Poor outlook by tech stocks kept the market in the red, even after Bernanke received critical confirmation

2010-01-28

Before the market's open, the futures were pointing to a good start, following an uneventful State of the Union address.  Obama was more focused on jobs last night, and bank bashing was kept to a relative minimum, so the market was ready for a positive reaction.  However, as the market digested through weak new weekly jobless claims of 470K vs 440K consensus, it erased the early gains.  Piling in on the weakness, Qualcomm - QCOM (down 14% for the day) reported before the market's open; it met expectations but revised its outlook for 2010, citing increasing competition and slower recovery.  Motorola - MOT (down 12%) beat estimates by 1c on a core basis, but warned that it expects to report a loss for 1Q10, whereas analysts were expecting a few cents in profit.

The big event of the day was that the Senate voted 70-30 to re-appoint Bernanke to a second 4-year term as head of the Federal Reserve.  This was a critical appointment and a nail-biter for investors.  The recent political turmoil has unnerved investors, so this resolution was considered a big step forward for the markets.  Uncertainty kept everyone at bay and had the market in limbo until late in the afternoon.  Only a few minutes before the market's close did the first procedural vote go through (the vote to have a vote), up to which point the market had a very positive reaction.  However, disappointing outlook from technology companies stole Bernanke's thunder and sent stocks lower.  The Dow was down 116 points (113 bps), the S&P was off 13 points (118 bps), and the Nasdaq lost 42 points (191 bps).

Even though Microsoft - MSFT beat earnings estimates easily (reported after the market's close), investors didn't find any positive signs of a turnaround in technology spending: the Office division's revenues were down 3%, while the "growth" server software group was up only 2%.  The stock was down 1.7% for the day and traded marginally down as the news broke.

Blackstone's co-founder Steve Schwarzman talked to Bloomberg from Davos and warned that banks may rein in lending in response to Obama's taxes, regulations, and break-up tendencies.  He doesn't find it appropriate for one country to abandon a coordinated global approach (through the Bank of International Settlements, for example), but each country occasionally submits to internal rhetoric and political dynamics.  There are risks of "venue shopping", which means that financial institutions will concentrate in the more friendly markets, and less lending, which can threaten economic recovery. The uncertainty introduced by politics and the negative perception of banks may prevent them from re-gaining the confidence necessary to restart lending, since they cannot be sure what businesses they can stay in and how much capital will be required against each different asset class.  [video link: http://bit.ly/ba1Lei]

Soros supports Obama's ban on proprietary trading by banks.  Banks have proved that they cannot be left to their own devices, because the weak economic system that resulted from lax regulation cost us a lot of money, so now we have to go back and fix regulation.  He seems to recommend regulation that can help deflate bubbles earlier, which is better than letting them fester.  That's because as bubbles become more entrenched, an increasing part of the economy becomes dependent upon them, and the unavoidable eventual crash has a much larger impact.  An example of that is the recent bubble of the housing market, where a very large part of the population became entangled with investing, fixing, building, and selling homes, so when the pyramid collapsed they had to scramble to find alternate employment.  Soros warns not to withdraw the government stimulus too soon, because the economy is still weak.  On the case for the dollar, Soros can't find a more attractive currency in this environment, except for some smaller ones, which are already bid up (overvalued).  The result is a general aversion to currencies and flights to hard assets, like commodities.  Soros agrees with the Volcker rule on proprietary trading because using deposits -- guaranteed by the government -- to take on proprietary positions means that the government has protected them against any losses, so they are speculating with other people's money and it is not appropriate.  [video link: http://bit.ly/bDdm8v]

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