Economic/Market Highlights 11/22-11/29/08: “Whack a Mole”
Posted by Larry Doyle on November 30, 2008 3:15 PM |
The domestic equity markets rebounded by 15% over the last week which is the single strongest week since the 1930s. With that rebound the markets still ended down app 5% for the month. Despite the enormous rebound, albeit on moderate volume and in a shortened week, the overall sentiment and fundamentals to the market remain decidedly negative.
The Dow has been in a range of 9600-7500 over the last 6 months so the rebound off the lows of 11/20 bring the market back slightly above the midpoint of this short-term range. I would counsel those who trade the market to trade it against those levels with an overall negative bias.
The rebound started with the announcement of Geithner as Treasury Secretary but then received another 1.1trillion reasons to move higher in the form of the rescue package thrown to Citigroup (300bln) and 800bln in the form of more rescue money for Freddie/Fannie, more purchases of debt issues by Freddie/Fannie and Federal Home Loan Banks, and funding for a facility to facilitate increased liquidity for consumer finance markets.
With those announcements, the equity markets continued to rally as did the U.S. government bond market, and the U.S. mortgage market (each of those debt markets rallied by app 40 to 50 basis points). The corporate credit markets, the high yield markets, and the municipal markets did not rally, however. Those markets remain largely frozen for entities looking to issue debt.
Let’s think this through for a second. On one hand, Uncle Sam is taking on a massive amount of increased debt to support a wide array of market sectors and then, on the other hand, Uncle Sam in the form of U.S. Treasury is the buyer of debt issued by entities that would have already been bankrupt without government support.
Yes, Uncle Sam is leveraging its own balance sheet in unprecedented fashion to then purchase the debt and assets of entities that are also massively levered. Does it sound like a mix of self-dealing, market manipulation, and adding more floors to a house of cards? I think so and many others do as well. In fact, the greatest risk factor at work in the markets currently is the “political” risk. This risk is typical of lesser developed countries but is now the greatest daily risk not only here in the U.S. but globally as well.
In fact, given the amount of leverage that the U.S. has taken on its’ books it would now be on the precipice of going on a “watch list” by rating agencies if it were a bank.
Let’s look at the move lower in rates this week. The 10yr U.S. Treasury bond moved lower by .40 (40 basis points…lower rates means higher bond price), which is counterintuitive with an equity market that just rallied so substantially. If the equity market rallied, thinking that equity values have discounted the economic pain that is likely to come in 2009, then the move lower in rates is a reflection of people believing that we are headed for deflation or more a reflection that the U.S. Treasury announced that they will purchase 500bln in bonds.
To put that number in perspective, that number of 500bln is 80% of the money spent on the Iraqi war exercised over the last 5 yrs. IMO, Paulson announced that commitment along with the 200bln for a lending facility for consumer finance and another 100bln for F/F to “move” the market (manipulate perhaps) and promote borrowing primarily by homeowners.
That said, IMO Wall St. “front ran” the Treasury knowing how large the program will be. As borrowing picks up primarily by “creditworthy” homeowners, we may see some stability in certain parts of the housing market, but we will also clearly see increased growth in the money supply and further drop in government rates.
Thus, IMO the next two big “bubbles” will be in U.S. government bonds and in our money supply leading to pain that may very well be even greater down the road than the pain of delivering that we are experiencing now. What will this pain be? Vicious inflation!!
The U.K has seen serious decline in the value of its currency as have other countries. I believe we will see global decline in currency values with inflation increasing dramatically given the continuation and the growth of “spending” our way and “printing” our way out of every problem.
The virtual certainty of a fiscal stimulus program to be delivered on Obama’s desk is in sync with this approach.
In fact, I can envision that every spending program coming out of Congress will now use the cover of “stimulus” and “it’s for our national economic well being”.
Well, I was always of the impression that in order to get out of the hole, one should “stop digging”.
Every day I look for somebody to have the political courage to propose the concept of cutting capital gains tax rates and other forms of tax relief to encourage private capital into our markets. By doing that we can promote the transferral of assets from weak hands to strong hands.
I also think Paulson promoted this last 800bln package given criticism he received for not allocating TARP money to the purchase of distressed assets previously. Concerned with legacy more than any concept of fiscal discipline, perhaps?!
In regard to the rescue line thrown to Citigroup, many people whom I respect qualify that as the “closest thing to nationalizing that institution” as we have seen. We did see the actual nationalization of the Royal Bank of Scotland in the U.K as that bank was unable to raise sufficient private capital.
I could write more as there are many more moles that have popped up previously that will be back as well as other institutions and agencies that will face the pain of liquidity and credit crunches in the near horizon. These include:
- pension funds
- auto industry
- sovereign governments
- hedge funds
- consumer finance companies
In regard to positive news and developments, for those in the position of having excess liquidity, be patient and judicious as there will be an abundance of outstanding investment opportunities.
Please join us Sunday evening from 8:00-9:00 p.m. ET on No Quarter Radio for an hour’s worth of “Dollars and Sense.”
I encourage comments, criticisms, and questions from all involved and interested in the economy and markets, especially from those with different outlooks and opinions.