Wednesday, March 05, 2008

Strong Opening Fades

Top Line: The stock market enjoyed a little relief rally on Wednesday. There seems to be a little more upside left, maybe to 12,400. The futures are up a little this evening indicating a strong opening on Thursday.

Jobs: ADP reported that in the private sector, nonfarm employment declined by 23,000 jobs for the month of February. This report precedes the Real jobs' report due out on Friday morning and the consensus estimate is for an increase of about 25K jobs. This estimate follows a loss of 17K jobs in January so we'll see if there are any revisions to these numbers.

Ambac: The market has anticipated the "good" news from Ambac (ABK) for two days so Wednesday's news was a little disappointing. ABK announced that they would be raising capital by selling more stock, thus diluting the current stock. This news took the stock down about 20% on the day and dented the strong stock market rally. The stock dropping would mean that for the same dollar amount raised more shares would need to be sold. Don't forget that ABK has dropped right around 90% over the past year.

Fed: About the same time as ABK was delivering its news, the Fed released its beige book which added to the stock market's confusion. The Fed reported that inflation at the wholesale level had ticked up but companies were having trouble pushing those costs through to the end buyers. The cause for concern is the possible hit to the continued interest rate reductions. As the Fed is considered to be lowering rates at least 50 bps at its meeting two weeks from now, this news should have drawn more selling but it didn't.

The stock market managed to rebound from the shock of both of those two news bulletins and closed higher, although not that much higher. The Fed will have no difficulty in lowering rates at its meeting and everyone knows it. There are really only a couple of questions outstanding on that issue. Will the Fed lower 50 bps or 75 bps? and Will the Fed lower rates before their next meeting like they did last time? We will watch this with you over the next two weeks and report on what we think.

FSI: 71.75 (another new low, slightly)

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