Financial and energy shares were the only sectors to manage a gain yesterday. Telecom, information technology and utility (on cap and trade worries) led the losses.
The pounding seems relentless, but it does feel we’re in store for a bounce. The broad market is down 33% since early November and 28% over the past nine weeks. Bear markets offer the most powerful rallies simply because they also exhibit the largest declines, and all that goes with declines of this magnitude such as short positions that people end up covering when things rally.
What’s more, when no one wants to buy the market, many times that’s exactly when a rally presents itself – when you least expect, expect it. Trouble is we haven’t been expecting it for quite a while now yet still it keeps falling.
This bear has been as harsh as they come (we’re something like 515 days into this bear market and the S&P 500 is down 57%; that’s worse than the -42% 515 days following the 1929 crash). We’re due for a bounce and when it occurs it should be a powerful move. Problem is with the type of policy that’s on the horizon the sustainability of such a move is quite unlikely.
Certainly, elimination of mark-to-mark and the return of the “uptick rule” (having to wait for a rise in price that’s above the preceding sale before implementing a short sale) can foster this rally – and if this is done the rally will be a big one. From there, allowing the market to correct some of the credit excesses (instead of forcing more debt upon the market, this is not September/October when financial collapse appeared possible) can make an upward move sustainable. But we’re a long way from allowing free-market principles to take over – this is simply the cycle we’re in and that must be acknowledged.
Market Activity for March 9, 2009
We were without an economic release yesterday, but that’s ok because there are many others things to talk about these days.
Increased Government Control = Misallocation of Resources
It was reported yesterday morning that Bank of America has become the first U.S. bank to withdraw job offers it had made to foreign MBA students graduating from U.S. business schools this spring. Why? Because banks that had received TARP money are prevented from applying for H1-B visas (visas for those termed to be highly-skilled immigrants) when U.S. workers have been fired.
And you don’t think there’s a protectionist tilt within the current make-up of Congress? Whether its goods or labor no matter, protectionism is protectionism and it ain’t good. Congress can try to block competition all they want, but eventually you must face reality.
That was the Reason?
President Obama was out again this weekend stating they will not repeat the policies that got us into this mess. One assumes he means unsound monetary policy and government intrusion within the arena of lending – specifically the housing market. These are the two primary issues that created a credit expansion that now in hindsight could not last, particularly since the Federal Reserve did not provide the proper oversight for which they were tasked -- one main reason credit standards were so lax for so long. (Oh, and the New York Fed is one of the main overseers of the banking industry – Mr. Geithner was President of the New York Federal Reserve Bank 2003-2009.) Exacerbating it all is the pernicious accounting standard known as mark-to-market (set in place in November 2007) and the removal of the uptick rule, allowing short sellers to drive bank shares into the dirt.
Of course, this is not what he means, as Mr. Obama is in the process of defining what got us into this mess – tax cuts.
I would contend that without the tax cuts of 2003 (capital gains tax rate reduced by 25%, dividend tax rate slashed by 62%, and income tax brackets by roughly 15% -- I would have gone further but these were helpful nonetheless) the economy would not have withstood the higher energy prices of the previous several years. Lest we forget, oil jumped 464% (38%% annualized) spring 2003 through spring 2008. (And not all of that jump was due to the price spike of 2008 as crude rose 200% in the three years ending spring 2006, or 39% annualized).
There is no way in hell the economy could have managed nearly 3% at a real annual rate for the period Q1 2003 through Q2 2008 with this rise in energy prices. Yes, the housing market was on fire for some of this period– but that accounted for just 6.5% of GDP at its peak – so let’s not say the economy grew only because of the housing bubble. Besides, since early 2007 housing has been a drag on GDP and until September 15 2008, when everything changed on the Lehman collapse, the economy still managed 2.1% at a real annual rate despite the nasty housing correction and oil prices that averaged $85 per barrel.
Nevertheless, we’re seeing the reasons for the current woes defined (say it over and over again and people believe it to be fact) and as a result policy will be directed toward removing the current tax rates for a burden that is substantially higher, along with increased government micromanagement. We shall see how the economy and capital react over the next couple of years. (The proposal to raise the FICA tax cap, currently set at $106,800, will create an additional tax burden to bear for both employee and employer at exactly a time in which we need jobs cuts to ease.)
Details? Why Offer Details?
Treasury Secretary Geithner commented last night that next week the administration will roll out a program to offer small business some help. How about starting with refraining from raising marginal tax rates? Roughly 65% of those within the two-top tax brackets are small businesses. No, they’d rather implement policy that hurts the group, only to then offer programs that show they are coming to the rescue, it seems.
(Oh, and speaking of tax rates, when do you think capital gains and dividend tax rates are going higher? At the end of 2010, right? Well, not quite. If President Obama’s fiscal 2010 budget passes, those rates will rise in October of this year – the government’s fiscal year begins in October. That’s nice.)
But back to this small business assistance program…well, never mind; I don’t have anything to say about it because Mr. Geithner’s comments involved zero detail. What’s new? They don’t seem to get it; or maybe they do get it. You with me?
Have a great day!
Brent Vondera, Senior Analyst
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