Friday Recap … October 30, 2009

Key News

* U.S. Economy: Consumer Spending, Confidence Fall on Job Worries (Bloomberg)

* U.K. Nationwide House Prices Post First Annual Gain Since 2008 (Bloomberg)

* China Will Sustain Growth Rebound, Central Bank Says (Bloomberg)

* Fed Ends Treasury Buys That Capped Rates, Stabilized Housing (Bloomberg)

The Event Agenda

Morning Run-Down

The Pavlovians that have systematically bought the dip and been immediately rewarded over past months are in for some punishment. Yesterday’s aggressive retracement following a fairly meaningless GDP report likely got them even more aggressive and convicted– perhaps even more inclined to keep adding into stock market weakness.

But the trends have broken and the risk environment has changed. All of the sudden people fell less comfortable about the state of the world, more concerned about sustainability of growth.

The VIX, a proxy for traders’ perception of risk and uncertainty, is up 54% in six days. The VIX is the one place that offered the best risk/reward opportunity for a double. Market participants clearly were underpricing risk as every tick higher in stocks translated into more optimism about recovery and a lower moving VIX.

A falling stock market can quickly dismiss blind optimism and bring the reality of the challenges to global economies back into focus. That means higher risk aversion, lower stocks, lower commodities and a stronger dollar.

Here is a snapshot of markets going into the close…

oct 30 screen Friday Recap ... October 30, 2009

Stocks (lines 1-3) followed the biggest rally since July with the biggest sell-off since July. Crude oil (line 4) fully retraced yesterday’s strength, now 6% off of last week’s highs. Commodity currencies and yen crosses were the biggest currency movers of the day, reflective of global demand concerns and rising risk.

Here’s a look at some long term charts for perspective on the crisis-driven declines and the extent of retracements over the past eight months…

Key Charts

The S&P 500 dropped 58% from its highs in 2007 to its low in 2008. Even following a 65% rise from the bottom, stocks remain in a long term downtrend.

oct 30 spx Friday Recap ... October 30, 2009

The New Zealand dollar contracted at a sharper rate than the US economy and is expected to have a weaker recovery in 2010, yet the New Zealand dollar retraced 83% of its crisis driven losses in just eight months. Look out below.

oct 30 nzd Friday Recap ... October 30, 2009