Trader Talk

The End of The World Officially Arrives

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Tough morning if you're hoping for an historic high in the Dow Jones Industrial Average. European markets were weaker as China's manufacturing data came in slightly short of expectations, though still in expansion territory, and in Europe euro zone manufacturing PMI was unchanged at 47.9, still showing contraction.

Copper fell to multi-month lows on those figures.

First day of the new month traditionally brings in new money, but it may not be enough to overcome the disappointing European performance and the January U.S. personal income figures, which were below expectations.

One problem for the bulls: There's an old trader belief that markets usually don't turn on Fridays.


1) Stocks and the sequester: The end of the world officially arrives. Hype vs. Reality.

Sequestration will cut defense spending and domestic discretionary spending, but not entitlement programs like Medicare and Social Security.

In the last several days, I have been inundated with worried ... really worried ... commentary from people who trade all sorts of stocks: defense, home builders, travel, and health care.

Guys who trade defense stocks are the most worried: I've seen some dire estimates that the U.S. defense budget could get cut by about 13 percent over the next seven months, but it seems there is a lot of flexibility here. In the short term, Northrop Grumman is often mentioned as having exposure to the Department of Defense through its Aerospace Systems division.

As for home building, there is anxiety as sequestration comes in the middle of the spring home buying season. There's concern it will affect consumer sentiment at a delicate time. Guys who trade housing stocks note that the 2011 debt ceiling controversy hurt consumer sentiment and housing activity.

Travel and hotel companies worry that cuts in government travel will hurt them.

Medicare providers, which are due for a 2 percent reduction, are also worried. In theory, it affects many companies, including HMOs and hospitals, who also face a two percent cut in Medicare rates. But the cuts don't begin until April 1, and most analyst estimates already reflect the effects of sequestration.

And yet, after reading through this mountain of trader worries, when I look at the stock prices of defense, health care, travel, and home building stocks, what I see is ... nothing. No big declines. No huge volume moves as traders dump positions wholesale. Nothing.

So why the Big Hype from traders? It seems the smart money believes the effect on cash flows for most of these companies will be significantly less than the headline (hype) numbers. Even when there are significant numbers, as with certain defense names, traders believe that the impact will not be felt in the front months of its implementation.

Bottom line: The Street still believes a deal will be done in the end of March, when it will be combined with efforts to address the Continuing Resolution that expires on March 27.

2) U.S. lags most global markets this week, at least so far.

This Week:

China 1.96%
Japan 1.94%
Hong Kong 0.43%
Brazil 0.27%
Germany 0.18%
Spain -0.11%
S&P 500 -0.06%

S&P 500 is on track for second straight week of losses. The Dow industrial average is poised for second straight week of gains. And the Nasdaq is on track for third straight week of losses

By CNBC's Bob Pisani