U.S. stocks sold off sharply despite better than expected earnings reports from bellweathers JPMorgan (JPM) and Intel (INTC); the S&P 500 retreated 1.1% and the NASDAQ 1.2%.  After a stellar first week of the new year, the S&P fell 0.8% and NASDAQ 1.3% in the second week.  Despite the "better than expected" figures (against analysts expectations who almost religiously understate reality), concerns voiced here and among members of the Euro Pacific team about the weakness of the US consumer suddenly mattered to the market today. 

• JPMorgan, regarded as one of the strongest U.S. banks, warned investors it was too soon to say that losses on mortgages and other loans have peaked. The weakness in JPMorgan's consumer business hurt other financial stocks, which led the rest of the market lower.
• The news from JPMorgan brought concerns about profits at other big banks, many of which post results next week. Banks have been saying since the financial crisis exploded in the fall of 2008 that mortgages resetting at higher rates and job losses would push more loans into default. The latest comments gave investors a fresh reminder that the economy still needs more time to heal.

There was also a weaker than expected University of Michigan consumer sentiment report but stocks were headed for weakness before this data surfaced.

The weakness in equity markets, led to knee jerk runs to the "safety trade" - creating rallies in both US bonds and the dollar.  In a return to the inverse correlation trade seen through much of 2009, commodities took a hit.  Oil fell for the 5th session in a row to settle at $78.00, while gold dropped $12 to $1131 and silver 22 cents to $18.44.

• Oil prices ran up against forecasts for warmer weather, people who won't drive or spend money and a stronger dollar.  Those factors combined for a fifth straight day of losses. Benchmark crude for February delivery slid $1.39 cents Friday to settle at $78 a barrel on the New York Mercantile Exchange. The price was down $4.75 for the week.
• The optimism traders had earlier in the year has been tempered by "prospects for pretty miserable demand" in January and February.

One interesting report today that won't get much focus is the growing disparity between wage growth and inflation; keep in mind the following data used government inflation which is substantially understated from what Americans see in their day to day lives.  If you have a child in college, pay for healthcare, use gas, heat your home, or eat food - you know inflation was higher than "2.7%" last year.  If you don't do any of things - you have no worries; inflation is benign.

• The spending power of families is being squeezed, government data showed Friday, highlighting doubts about consumers' ability to drive the economic rebound.
• Workers saw their inflation-adjusted weekly wages fall 1.6 percent last year -- the sharpest drop since 1990 -- even as consumer prices rose only modestly.
• For some families, the overall inflation rate last year -- 2.7 percent -- understates their burden. Many are struggling with surging costs for health care and college tuition, both of which have been galloping far above the overall inflation rate.
• "I haven't seen anything getting cheaper," said Kimbrel, 43. She's facing rising costs for health insurance and gas, in particular.

Again let us stress none of these factors disappeared the past 3, 6, or 9 months.  Many times the market chooses to ignore what is happening on Main Street - or in fact one can argue many of the penalties hampering Main Street (loss of jobs, lack of wage growth, a move to a more temporary work force) actually are helping corporate profits, especially in large multinational corporations.  Only a massive bout of government borrowing and spending, on the order of 1 of every 6 dollars of the average American's income (highest level since 1929) is helping to push these inconvenient facts under the rug.

• Inflation and wages remain low because employers can't or won't raise pay in an economy that's shed 7.2 million jobs since the recession began two years ago.
• Inflation-adjusted pay has sunk in five of the past seven years, underscoring the pressures households felt even before the recession. 

Let us repeat, if the government is saying inflation adjusted pay has sunk for 5 of the past 7 years using their understated CPI - you can be assured the reality is 7 out of 7 years.

• Over the past 10 years, for example, inflation-adjusted wages grew only about 13 percent -- the slowest pace in five decades.

In Europe, stocks were weaker across the board.  Britain's FTSE 100 fell 0.8%, Germany's DAX 1.9%, and France's CAC-40 1.5%. 

Asian markets were mixed with gains in Japan (+0.7%) and China (+0.3%) offset by small losses in India (-0.2%) and Hong Kong (-0.3%). 

Brazil followed the domestic market downward, dropping 1.2%.

Aside from being a daily contributor to Euro Pacific Capital, Mark also maintains the website Fund My Mutual Fund.

Mark Hanna, known in the financial community as "TraderMark," provides his insightful daily market coverage in this column, exclusive to Euro Pacific Capital.

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