Traders halted what was essentially a seven-session winning streak (there was a day in there in which the broad market declined but it was minor and easily made up the following day) erasing two-thirds of the weeks earlier gains in the final two sessions. Still, we added upon the prior week’s big 10.7% bounce, so let’s be thankful for that.
Health-care and consumer staples, traditional areas of safety during rough times (although not so during this downturn) were Friday’s only positive sectors.
Financials, energy and industrials took the brunt of the damage, falling much more than the overall market. Shares of GE accounted for a third of the industrials decline (as measured by the S&P 500 index that tracks these shares) after analysts downgraded the conglomerate’s profit estimate.
Market Activity for March 20, 2009
Populist Wave
You know, I was going to touch on this bonus sideshow on Friday, but decided against it. That was a mistake. This issue potentially has wide-ranging ramifications, and since we are without an economic release to talk about, now is the next best time to comment on what’s occurring.
There are a number of things to think about with regard to the imposition of a 90% tax on bonuses, which was passed by the House on Thursday. For now, this legislation would encompass those firms receiving at least $5 billion in taxpayer funds. (I use the derivation of the root word “receive” instead of “need” because many institutions were forced to take government money as a way not to expose those that truly needed it – so, and it’s important to get this right, they demand that the money is accepted and then impose onerous restrictions on compensation. Nice.)
Anyway, there are a few things to think about as we endeavor down this dangerous road of populism:
One, the AIG bonuses make up just 0.1% of the total government funds to the company. It seems to me the 435 (actually 433 right now) members of the House have better things to concentrate on considering all that we face.
Two, the market hears loud and clear what is going on. While for now they focus on those firms that hold taxpayer funds, the message is one that disparages one of the most important forms of incentive-based pay. The market understands this is a quite damaging path for the government to travel and I don’t think those who provide the capital to this economy are going to gain any confidence from this behavior, in fact it’s likely to erode further.
Three, and this is the really idiotic aspect of this whole game, the Treasury Department and the Fed are in the process of attempting to roll out a couple of programs they deem essential to getting the credit markets back to normal and need the private sector to accomplish the plan.
The Fed has just begun the TALF program – a funding facility aimed at kick starting consumer lending – and Treasury is trying to get their Public-Private Investment Fund (PPIF) off the ground. (This is the plan to get troubled assets off bank balance sheets, which has now changed to the Public-Private Investment Program, or PPIP, – why they felt the need to tweak the name is beyond me). We can argue about whether these are the best ways to combat current credit-market issues but the people in charge believe these to be vitally important so that’s all that matters for now.
You can pretty much forget about getting private sector help when Congress is going to continue down the road of changing the rules of the game on a weekly basis. The TALF just rolled out on Friday and it began with $4 billion in bids, if you will, from private-sector firms – the program is meant to provide $1 trillion in funding. At this pace they’ll achieve that goal sometime in year 2500.
In terms of the PPIP, forget about that as well. Who in the heck is going to participate in this program when they fear the government will run top talent off via confiscatory tax rates on incentive pay, or take away some of their profits? The administration will have to explicitly state that those who participate in this program will be immune from confiscatory tax rates on incentive-based pay. They will also have to state that tax rates on profits will not arbitrarily be increased when huge profits result, and large profits are possible simply because assets are trading at distressed prices as a result of thin markets and thus have a much higher intrinsic value – how’s that one going to go over in this environment?.
And if they do make participants in the PPIP immune from their “scorch the earth” policy , then we have the classic situation of the government picking winners and losers as always occurs when government involvement rolls out of control.
And that brings us to another point. The Fed came out with its “shock and awe” strategy on Wednesday, and that phrase is not an overstatement. Why did they make such extraordinary moves? They may have known last week that PPIF was dead. Think about that one.
I’ve known for some time giving this group the numbers they have been granted in Congress is a dangerous endeavor, but with each day that passes, even those of us who understand the majority’s agenda, have to be surprised by the degree with which they can do damage – these are my own personal comments, not the firm’s.
So today we get Geithner III, his third public statement on the administration’s plan to remove “toxic” assets from bank balance sheets. Apparently, the market expects a greater explanation this time, although his Op/Ed this morning on the subject does not offer great detail.
Stock-index futures are up big as traders anticipate a strong performance and explanation of just how they will entice banks to sell at a level in which private firms are willing to bid, along with the issues expressed above. Let’s hope the third time really is the charm. Funny thing is as it appears we’ll be getting a statement from regulators very soon regarding the modification of mark-to-market accounting (for assets in which there currently is no market), and its impact on regulatory capital, we may not even need the PPIP.
Have a great day!
Brent Vondera, Senior Analyst
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