Market Wrap (4/2) & What's on Tap for Friday

The verdict is in. I said Wednesday that equities would see limited up side ahead of the Friday jobs report with the mark-to-market rule change providing the only possible exception as an upward catalyst. Once the FASB caved in and approved the measure, markets extended their gains with financials rising over 3%. The S&P closed up 23 points or 2.9%, well off the session highs as stocks pulled back late in the day ahead of tomorrow's employment report. The financial sector underperformed cyclicals, basic materials, and transportation today. The G20 are also increasing the International Monetary Fund's lending power to $750B. The dollar index slipped nearly 1.4% as the European Central Bank cut interest rates by 25 basis points to 1.25%, less than the 50 expected by most observers. Rhetoric coming from the G20 leaders did contribute to the positive sentiment in the market.

The consumer cyclical and transportation sectors drove the market's gains today rising 7% and 6% respectively. The G20's actions coupled with the possible easing of credit conditions fueled investor optimism that the economy will improve sooner than originally anticipated. This also prompted oil to rise 8% to over $52 a barrel. I am particularly confused by the strength exhibited in the retail sector as many of these stocks have soared over the past several weeks in the face of increasing unemployment and rising gas prices. Many of these stocks are no longer pricing in the severe strains that consumers will begin to endure over the next year.

Treasuries declined as investors fled from the safety of government bonds to equities in search of better returns. The yield on the 10-year increased to 2.76% and would have risen further had it not been for the Fed purchasing over $7B of notes in today's session. The Fed will most likely increase its treasury purchase program from $300B to over $600B in the next six months. Given the Fed's current treasury purchase pace, it will most likely surpass its original $300B limit within four months.

I want to hit on a brief point regarding the US dollar fluctuations and impact on equity markets. Investors can attribute about 1% of today's equity market gain to the weaker dollar. If the S&P rises 1% while the dollar falls 1%, then the U.S. market value has not risen from a real dollar perspective. Take today as an example. If you are money manager based out of the Euro-Zone and own a broad based S&P ETF, you are excited that it closed up 3.5%. However, since you will have to convert those gains back into your currency eventually, your real gains from a Euro perspective are only 1.4% (2.9% market gain minus 1.5% daily Euro gain). I just wanted to point this fact out since most people do not consider how currency fluctuations can impact their real returns. So if the S&P doubles from here, but the dollar index loses 50% of its value, then you have a 0% real rate of return.

The DOW is currently hovering near 8,000 after it closed at 11,500 on 12/31/99, meaning that it has lost 3,500 points or 30% this decade. However, once we review the DOW’s performance in terms of gold, which factors in the dollar's declining value, the market’s drop has been even more precipitous. Gold traded at roughly $300/oz when we ushered in this decade, but today, it has soared to over $900/oz, more than tripling its value over the past eight years. Once you apply the DOW/Gold ratio, the market’s drop is stunning. The ratio dropped from 38 (11,500/$300oz) in 2000 to 9 (8,000/$900oz) in 2009. So when you price the index in gold and compare the prices over the same time period, it has dropped by 76% (38-9/38)! This drop follows significant cuts in the capital gain tax rates to 15% and a favorable interest rate environment for the better part of the last decade. These are the types of measurements that main stream commentators and financial networks rarely discuss.

The BLS releases the March employment report tomorrow with economists forecasting 650,000 in job losses for the month. Traders have decided that poor employment numbers no longer matter since it is already baked in to the market. I am not a market timer nor do I aim to become one, but people continue to underestimate the true state of the job market and the longer term impact on the economy.

Company Spotlight
Sears Holdings (SHLD)completely defies all logic closing up over 8% to $52.13 today. Operating cash flows continue to deteriorate as it loses market share to competitors. Consensus analyst estimates for the current and next fiscal year is $.16 and $.58 respectively. Sears real estate holdings continue to decline in value yet the market has assigned this stock a crazy premium trading at over 300 times this year's estimates. It is even expensive when analyzed using enterprise value metrics. Needless to say, if you have the patience and can find the shares to short, you will be rewarded because the stock has no business trading over $20.