The median forecast of 17 economists surveyed by Bloomberg has China raising interbank rates and reserve requirements by June and the Obama regulatory plan has people worried about earnings and the fragile and incipient economic rebound. Certainly, traders had no desire to go into a weekend with the increased uncertainty in the air, made worse by the possibility that a politician may say something that brings a Bernanke confirmation even further in doubt – this concern has now dissipated, more on that below
As I stated yesterday, I think this regulatory proposal is more talk than anything else. It’s difficult to see the thing passing in the current economic environment, but Congress has been known to do things that are rather unwise (to put it kindly) and horribly ill-timed. Because of the lack of specifics in the proposal, some are wondering if this plan would limit balance sheet expansion. That gets to the credit contraction issue. This isn’t a campaign, and the President can’t go out there as if he’s on the stump; this is for real and this market surely doesn’t need additional uncertainties spooking it.
Speaking of regulations that are more certain, the Credit Card Accountability Responsibility and Disclosure Act (no wonder it goes by the easier name: CARD Act) is beginning to present some issues for certain aspects of the market – frankly, the market should have begun pricing this in a couple of months back. The latest comes via analysts’ downgrades of the major card issuers as proposed changes to credit-card regs. will damage margins. American Express and Capital One were hit by 8.5% and 12%, respectively. Beginning next month the group will have to deal with new provisions via the CARD Act.
Tech, financials and basic material stocks were the worst performers on the session. Two of the traditional areas of safety, consumer staples and health-care, were the best performers. That was true for the week as health-care shares actually rose, up 1.5%, and staples fell just 2.1%. The broad market lost 3.9% for the week, led by a 6.3% slide in basic material shares. This marks the third-worst week for the broad market since March lows.
With about 30 minutes left in the session I noticed the S&P 500 was managing to hold above 1090, which may be a level technicians are keeping an eye on as that’s right about the number the market has found support on several occasions. It looked like we were going to dive past that mark but it held. We’ll see this week if that level continues to be supportive.
Market Activity for January 22, 2010
Populism’s Engulfing Wave Hits Bernanke Beach
The swell of populism, that has undoubtedly been fomented by politicians, looks to be headed straight for Fed Chairman Bernanke. The Fed head is up for confirmation and that means he must garner 60 votes in the Senate. But the members of Congress are running for cover ahead of the November mid-term elections and that means Bernanke is caught in the middle of it.
I’ve been critical of the Fed; plain and simple they are the origin of the credit/debt bubble that the economy will continue to work off for some time still. There were many things that caused consumers and institutions to take on dangerous levels of leverage: years of social-engineering from Congress that targeted putting as many people as possible in houses, at any cost; an erosion of credit standards; and a lack of personal responsibility, to name the big ones. But none of this would have gotten rolling if the Fed had not kept rates too low for too long – a three-year period of holding the real fed funds rate negative. When you hold short-term interest rates below the rate of inflation you subsidize debt, which means you will get more of it – and boy did we. It also engenders a mispricing of risk. Fed policy earlier in the decade was the incendiary device that lit the bomb.
That said, you can’t exactly go and change the Fed Chairman without telegraphing it to great extent. Besides, it’s not like we’re going to get a Dick Fischer, a John Taylor, a David Malpass, a Glenn Hubbard as the alternative – and certainly not Paul Volcker; that would demolish the easy-money trade in a millisecond. These are strong dollar, sound money economists that understand you just can’t keep jacking interest to rock-bottom levels and pumping massive amounts of money into the system without perilous consequences on the other side. At some point you have to do some things that may make life more difficult in the meantime, but puts things on a more solid footing for the longer term. (And I’m not saying the Fed should not have responded to what happened in the back half of 2008, just that they caused the issue in the first place and have yet again sent fed funds too low – coupled now with a quantitative easing program that will be tough for them t completely rein in.)
No, the replacement we’ll get if Bernanke can’t get the 60 Senate votes required for confirmation is Donald Kohn, the Vice Chairman of the Fed. He is of the exact same mold as Bernanke, so the change could do significant damage to the market, but without actually changing the policy direction in a way that makes us better off in the longer-term. It’s the worst that can happen.
So, we don’t know yet what will happen to Bernanke. Certainly, things were looking much more precarious Friday afternoon than they are right now after a few Senators decided to signal they’ll back the Chairman Friday evening following the stock-market reaction. Senate Minority Leader McConnell stated on “Meet the Press” that they’ll have the 60 votes. Even if he gets 60, that means 40 nay votes. To this point, the most nays a Fed Chairman has ever received is 16 when Volcker was re-confirmed in 1983. The big difference was Volcker had jacked the fed funds rate to the politically abhorrent double-digits, while Bernanke is at the politically harmonious rate of zero.
If it wasn’t hard enough, Bernanke’s job is going to get even tougher if he is confirmed. The lack of support means he’ll have an exceptional level of politicization to work through in getting policy right. As a result, it’s even more likely the FOMC will make mistakes that cause significant problems down the road.
Huge Week
It will be a big week on every front as we get a slew of economic data, the heart of the earning season, the Fed’s latest meeting and the State of the Union address.
On the economic front we’ll get several releases on housing, consumer confidence, durable goods orders, the first look at fourth-quarter GDP and comments from the FOMC as they’re two-day meeting closes on Wednesday.
For earnings, 136 S&P 500 members will report so we’ll have nearly 50% in by the end of the week and a great sense of how the quarter will wrap up.
The State of the Union will be quite enlightening. If it looks anything like President Obama’s speech on Friday from Ohio, things are about to get even more interesting.
Have a great day!
Brent Vondera, Senior Analyst
Populism’s Engulfing Wave Hits Bernanke BeachThe swell of populism, that has undoubtedly been fomented by politicians, looks to be headed straight for Fed Chairman Bernanke. The Fed head is up for confirmation and that means he must garner 60 votes in the Senate. But the members of Congress are running for cover ahead of the November mid-term elections and that means Bernanke is caught in the middle of it.
I’ve been critical of the Fed; plain and simple they are the origin of the credit/debt bubble that the economy will continue to work off for some time still. There were many things that caused consumers and institutions to take on dangerous levels of leverage: years of social-engineering from Congress that targeted putting as many people as possible in houses, at any cost; an erosion of credit standards; and a lack of personal responsibility, to name the big ones. But none of this would have gotten rolling if the Fed had not kept rates too low for too long – a three-year period of holding the real fed funds rate negative. When you hold short-term interest rates below the rate of inflation you subsidize debt, which means you will get more of it – and boy did we. It also engenders a mispricing of risk. Fed policy earlier in the decade was the incendiary device that lit the bomb.
That said, you can’t exactly go and change the Fed Chairman without telegraphing it to great extent. Besides, it’s not like we’re going to get a Dick Fischer, a John Taylor, a David Malpass, a Glenn Hubbard as the alternative – and certainly not Paul Volcker; that would demolish the easy-money trade in a millisecond. These are strong dollar, sound money economists that understand you just can’t keep jacking interest to rock-bottom levels and pumping massive amounts of money into the system without perilous consequences on the other side. At some point you have to do some things that may make life more difficult in the meantime, but puts things on a more solid footing for the longer term. (And I’m not saying the Fed should not have responded to what happened in the back half of 2008, just that they caused the issue in the first place and have yet again sent fed funds too low – coupled now with a quantitative easing program that will be tough for them t completely rein in.)
No, the replacement we’ll get if Bernanke can’t get the 60 Senate votes required for confirmation is Donald Kohn, the Vice Chairman of the Fed. He is of the exact same mold as Bernanke, so the change could do significant damage to the market, but without actually changing the policy direction in a way that makes us better off in the longer-term. It’s the worst that can happen.
So, we don’t know yet what will happen to Bernanke. Certainly, things were looking much more precarious Friday afternoon than they are right now after a few Senators decided to signal they’ll back the Chairman Friday evening following the stock-market reaction. Senate Minority Leader McConnell stated on “Meet the Press” that they’ll have the 60 votes. Even if he gets 60, that means 40 nay votes. To this point, the most nays a Fed Chairman has ever received is 16 when Volcker was re-confirmed in 1983. The big difference was Volcker had jacked the fed funds rate to the politically abhorrent double-digits, while Bernanke is at the politically harmonious rate of zero.
If it wasn’t hard enough, Bernanke’s job is going to get even tougher if he is confirmed. The lack of support means he’ll have an exceptional level of politicization to work through in getting policy right. As a result, it’s even more likely the FOMC will make mistakes that cause significant problems down the road.
Huge Week
It will be a big week on every front as we get a slew of economic data, the heart of the earning season, the Fed’s latest meeting and the State of the Union address.
On the economic front we’ll get several releases on housing, consumer confidence, durable goods orders, the first look at fourth-quarter GDP and comments from the FOMC as they’re two-day meeting closes on Wednesday.
For earnings, 136 S&P 500 members will report so we’ll have nearly 50% in by the end of the week and a great sense of how the quarter will wrap up.
The State of the Union will be quite enlightening. If it looks anything like President Obama’s speech on Friday from Ohio, things are about to get even more interesting.
Have a great day!
Brent Vondera, Senior Analyst
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