Good Evening: After spending most of Earth Day solidly and appropriately in the green, stocks returned to Terra Firma late in the session. Various earnings reports and some conflicting stories about the current state of U.S. home prices all contributed to the crosscurrents that ruled Wednesday’s trading. It’s still too soon to say if “countertrend Tuesday” correctly pointed to a resumption of widespread risk aversion, but today’s action hinted that such an outcome is more than possible.

U.S. stock index futures were indicating a lower open this morning after a very disappointing loss announced by Morgan Stanley (see below). Analysts and investors alike bemoaned the write-downs taken and the trading opportunities missed by MS in Q1. With Goldman and JP Morgan using their balance sheets to rake in fixed income profits in the first three months of ‘09, Morgan Stanley decided to hunker down. That MS’s leverage ratio of assets to equity is now closer to 10 than last year’s 30 looks wise to me in this environment, but investors obviously disagreed with this view.

Market participants did their level best to portray the MS results as company specific in the early going, and stocks were soon higher after opening losses of nearly 1%. Positive surprises from AT&T, JC Penney, and Sybase contributed to the comeback in equities, as did one of the stories about housing you see below. The Federal Housing and Finance Agency (where did they come from?) put out a report this morning that tried to claim that U.S. home prices actually ROSE in February. What’s more, this report apparently also stated that inventories of unsold homes are declining. CNBC touted the story, of course, though I think the last story you see below is a more accurate picture of housing. In addition, please see BAC-MER’s take on the mortgage applications data out this morning (see below). In it, David Rosenberg and crew note that while refinancing activity has perked up of late, the number of applications by folks actually looking to buy a house has been falling. They think the April home sales figures are at risk, and I agree that housing is far from being out of the woods.

The major averages couldn’t be bothered with the details, however, and they sauntered their way to gains north of 2% with 40 minutes to go. Whether it was late day profit-taking or more concerns about the upcoming stress test results, I don’t know, but equities had the rug pulled from beneath them as the closing bell approached. Gains in the Dow and S&P 500 turned into losses, while the other indexes finished mixed. The Dow Industrials (-1%) fared the worst and the Dow Transports (+1.6%) held up the best. Treasury prices were on the weak side all day after fixed income investors were reminded just how much debt Uncle Sam will have to issue in 2009 (see below). This figure could total almost $2 trillion, a daunting sum that gave investors pause when they realized that all the sovereign wealth funds combined don’t have that much spare cash to lend us. Yields rose only 2 to 6 bps today, but the curve did steepen as a harbinger of what may lie ahead. The dollar dropped 0.5% and the CRB index was unruffled in gaining a tiny 0.15%.

On the original Earth Day back in 1970, this writer was in a music class with his third grade contemporaries when our teacher put up the following 5 note scale: E G B D F. To mark Earth Day and learn these notes, she introduced us to the concept of the pneumonic device by asking us to come up with a green phrase that matched the letters in the scale. Predictably, we came up with something appropriately simple for 9 year olds: Earth Garbage Brings Death Fast.

I share this vignette because the Earth Day circa 2009 brings to my mind a financially oriented set of words to commemorate the occasion. Given what happened today to Morgan Stanley, various bank stocks, many REITS, and financing entities like CIT Group, let’s try Earnings Ground Banks, Developers, and Financiers on for size. Though this phrase won’t enhance anyone’s musical IQ, it is simple enough to fit right in with the third grade mentality many investors have displayed while chasing financial stocks these past six or seven weeks. The downside reversal today in the major averages in general and the financial stocks in particular may or may not portend an imminent shrinkage of risk appetites. Investors might even find Apple’s earnings news tonight delicious enough to make them hunger for shares of all types tomorrow. But if it really does come down to housing, the health of our banks, and earnings reports that seem to need accounting tricks to make them palatable, then perhaps the rally off the March lows has indeed run its course. Even a third grade investor-to-be might understand that stocks unable to stay in the green on Earth Day may soon be polluting portfolios that are left untended.

– Jack McHugh

U.S. Markets Wrap: Stocks Drop Following Late-Day Bank Slump

Morgan Stanley Posts Bigger-Than Estimated Loss

Soaring U.S. Budget Deficit Will Mean Billions in Bond Sales

Home Prices Gain 0.7% in February From January

California, Florida Metropolitan Areas Lead in Foreclosures

Lower rates lift mortgage refi.pdf

Category: BP Cafe, Markets, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

9 Responses to “Stocks Cannot Stay Green on Earth Day”

  1. Marcus Aurelius says:

    Just checking to see if my comments are showing up, now that the blog is “fixed”.

  2. Marcus Aurelius says:

    Good.

  3. Myr says:

    Well, I guess the Fed could simply print a trillion dollars to take up the slack? Or the Treasury could issue it all in 1 month – 2 year treasuries…maybe we’ll see a little more yield? The government is becoming GM…entirely reliant on short term debt. We needs someone to guarantee our debt. The long bond looks like it’s about to crack.

  4. Myr says:

    I meant to say GE…not GM. But what’s the difference anyway?

  5. Mannwich says:

    I’m viewing this rally as a gift from the Gods to allow me to slowly liquidate my long equity positions into strength. There’s no way this is the final chapter in this mess and it’s to the moon from here. I just can’t see it. Too many clouds on the horizon.

  6. Kyle says:

    Mannwich, I suggest you liquidate now, if you haven’t already. The only way I can see the market going up even a little bit from here is based on seasonal upticks due to spring/summer demand for lawnchairs etc. The financials are all still black boxes full of radioactive contracts, unemployment keeps rising, PRIME mortgages are in default, the CFO of Freddie Mac just killed himself.

    The only good news over the last month was the stock market going up based on leaked* bank “earnings”. A good strategy this year might be long gold short dollar every time there’s a treasury auction or Fed statement. Worked for me last time at least.

  7. Martinghoul says:

    While I agree with the post wholeheartedly, could I pls beg someone to correct the horrible, glaring ‘pneumonic device’ homophone? It’s a pet peeve of mine and I’m sure it’s not a big deal, but still…

  8. leftback says:

    Another mnemonic for you, Jack. EGBDF, Every Good Bank Deserves Funding.
    Whereas every bad bank should be nationalized and the management and board fired.

    The rally attempts seem to be getting weaker and weaker as the earnings news sinks in.
    For me, the news that GM will miss a debt payment and close for nine weeks was not exactly bullish.