Yesterday seemed quite – we await to see the seriousness of the swine flu (as WHO raise their alert), Stress test is still in the wind – but rumors are a couple of banks need more capital, earning season ends with a few positive surprises (but many lowering forecasts), and we celebrates and review the first 100 days of the Obama administration.
I did get quite of few emails about my grading of Obama and let me clarify simply – I think his most valuable accomplishment is bringing optimism to the table, which is something we most certainly need and was reflected in the consumer confidence number (which initially sent the market spiking up mid-day). My criticism (abet constructive) is that I would hope that he could convert some of that popularity into action. I appreciate that he has taken on probably one of the most difficult times to ever become a president and he sure has not wavered in his conviction and optimism, all of which are important. However, with full control of the House and almost full control of the Senate (which now he has) – he has not able to get his party to come together. Maybe it is because he was a junior senator and some of the senior congressional members in his party wish to have a bigger say and not be steered by someone his junior. There has been push back on his policies, specially economically. He (and Geithner) want to (almost have to) go back to reload the TARP, but he knows that will be a hard sell to Congress. Additionally he is getting push back on his Cap-n-Trade policy – especially from those energy producing states and we can guess which way Specter will vote on those lines. Health Care on principal is going forward, but many Democrats have their own thoughts on which way it should go and how it should be implemented. He is our president and it is our job to make sure that he HEARS the people’s voice and our job is to write and contact our Congress members and Senators to make sure they represent the people and put the their best foot forward and our responsible with our tax payer money.
I think the next 100 days will be measured more by accomplishments, rather than just popularity and rhetoric. Even Bush was popular (not nearly as much, but was none the less) in his first 100 days as well. At the end, a president will be judged by action and not mere words. I wish the president the best, I know he is well intentioned and very smart – regardless if I agree with all his policies or not. My biggest concern is that he does not knee jerk to the present without carefully measuring how it will impact our future.
These markets, probably more than any other time in recent history, are reacting to political policies rather than fundamental reality. And that means the government can help make or break the market – more than any earnings report.
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GDP – OUCH!!!
The economy contracted 6.1% decline – more than expected. But that should be expected – job losses, little to no access to credit, means that consumer spending will continue to contract (which makes up 70% of the GDP). Until we see credit flow and/or jobs pick up we will continue to see a contraction in the GDP. We must remember this is a CONSUMER country – not a PRODUCING nation. That model is a little precarious because it means that consumers need jobs and access to credit to continue to spend. The nation is unable to rely on trade or production to make up the difference. As a nation that produces very little we are also exposed to currency, transportation, tax, price risk – since goods need to be purchased, shipped, and possibly taxed from abroad.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a5JDhODWL6J4&refer=home
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Stress Test initial results
According to Bloomberg, 6 of the 19 largest U.S. banks will require additional capital (according to preliminary results). However Obama and Geithner have a serious problem, the TARP is low and it needs a serious reload. That means going back to Congress to get more money, which is very unpopular and will mean that political deals “earmarks & pork” will have to be added to get the votes. It’s sad that it would seem that blackmail and extortion is a political method to garner votes – but just like the last round of TARP the bill had 100s of pages of pork. How does a member of Congress vote for something unpopular? Get some money for the state, union, or special interest group that will keep them in office. So what does that mean? It will mean that the Banks will have to raise money by converting preferred shares into common and look “hope” they can leverage back up in the private sector. But that has its own problem, what private investor wants to get into bed with a bank that is seriously deep in bed with the government? The risk of investing along side with the government is several fold, government is first out, government can move back to the head of the line, bond holders could get wiped out, nationalization, bankruptcy, and/or more Congressional mandates that could affect the company. Private money is looking at GM, AIG, Freddie, Fannie as well as the Congressional pressure on existing banks and they don’t like what they see.
The challenge are these:
1. Can Obama and Geithner double dip the Tarp and get Congress on board?
2. If not, can the banks raise ENOUGH private capital?
What may happen is that we don’t initially reload the Tarp, banks fail at raising enough in the private sector, we face banking problems AGAIN, Congress caves and reloads the Tarp in the 3rd quarter and we start over again.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aiz06xRmmeOQ&refer=home
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Futures Pre-market
We initially saw the futures on the rise slightly – then the GDP report came out which initially sent a spike to the downside and then some volatility. Futures are still up, but off their previous gains. If these spreads remain we may see a small gain at the opening.
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Support / Resistance
INDU 8000? (We dipped below and closed right above 8000. Futures look positive at the opening – but watch the close and see if we test again.)
NDX 1325 / 1350 / 1375 (We are testing that 1375 range and look to do so at the opening if the futures remain at this level.)
SPX 835 / 850 / 875 (We were right in the middle and look to open higher – but below that 875 line)
RUT 450 / 480 (The RUT was the only positive index yesterday – out of the 4 – and looks like it might test the 480 area.)
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Gold 850 – 900 (Back into the range after we saw it break slightly above)
Silver 12+
Oil 50 (which seems to be a pivot point)
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Conclusion
The market seems to have stalled and is trying to figure things out. Obama has brought much needed confidence to the market, but the bank stress test shows that almost half are still seeing serious problems, jobless claims continue to move higher, home prices continue to fall (but more slowly), and companies are lowering forecasts. Certainly the contraction of the GDP was not good news this morning. So we wait – we WILL get through this but it seems that the ECONOMY has not put in a bottom yet – and the market is determining if it still needs to put in a bottom as the economy has not.
This pause is frustrating as the Bulls are not confident to get long and the Bears are seeing optimism and hope trump fundamentals. The market moves on perception and Obama had done a great job of bringing HOPE to the economy. I have a feeling we can only ride the HOPE train so long before we need to see results.
The market will be seriously hanging on a thread as to how Congress, Banks, and more government data pans out the next quarter. I am hearing lots of “Summer Doldrums” talk – thinking the market will not move up or down any significant amount over the next quarter as everyone digests where we have been and where we are going.
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