Wednesday, January 20, 2010

DJIA as political yo-yo

The crowd following US stocks gets into various themes - fads, "stories", whatever - and Guambat reckons the meme du jour is politics.

Now, most folks will tell you that politics is irrelevant to the stock market, and in general that would seem to be true. But if Guambat's observation is any where near close to correct, and the tag put on today's market movements is any guide, until the next thing comes along, politics seems to have some market play about it.

In Guambat's most recent post, following a 100+ point fall of the DJIA, Guambat noted the fall was not coincidental when viewed in light of the official announcement that President Obama was going to push through banking reforms and claw back the money given away to the banks under the TARP. Guambat reckoned the Wall Street machine was playing political push back by putting some hurt on.

Today there was a 100+ point rise in the DJIA, which the pundits are also attributing to politics.

MarketWatch said,
The stock market hit a new 15-month high Tuesday, spurred by the biggest jump in health-care shares since the summer as traders bet on the outcome of a Senate race with big implications for proposed health-insurance reforms.

"Not only could today's race turn out favorably, but the signal here is that we could also be headed for November elections that would cause some real gridlock" if the balance between Democrats and Republicans tips further in Republicans' favor, said Peter Cardillo, chief market economist at Avalon Partners in New York.

"From the market's standpoint, that would be exactly what the doctor ordered."
Bloomberg , echoed the line: "U.S. stocks rose, boosted by a rally in health companies on speculation Republicans will block an industry overhaul."

The Bloomberg article also noted,
The S&P 500 is up 70 percent since reaching a 12-year low in March. The biggest stock market rally since the Great Depression boosted the index’s price-earnings multiple to a seven-year high 25 last week from 10.1 in March, the lowest in a quarter-century, data compiled by Bloomberg show.
Of course, nobody is giving the President any credit for that. Especially at the WSJ:
Republican Rise

As Barack Obama enters his second year in office amid an enduring economic downturn, voters are less optimistic about his ability to succeed and no longer favor keeping the Democrats in control of Congress, according to the new Wall Street Journal/NBC News poll.

The survey results show that Mr. Obama's personal popularity remains high across a large swath of the electorate, but they also chronicle a decline in the high support for his agenda.
Obama didn't get elected on his good looks.

In largest part, he was elected because Americans were sick and tired of the agenda put in place by Republicans to remove financial regulations, drive down the value of the US dollar with low interest rates and easy money, and give free reign to the big banks, especially the (then) investment banks (which morphed to normal banks merely to exploit the bail out money) ... the crowd that brought on the biggest financial chaos since the Big Depression.

That crowd is now financing and manipulating the market's yo-yo behaviour to keep its own agenda in place.

Of slightly related interest is this story in the Financial Times:
How the big banks rigged the market

When Lloyd Blankfein met politicians in London a little while ago he brushed aside warnings that investment banks faced higher taxes if they ignored the rising public outcry about multibillion-dollar bonus pools. The Goldman chief executive seemed to believe governments would not dare.

That misjudgment – a measure of the breathtaking hubris that, even after all that has happened, continues to separate bankers from just about everyone else – may explain Goldman’s response to the British government’s decision to apply a 50 per cent tax to this year’s payouts.

In the description of Whitehall insiders, Goldman executives reacted with anger and aggression.

Many in Mr Blankfein’s world want to pretend the backlash against the banks is a conspiracy between the mob and populist politicians. They hope, and expect, the pressure will go away when prosperity returns.

read the story. It gets very interesting.

The aggressiveness of the banks is also mentioned in this Bloomberg piece:
Wall Street May Seek to Sway Congress by Hiring Top Lawyer

The banks could try to argue in a lawsuit that a law imposing a bank tax would be a so-called bill of attainder, or measure that singles out a certain person or group without due process, said David Rivkin, a Washington lawyer at Baker & Hostetler LLP.

“It would be a difficult argument, but not unreasonable,” Rivkin said. Even so, “It’s important to push back early and aggressively,” he said.

And in an even slightly more less but still related way is this article: The Derivatives Of Politics

But if pushback is the order of the day for Wall Street banks, they better have a clear idea of what it is they're pushing back against. Obama is not a push over, as David Weidner points out.
The traders on Wall Street rarely miss an opportunity, but they did last year, and now the industry is about to pay a price.

Here's how: Back in March, newly minted President Barack Obama, in only his second live prime-time address from the White House, warned Wall Street not to block new regulations.

"Bankers and executives on Wall Street need to realize that enriching themselves on the taxpayer's dime is inexcusable, that the days of outsize rewards and reckless speculation that puts us all at risk have to be over," Obama said.

During the next five months he repeated the message.

Finally, fearing the memo wasn't getting through, he went to Wall Street on Sept. 14 and delivered this admonition:

"There are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis from which we are still recovering, they are choosing to ignore them. They do so not just at their own peril, but at our nation's."

Risk-taking went unabated for much of the year. Now, Wall Street is in the process of paying out $145 billion in bonuses, 18% more than was paid in 2008 and slightly more than was doled out in the record bonus year of 2007.

They bet against Obama and now they're paying the price.

Greed on Wall Street is showing itself to be an uncontrollable urge. Had Wall Street shown some restraint, it likely would have avoided the clampdown coming its way and bought itself time until the populist anger blew over.

They've spent $3.8 billion during the last decade, including $64 million last year, lobbying. In the current election cycle, banks and brokerages have put up $14 million in contributions so far, an amount that ranks only behind the legal and healthcare industries, according to the Federal Election Commission.

The influence that money buys could present a stumbling block to the bank tax and any reforms that may be proposed. But it's a big bet, given the outrage over the $1.2 trillion in support the government has given banks and the markets.

The industry could also be hoping that reform and efforts to curb pay collapse upon themselves. There's no guarantee the Financial Inquiry Commission will bring meaningful reform. And other than a pay review by the Federal Reserve, there are no hard and fast rules governing compensation.

A better bet would have been to show some restraint, if only for a year.


Barry Ritholtz gets shrill about the politicizing of the WSJ reporting, particularly it headline writing and its selection of leading messages, here and here.

And the WSJ Heard on the Street column writes, "The wild card of government policy is back with a vengeance."

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