Dow Gets Dinged, Culprit: Cyprus

The Dow Jones Industrial average traded lower for a second day, closing down 62.05 points, or 0.43%, to 14452.06.

The Standard & Poor’s 500 Index fell 8.6 points, or 0.55%, to 1552.10.

News that a big Greek bondholder, the diminutive Cyprus, would tax bank deposits as it attempts to achieve terms of a bailout, was not exactly cheered. On Tuesday, look for more volatility as Cypriot leaders meet to discuss the details, outlined in our post here. The Federal Reserve also begins two days of meetings Tuesday.

Technology stocks were among the day’s biggest winners: Verizon Communications (VZ) rose 1.5% (our post�here) and Hewlett Packard (HPQ) rose nearly 3%. Shares of UnitedHealth Group�(UNH) rose 0.5% and Caterpillar (CAT) rose 0.6%. Laggards included International Business Machines (IBM), Boeing (BA), McDonald’s (MCD),�3M (MMM) and Disney (DIS).

Financials took center stage, with Keefe, Bruyette & Woods citing its preference for credit services companies, and Meredith Whitney waxing on the merits of Bank of America (BAC) on CNBC at the end of the day. Tempering fears about contagion, Citibank noted Cyprus is unique, with “the reputational shadow of money laundering, tax avoidance and tax evasion hanging over them, as has been reported in the widely leaked report by the German secret service.”

Looking beyond the near-term weeds, Morgan Stanley offered its Spring strategy outlook Monday. It calls for less correlation in asset classes, regions and countries, with lower systemic risk and higher company-specific risk:

“We maintain a strategically constructive view on equity and credit markets, as neither are structurally expensive, implying that additional moderate gains are likely over a 6-month horizon.� Our view also rests on central banks’ determination to maintain highly abnormal monetary policy despite a gradually normalizing macro environment.� Bull case: investor flows turbo-charge and front-load risk asset returns, with equities the key beneficiary.� Bear case: any sign of global liquidity withdrawal earlier than we expect would roil all markets. … Our strategic preference is for equities over credit over government bonds.� Equities are cheap relative to credit on risk-adjusted valuation.� Within equities, we strongly reiterate our preference for quality growth and income.� Japan is our most favoured equity market and Europe now least favoured.� Core government bonds should generate negative total returns over the next six months, but policy limits downside.”