Friday's Brew - Market Wrap Up

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. I hate to say it, but we were right today about the subprime market's ability to turn the tide negative despite the warm start. Over the weekend, we fully expect important financial news publishers from Barron's to Businessweek to highlight the ailing subprime mortgage market and the risk it may pose of spreading into other facets of the economy. These articles typically move markets and rightly so, we believe, especially in this case. Thus, Monday could get ugly.

OVERSEAS MARKETS

Asian markets were mixed today, but mostly higher. Hank Paulson's trip seemed to help sooth previously troubled Asian markets. His reassuring comments concerning the health of global markets and the U.S. economy were helpful in focusing investors' attention in a positive direction. Today, the Hang Seng slipped 0.21%, while the mainland Chinese markets also weakened. The Shanghai and Shenzhen 300 Index fell 0.62%, as traders are still wary of holding stock through the weekend.

It seems the reversal of yen carry-trades and repatriation of Japanese firms' capital before fiscal year end seems to have eased. Also, the yen weakened again today, reducing concern for the shares of Japanese exporters. The NIKKEI 225 rose 0.43% as a result. The hot Asian markets today were found in the Philippines and Vietnam. The Philippine Stock Exchange PSEi Index climbed 2.36%, while Vietnam's Ho Chi Minh Index rose 1.2%.

Post the ECB's move to raise interest rates, the performance of European shares was relatively muted today. The DJ STOXX 50 inched up 0.1%, while the FTSE 100 rose 0.28%. The Russian RTS Index rose 2.35% and the Saudi Tadawul All Share Index climbed 1.2%, but this was before oil closed lower in the U.S. later in the day.

ECONOMIC DATA & ANALYSIS

Three very important data bits hit the wires this morning. February nonfarm payrolls were expected to grow by 95,000 jobs, and were reported up by 97,000. This lifted the spirit of the market to start the day. Unemployment came in at 4.5%, below the expected 4.6% rate and marking a decrease from January. The only negative news was that average hourly earnings were reported higher by 0.4% from January, increasing 4.1% year over year. This portends continued inflationary pressure that makes it complicated for the Federal Reserve to reduce rates.

January international trade was expected to show a deficit of $59.8 billion, versus $61.2 billion in December. The actual report of $59.1 billion was the result of record high exports and decreased imports, while imports from China rose 12%. Wholesale inventories for January increased by 0.7%, versus expectations for an increase of 0.1% and a decrease of 0.5% in December. This was relatively unnoticed by the financial media today, but portends slowing GDP.

The RBC Cash Index fell to 92.3 from 103 a month ago, indicating consumer confidence weakened this month. The service sector and consumer spending have been the mainstays of American economic strength in recent times. If the consumer starts to tighten his belt, it portends to slow corporate earnings this year, as is widely expected. We will have to keep a close eye on consumer confidence, and evaluate whether this data was simply due to the recent weakness of the stock market, or if a greater force, such as housing weakness is impacting the consumer's view. On the other hand, the job market continues to provide support for consumer confidence.

Fed Governor Susan Bies made some statements today that were startling to some, concerning to others and expected by Wall Street Greek. While speaking at a risk management forum in North Carolina, she said, "What's happening is the front end of this wave of teaser- rate loans that are coming into full pricing." She continued, "So what we're seeing in this narrow segment is the beginning of the wave. This is not the end, this is the beginning.'' Not reassuring news my friends. Her use of the words "narrow segment" did not ease my concern, as although the weakness of the segment may not portend defaults for other borrowers, but it still implies that the future spending capabilities of other segments of borrowers may be hampered.

COMMODITY MARKETS

Oil, natural gas and distillates all declined today, as a warming trend is expected to take hold in the Northeastern United States tonight. Gold declined 0.82%, as the dollar strengthened.

STOCK SPECIFIC NEWS
The subprime lenders led all headlines today again, as New Century (NEW) declared that it would cease its acceptance of loan applications due to a lack of liquidity from its backers. NEW shares fell 17% as a result. Earlier this week, the FDIC order Fremont General Corp. (FMT) to cease and desist its subprime mortgage lending due to a lack of proper risk controls in place. Then, yesterday, the FBI issued a warning on illegal lending practices, saying they would carry legal consequences.

It's so interesting how everybody cares all of a sudden. It's clear that a good deal of the housing boom was fueled by poor lending practices, and the government should have been policing and warning us then, not now that it's too late. This is typical of the reactionary behavior that pervades within our great nation. It's time to pay the piper now for our incompetence and laziness as a group of people. However, most will just look for a direction to place the blame. Bloomberg reported this morning that CreditSights Inc. anticipates that defaults in the subprime mortgage market could add 500,000 homes to the inventory of residential real estate for sale. Those homes should have never been sold in the first place, and now good Americans who overpaid for their homes as a result will have to suffer as the value of their homes are impacted.

(disclosure)