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Tuesday, August 09, 2011

 

Market capitulation leads to reversal (for now)

Yesterday's wipeout of the stock market was followed, as one might expect, by a technical rebound this morning. However, in a very volatile session even by recent standards, the market seemed to be giving most of the gains back. Ar 2 PM, the Fed released its statement following its meeting, which featured a lengthy and fairly grim assessment of the economic picture, followed by the most unusual statement that the Fed was now defining its extended period for holding interest rates near zero as lasting at least into the middle of 2013.

At CNBC, it took the commentators more than a few minutes to digest the statement. Clearly, the Fed was saying that the economy was so bad, and immediate inflation pressures had eased to such an extent that higher interest rates were not appropriate. On the other hand, the Fed also provided some red meat for inflation hawks by not mentioning anything about QE III, the "fix" liberals anticipated.

The market reaction was initially negative, and sharply so. The Dow went from about an 80 point gain to a 200 point loss in a matter of minutes. As usual, there were differences of opinion about why. CNBC economist Steve Leistman seemed to think that market participants reading the statement's dour economic prognosis were reacting to that. Others may have felt that it was disappointment that QE III was not being initiated. I don't think either is the correct interpretation. In any event, the market then did another about face, rallying over 600 points in the last hour and a half to give us a reversal of about two-thirds of yesterday's carnage. Was the market cheering Fed action, Fed inaction, or was it simply tired of selling. That was one of the suggestions made tonight - when the hedge fund types couldn't drive the market over the edge, they switched to the buy side and gave us the big relief rally.

My own view is that the market at first wasn't thrilled about the continuation of current policy, then thought a second time and realized that at least it wasn't more monetizing in the form of quantitative easing, that we could now look forward to at least two years of fairly stable Fed policy, and that the Fed quite properly kicked the economic ball back to the politicians to solve.

It should also be noted that there were three dissenting votes, mainly from the hawkish side who presumably would like to have kept the Fed's options open to raise interest rates.
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No surprise that the administration is the big loser in this chapter, since it is now so clear to all but the most "convinced" progressives (never right but always certain) that what everyone is demanding is real spending discipline. Meanwhile, the administration and the President seem to be obsessed with its political message. This quote from yesterday's message from the President on the convulsed markets has become all too typical: "the package should include tax reform that will ask those who can afford it to pay their fair share." A President trying to position himself above politics would have ended the sentence with the word reform, but Obama cannot resist the impulse to engage in class warfare, which is key to his ill-conceived re-elect strategy. The WSJ editorial writer put it best, quoting a friend: "The Obama administration needs to stop trying to disarm the fire alarm and start trying to put the fire out."

By the way, what would be our fair share? Aren't the "rich" paying a disproportionate share of our taxes already?

As for the S&P downgrade of Federal debt, instead of pointing out that economically, it was really a non-event (simply making official what should have been fairly obvious) Obama and Geithner degenerated into intimidation mode, taking S&P to task for their action and claiming that the downgrade was based on a $2 trillion mathematical error. Today, Democrats in the Senate piled on, threatening to subpoena S&P officials to testify at hearings.

In its ineffectual nod to "job creation," Obama has proposed (or rather, demanded) that the payroll tax reduction (waiving 2 per cent of the employee's social security withholding) from the failed stimulus be extended, along with the 99 week unemployment benefit period. Neither of these items creates a single job of course. The two per cent reduction in withholding does not apply to the employer's share, therefore does nothing to encourage either large or small business to hire. As for the extension of unemployment benefits, I view that as a negative for the economy. Not only does this add to employer costs for funding those benefits, it alters the equation for job seekers, causing them to demand more before taking a job but leading to the further erosion of their skills.

Of course, incentives are not considered by this gang that can't shoot straight.

All extending these measures will do will be to increase the overall Federal debt, hasten the looming insolvency of social security, and discourage able workers from returning to the workforce.

Sadly, Tim Geithner has decided to stay on at Treasury which means he can continue his apparent mission to compile the worst record at that post in over 30 years. He has also become a shill for the administration's class warfare policies, further reducing his almost non-existent credibility.
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In happier news, the Mets have reacted to their latest flurry of injuries by engineering remarkable come-from-behind wins against the hot Padres the last two nights. We were in the ballpark for Monday night's rally, and it was really fun.

Yankee fans were on cloud 9 following their very clean win over the hated Bosox Friday night and anticipated winning that three game series. Instead, it was the Red Sox coming up with two devastating wins, as CC was bombed Saturday and Mariano actually blew a save. Rivera also took the loss at home against the Angels tonight.

Baseball is certainly fun in its unpredictability.
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As followers of this blog might expect, the market swoon has us in buy mode. On
8/5, we bought 100 shares of Hartford Financial Preferred (HIG.PR.A) at 22.64. On Monday, we bought 100 shares of Flir Systems (FLIR) at the opening for 24.01, of course not knowing how much cheaper it would get over the course of the day.


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