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Market Fades on the Close

Posted by Larry Doyle on March 16, 2009 6:30 PM |

Monday’s price action in the equity markets was particularly interesting. The market opened firm, up approximately 1%, and continued to trade with a very firm tone all day. What precipitated the strong tone? Fed chair Ben Bernanke was interviewed on 60 Minutes last evening. On that show, Bernanke Defends Recovery Efforts in Rare TV Interview.

First and foremost, it is very uncharacteristic for anybody from the Fed to consent to an interview targeted at a general audience. I view this as Bernanke trying to make the case for himself, the Fed, and the economy during these challenging times. In fairly short order, Bernanke has gained significantly greater credibility than his colleague, Secretary Geithner. Bernanke also spoke well of the economy turning around later this year IF the financial system recovers. That is a mighty big IF!!

While the market traded well for the better part of the day, as the Dow approached the 7400 level, investors broke out their sell tickets. Ultimately the market totally retraced the 2.5% upward move and closed marginally lower on the day. The rejection of that 7400 level combined with a lower close confirms the trading range mentality I discussed on my radio show last evening.  I view the parameters of that range to be 6700-7500.

Which sectors led the market lower? The commercial real estate laden REITs which I wrote about earlier today, What About Commercial Real Estate. That sector closed down on average by 10%. Who else has significant exposure to commercial real estate? Financials broadly speaking and that sector closed down 2%. Consumer staples, (food and beverage) closed up 1%, as people still need to eat and drink!!

UPDATE: FASB Plan to Allow Cos More Leeway Under Mark-to-Market ….I find it very interesting that while politicians of all stripes are justifiably kicking and screaming for greater regulation across the entire financial industry, in one fell swoop this modification promotes lesser regulation. In so doing, it will allow banks much greater latitude in managing asset valuations. While certain bank stocks, Citi and BofA, benefitted today, I view this modification as further reason NOT to invest in banks. Why? This modification will generate a lack of transparency. Any time there is a lack of transparency, in my opinion, there is a lack of trust. I am a much bigger proponent of the “trust but verify” approach.   

In other news, the government is looking for the forfeiture of $100 million in assets from the Madoff estate. Why is it that Bernie Madoff was not charged with conspiracy? Does the government think he pulled this massive fraud off by himself? Wouldn’t a conspiracy charge put pressure on him and others? Why am I suspicious on this topic?

Market trades in almost a 3% range on the day . . . just another day at the office!


  • fiscalliberal

    Larry – Kudlow of CNBC EMPHATICALLY likes the FASB changes in Mark to Market with a cash flow option. – Do you have any opinions of Kudlows ability to analyze this stuff?

  • Larry Doyle

    Kudlow used to be the economist at Bear Stearns when I worked there. I personally think he is quite sharp although he had some personal demons. He ultimately beat them, although I guess one never fully beats them but learns to deal with them. I am happy for that.

    In regard to cash flow analysis of CDOs, I do not think Larry is in the camp of fully knowing the finer points of these bonds. From my experience the market for bonds may be rich or cheap but ultimately it is the market. The bulk of the bonds in question here are the top of the capital structure in most of these deals. These bonds can be priced and sold, the simple factor involved here is that the clearance price in the market is far lower than where the major players want to transact.

    This modification is another means for the banks and Congress to buy time. I view this as forestalling a healthier recovery.

    In regard to the cash flow, any structured bond has to have an assumed rate of prepayment, default, foreclosure, and recovery. Inputting those variables and an assumed spread at which the bond should/may trade will calculate the price. The major bone of contention is the rate at which the underlying loans will default.

    Those who would say that they can merely utilize a cash flow option are not incorporating an assumed rate of default into their statement. In my opinion, they are trying to oversimplify something that is not all that difficult in the first place.

  • fiscalliberal

    Larry – OT. House Financial Services is holding a hearing on AIG Wednesday and Liddy is one of the witnesses.

    Should be interesting.

  • Larry Doyle

    Thanks for the link. Something does not add up with this situation. I do look forward to hearing what Liddy has to say.

  • fiscalliberal

    Of course, all the details on AIG are not out. However I heard one guy say on TV that it is ok for the government to tear up labor contracts in the automotive industry and it is not in the financial industry.

  • fiscalliberal

    Another example: I know a GM six figure executive who hit all of his Incentive Compensation targets with flying colors. I think that is a contract.

    However because of the GM plight, he took a 50% hit on Salary and no Incentive Compensation payment.

    So – the AIG people who worked in a Failing Department that brought the comany down really should be happy they have a job. Like the GM executive, if they do not like it go get another job.

    • Larry Doyle

      The public gets it. This scenario smells.

      Again, the question begs how after 6 months a situation like this could have played out in this manner.

      Both the government and AIG knew how this would be received.

      • TeakWoodKite

        LD, Fiscal, what is disturbing is that both the
        government and AIG knew about the compansations and how it would and still let the mountain ofcarpet stain go grow mold.

        Just anoher day at the office indeed. 🙂

        • Larry Doyle

          It truly defies logic. Now we are to believe that President Obama is going to ride in and clean it up. The height of pandering and nonsense.

  • Donnie

    Larry,I believe you have touched on this point before but it is time to stress again.Until they start doling out jail time this bookeeping practices will continue.

    • Larry Doyle

      Donnie…Interesting you raise that point. Whatever happened to a few good old fashioned “perp walks?”

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