Okay, Here’s the Deal

So here’s the deal; the Dow was down 270 points today and everybody (except you of course) is freaking out. I’ll waste just a few words on what may or may not be the catalyst, then finish with a little healthy perspective…

You’ll hear all over the news that sovereign debt is the culprit. In particular, Greece, Spain and Portugal appear to have indebted themselves beyond the safety zone and there’s talk of possible defaults – which, reminiscent of the Asian and Latin American contagions of years past, could ripple through the global financial markets in a somewhat distasteful fashion. And presumably, while we’ve been aware that such risk exists, this is the excuse for today’s sell-off.

If, at the beginning of the day, you had told me the dollar would rally as it did (regardless of the reason(s)), I would have told you the Dow would be down substantially. Why? Because as I’ve commented here ad nauseam of late, the dollar and stocks correlate in a very negative manner at the moment.

While there’s no doubt that Europe’s issues have caused a flight to “quality” (i.e., the dollar), there have been a few other, more palatable, reasons for the greenback to rally as well. 5.7% GDP growth, the ISM manufacturing and service sector indexes showing surprisingly positive activity, improved consumer confidence and productivity gains are all fundamentally sound reasons for the dollar to gain ground. And again, while those factors, along with the exceptionally positive Q4 earnings reports, ought to be very good for stocks (and ultimately probably will be), they’re big-time good for the dollar… So I wouldn’t sweat this pull-back just yet…

Now for a little perspective. The Dow’s sitting right at 10,000. The last time the Dow pierced 10k you were thrilled because it was moving higher – today you’re chilled because it’s moving lower. Well…, as you know, stocks change direction – sometimes often and sometimes dramatically.

When asked a few weeks ago, what could spark the next big sell-off, I replied, “could be anything, but if I had to guess, it would be a scenario where interest rates begin rising while the economy remains weak”. And here we are selling off while interest rates are actually dropping – and the economy is showing strength. Go figure??

In fact, I honestly expected interest rates would be on the rise right about now – I thought we’d see an improving economic picture and I knew the Fed was scheduled to complete its mortgage securities purchase program next month. But even though the economy is improving and the Fed can’t keep expanding its balance sheet, due to the recent global debt worries, rates are remaining low – at least for the moment.

Hmm, now wait a minute – the economy’s growing and interest rates aren’t yet rising, which means borrowing costs are staying low, which bodes very well for the economy going forward.

So while the concerns over Europe’s debt problems may indeed give us that “over-due” 10% (or more) correction everyone’s been predicting, it may turn out (in a sense) to be a near-term blessing in disguise, in that it could keep the bond market healthy and interest rates low, even beyond the Fed’s exodus of the mortgage-backed securities market…. How’s that for a little silver-lining?

As for tomorrow, look for the jobs numbers to move the market big-time (maybe), one direction or the other. Or, forget the jobs numbers (cause only your long-term money’s in the market, right?) and look forward to watching the Super Bowl, and the commercials. You know how much those ads cost, right? I guess business ain’t that bad after all…