Non Farm Pay Rolls tomorrow (and revisions)-Dow to break the 10,000 barrier?

The Dow fell sharply today from the 10200 region down to a low of 10001 as worse than expected intial jobless claims were released (480K vs 460K).
The Dow had done well at the start of the week due to some better than expected news from ISM figures, and good earnings results in technology among others, and we saw commodites and mining stocks stage a 5-10% recovery from last weeks sell off.

There are fears mounting over the "contagion" aspect of government debt problems in Greece, and how much it could spread. The market is concerned that, as people underestimated the subprime debt issue as being "contained", and not big enough to cause any serious problem, the risks of interconnectedness within the institutions bearing these risks, and how they could impact lending to the wider public and therefore the eocnomy in general were overlooked.

This brings us to an important question. Can the stock market, which is a reflection of the potential future earnings of a company do well, if the companies earnings are doing well presently, despite high levels of unemployment?
Has sustainable top line growth returned? I'm not convinced. Has sustainable growth resumed, vis a vis GDP figures? I'm not convinced (inventory build ups?).
If the companies continue to produce good earnings, and people keep buying the stocks on that, then surely the market must continue to rally despite the unemployment situation? I'm not convinced. Here's why.
Essentially, where before it was the toxic balance sheets of the banks, due to all the mortgage backed securities they owned, and fears of counterparty risk among banks and not knowing who's going to be able to repay you, that drove up overnight lending rates (accelerated by Lehman's bankruptcy), and brang forward the credit crunch as such.


Essentially now what we have are Governments with bad balance sheets, and as we see yields on Greece, and Portugal continuing to rise. How will this impact yields on Gilts,Treasuries, JBG's? The triple A ratings of the United States has been questioned by the S&P ratings agency recently, stating that if there is not a convincable fiscal debt reduction strategy they may lose their rating. What will the impact of this be for the united states, the proverbial last to default?

What will the impact of US ratings cuts be on their ability to finance the interest on the debts they already owe. With mounting unemployment certainly tax revenues are down. What will the impact of US sical problems be on the markets perception of China. The worlds largest owner of American Debt?

With no evidence that unemployment has stabilised, or that there is any near term infrastructure for hiring (except for the numerous random projects the American Government is trying to create to employ people, such as building new railways and so on..) the possiblity of 30y yields rising the property market is likely to trend lower. So adding to the possibility of an increasing number of foreclosures.

In short Government debt problems, in my opinion, are likely to cause a decline in the avilability of credit from banks, due to the fact that so many banks are capitalised by government bonds. Take for example the UK, where I believe currently the FSA allows banks to hold gilts, as a risk free assets. How will their capital requirements be affected by a government debt crisis? Surely this will result in lower levels of lending to the consumer, and thus have an impact on companies earnings prospects.

Hence I am bearish on the dow in the medium term.