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Busch: Watch the Numbers, Beware the Grind

Lies and Mendacity seem to be spreading thickly through the financial markets today as we watch the Dow Transports drop sharply as energy continues to rally and gasoline demand in the United States drops.

With both President Bush and US Treasury Secretary Paulson giving speeches today, you wonder how important it is to see them engaging reporters ahead of the G8 meeting. Isn't this just a bit unusual for the President to talk about a financial summit almost a week before it occurs?

I'm watching Paulson get grilled on his speech from European reporters and stating the obvious: the financial regulatory institutions we have are far from optimal.

"How manageable are the large financial institutions," he opines ( see video). How about the small ones as the WSJ article today discussing the weak state of small and regional banks with exposure to construction loans underscores this issue. For both big and small financial institutions, this is a question of survival by raising capital or selling assets or both. The big companies have the most exposure to the subprime slime and many acted quickly. The little ones didn't have the subprime, but they lent to construction firms and have been reeling from the decline in loan qualities.

The data today have been decidedly mixed with a very weak ADP number foreshadowing a weak NFP number tomorrow, but strong factory orders showing why the weak dollar has been a boon to exporters in the United States. This is what a free floating currency can do in case anyone in the Far East or Middle East is listening.

So as I watch the Dow Industrials catch up with the Transports, I'm thinking we're in for a day of risk aversion with stocks going south, bonds yields going south, and the US dollar going south. Tomorrow, we'll get an early wake-up call with the ECB meeting and then the key Trichet press conference afterwards. This will be going on simultaneously with the release of the US employment data. Hard hats and shock absorbers will be required attire.

Don't watch the numbers, watch the markets reaction. Bad data with a muted response is a big positive. However, a slow grind down tomorrow should mean the same for the coming weeks on the equities.

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Andrew Busch

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