As quickly as the market tipped into official Bear Market territory, defined as a 20% decline, it snapped back like a rocket yesterday. Intraday the S&P had declined by more than 20% from its April 30th high, then snapped back to end the day with a 3% increase. This morning the markets are a bit calmer on the open. The ISM Services came in at 53.0 vs. expectations of 52.8. The ADP Employment report showed a private sector increase of 91K jobs vs. an expectation of 75K. Let’s face it, jobs are extremely difficult to find right now as companies are concerned about demand and an uncertain regulatory future.
Federal Reserve Chairman Bernanke was on the Hill yesterday, testifying to Congress. His message since his recent rebuke(s) by members of Congress, the Senate, and Presidential Candidates has become decidedly more dour. Yesterday he told the Joint Economic Committee that the US job market isn’t likely to improve quickly and that the overall economy is “close to faltering.” He further stated that he’s “dissatisfied with the policy response here in Washington.”
A Citi report yesterday commented that over $10 trillion of equity value was wiped out in the 3rd quarter. The question we need to answer from a market perspective is whether this is a 2008 redux or more like 1998? The similarities to 2008 are apparent and have been well hashed. In 1998 we had a correction fueled by currency issues in Asia that began in mid-1997 and sovereign defaults (think Russia). In 1998 we had a tightening in the spring that contributed to a wipe out in the financial sector that summer. The 4th quarter rally was enormous with the S&P rising 21% and the NDX rising by 36%.
The House has been criticized for an austerity program that repeats one of the mistakes of the 30’s. Now the Senate has decided to complete the sequel by introducing legislation that would slap tariffs on products from China in an effort to legislate them into breaking their peg to the dollar. This is wrong on so many levels I’m not sure where to start. The surest path to breaking the peg would be a continued loosening of monetary policy, which will eventually force the hands of China due to the internal pressures it creates for them. I don’t want to be accused of criticizing only the House and Senate when the White House shirks its leadership in this debate by promising to “study the proposal” as opposed to coming out aggressively, saying it’s a bad idea they won’t support. China’s leadership has already weighed in, saying the measure disrupts trade between the countries and violates WTO rules.
This is a bit of a long story, and if the theater of the absurd that is occuring in Washington annoys you, please skip this section. Most Americans remember the multi-hundred billion we spent helping the banks stay solvent in 2008/09, that we changed the accounting rules so the banks could appear solvent, and even went so far as to partially nationalize them. In the Dodd-Frank Act there was an add-on called the Durbin Amendment, named after Senator Dick Durbin of Illinois. The Durbin Amendment limited swipe fees, those pesky $.20-$.40 fees paid by retailers to the credit card exchanges each time a consumer uses a card for a transaction. This amendment was expected to hit the profitability of the banks by billions, and transfer those savings a penny at a time to the retailers. In their effort to make money, Bank of America (BAC), our largest bank by assets and a recipient of at least $45 billion in TARP money, announced they would begin charging consumers $5 per month to carry one of their debit cards. Senator Durbin, who supported the bank bailouts, has now been telling consumers to withdraw their money from BAC in protest. Are you kidding me? This is one of the leaders we are relying upon to put us on the right track for recovery, and he’s trying to start a run on our largest bank? Yowsa!
Costco started off the reporting of September comps with a robust 12% comp. The company also announced plans to raise membership fees as profit margins narrow. The annual fee is expected to jump from $50 to $55. Rumor has it that Dick Durbin will be issuing a statement this afternoon encouraging consumers to shop at Sam’s Club instead of Costco because they are trying to make a profit.
Speaking of consumers, oil prices (see chart below) have declined by 32% since late April. Gasoline prices have been a bit stickier, falling by 15%. A continued decline in gasoline will be a boon to a cash strapped consumer, and could help fuel better holiday spending.
According to the International Financing Review, the buying strike for new emerging-market debt has hit such a lull that some banks are considering closing their emerging-market desks for the rest of the year.
A recent poll shows Herman Cain now in a statistical tie with Mitt Romney for the Republican nomination. These polls have been all over the board in recent weeks as candidates enter and drop from the race with the frequency of a cheap ham radio.
Cars sales provided a bright spot yesterday as GM September sales jumped 19.6% and Chrysler experienced a 27% increase. Volkswagen of America saw a 36% increase.
OK-the Rangers move on, the Yankees are tied, the Brewers and Phillies are both up. LSU is #1.
Monday I mentioned that the Lions started 4-0, and made the obviously off-hand statement that it could be the first time this had happened. I was rebuked by a reader who informed me the 1958 team also started 4-0 on their way to the NFL Championship. The reader should have also checked his facts, because the 1980 Lions were the last Lions team to start 4-0. I don't mind flipping him some gas given our 30 year friendship. After all, I'm the only one he has.
Have a great afternoon
Ned
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