Yesterday the market was under pressure more of the day, as analyst and economist pointed that while the bottom is near - we could have problems with credit and consumer spending and thus seeing slower growth in the GDP (or recovery).
Apple caused some buzz and excitement on a couple of fronts, dropping the price of the Iphone to $99, new generation introduced, GoTo GPS, and Steve Jobs returning to Apple (even though he wasn’t there). Then Paul Krugman (Nobel prize economist and NYT columnist) made the statement that in hindsight we may look back to the summer as the bottom of the recession. This news sent a euphoric spike to the market into the close. It shows that we can certainly take one sentence out of context and turn it into a "Green Shoot" - for good or for bad, our media loves to latch onto out of context sentences and spin them. He didn't say the recession ended, but media spun it as if he had.
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Supreme Court vs. Administration
The government's involvement in the bankruptcy's of the auto companies has caused confusion and questions. The big question that has reached the supreme court seems to be one of ideology vs. contact law. The Administration stance is that we are putting the Automotive companies and the 1,000 of jobs first and the secured bond holders (those that lent money to auto companies) said that they (by law) are first. The lower courts ruled in favor of the government, but pension funds that have been sent to the back of the line said STOP. They had invested for their state pension funds under the correct assumption that they are first in line.
Now it is in the Supreme Court's hand and they have HALTED the sale of Chrysler to Fiat until they review this further. This could also create serious problems for GM, which is in a similar situation (yet different).
While this may not affect action in any issues today - if could create the following problems going forward.
1. Psychological - if ruled against the government it might create negative market segment indicating the government will have a harder time trying to bailout companies (banks, airlines, automotive).
2. Bond interest rates - if the government wins it could create higher rates on corporate bonds for companies that are traditionally in need of government aid (banks, airlines, automotive) - making it harder for companies to raise money and certainly more expensive that will affect the bottom line.
It is both an interesting story to follow - on a legal and political basis, but also important to follow because it could create some volatility in the corporate bond market and the verdict could create some market volatility. What is best for the country and what is the law – it will be debated.
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Tarp Repayment
After months of questions and request the Treasury is going to grant 9 banks to be allowed to pay back the Tarp. The debate was that if the Treasury had let only a handful pay, it would make the others look worse. I think we all know by now which banks are having problems and which are not. Goldman, JP Morgan, US Bank and a few others are suspected as the ones that will be granted to pay back the money. The announcement should be made today - and we could see some intra-sector volatility as those that can repay could go up (showing confidence) and we could see ones that didn't make the cut come under pressure. For now it expect some volatility in the banking sector - up and/or down.
On analyst on Bloomberg made an interesting observation, stating that while the banks have raised money (by selling shares) - they have also benefited from new accounting rules and one important factor that we have not included is their huge borrowing at the Discount Window of the Fed. While paying back the Treasury (TARP) is a good sign, they are still borrowing from the Fed - and thus would be borrowing from the Fed to pay back the Treasury. I guess nothing is wrong with that - since that is what Treasury is doing selling bonds (borrowing from the Fed). Interesting observation....
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Futures Pre-market
Flat to slightly positive – expect a flat to mix opening. No Arb as of this morning.
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Support / Resistance
We were down most of the day – until the close. Still close to those resistance levels. The bad news about the rally at the close was the very light volume. That means it is going to need a little more volume to push up harder.
INDU 8750 (We came off over 100 points yesterday only to rally into the close back to the 8750 area.)
NDX 1500 (We came off – but are close.)
SPX 950 (We are only 10 points below.)
RUT 540-550 (We are significantly lower than the other indices, % wise yesterday showing weaker broader market).
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Conclusion
The debate we are hearing from Congress and the Administration is rooted in “What is best for this nation!” – I fully agree that our elected officials should be operating from that position (ALWAYS) – but when that trumps the Constitution we begin to ask the question is it really best for the nation, or for a particular group. No doubt that our auto companies have been a manufacturing staple of this country, 100,000s of jobs, a beacon of our industrial might, etc. The government should do all it can to help the company – within reason (not only of the law and constitution, but also the tax payer). The 100s of billions are one thing that has created turmoil in the deficit and debt of this nation – but that is an argument for Congress and economist, but the bankruptcy and government involvement is highly questionable (from a legal and constitutional sense).
A bankruptcy by the government and for the government. Not only were they involved both financially and political before the bankruptcy’s they are also benefiting as the largest stake holder after the bankruptcy. They are putting their interest first – before those of the people. The Supreme court has halted the sale of Chrysler and will review if the government has stepped over the constitutional line. It is a landmark case and will certainly result in an interesting outcome and that outcome will clearly define our corporate future. Empathy and sympathy vs. blind justice. Who wins?
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