear for the market to rise. Well, we knew it could rise for at least as long as Ben Bernanke's testimony to the House Budget Committee. Mr. Bernanke was immediately asked to express his views on the stock market decline, and he proceeded to assure the politicians that he did not see any one factor that drove the market yesterday and felt it inappropriate to try to draw a connection. He did, however, say that there was a decent chance that economic growth could pick up later this year. The third obstacle to the day's recovery was now out of the way.

Still, not all the news was benign today. New home sales were reported for January, and fell far short of expectations. Bloomberg's consensus expected January sales to reach an annual pace of 1.08 million, versus 1.12 million in December. New home sales actually fell 16.6%, to an annual pace of 937,000. This was inconsistent with the existing home sales results from Tuesday, but fits into the puzzle of our housing theory. Remember, we said the salesman mentality would push home sales in January, as desperate real estate agents and mortgage brokers likely pushed through sales of existing homes. New homes were pushed in December, as home builders sought to make their numbers. So, a whole different set of incentives drove a different result.

Considering the early a.m. data releases, we expected the New York Fed President, Timothy Geithner, might have some important comments as he addressed liquidity and the financial markets. His voice was completely drowned out by the focus on the Fed Chief, in light of the market move of the day before. Still, what he said was notable. Geithner stated that the economy continues to show "remarkable resilience."

The National Association of Purchasing Management - Chicago posted its index measuring business conditions in the Chicagoland area. The consensus view provided by Bloomberg anticipated a reading of 50.0, but the actual result was lower, at 47.9. A reading below 50 indicates business contraction, but tomorrow's broader reaching ISM report may still show better manufacturing sector health.

COMMODITY MARKETS
With the Chinese financial markets threatened to collapse the Chinese and perhaps the global economy, commodity prices generally fell yesterday. Even today, we are surprised to see gold and many industrial metals still lower. We expect recovery as the market realizes Chinese demand will continue.

STOCK SPECIFIC NEWS
On the corporate scene, a House Judiciary subcommittee is holding a hearing about the proposed merger of XM Satellite Radio (XMSR) and Sirius (SIRI). There are significant regulatory barriers to overcome before this deal can occur, and we stated on Sunday that there could be opportunity on the short side of the two while the deal obstacles take the media limelight in the near term. United Technologies and Home Depot are holding investor meetings today, while Novellus is providing its mid-first quarter update. Reporting earnings today, look for Sprint Nextel, Edison International, Limited Brands, Barr Pharmaceuticals, Hospira, Centerpont Energy, Interpublic Group, Liz Claiborne, King Pharma and Dollar Tree Stores. market.

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