Good Evening: A day after stocks endured their worst pounding ever on the inauguration day of a U.S. president, investors decided to take back most of yesterday’s losses. It seems that decent earnings news out of IBM, some purchases of BAC stock by senior management, and some further hints about Mr. Obama’s economic plans combined to push prices higher. In movie parlance, “take 2” of the inauguration rally turned out to be a keeper.
Equity index futures were higher prior to this morning’s open in the wake of a surprisingly good earnings report from IBM. I don’t know enough about Big Blue’s business to comment on the quality of their “beat”, but market participants certainly liked the news out of Armonk. Also on the positive side were reports from Northern Trust and BONY/Mellon, showing that yesterday’s poor showing by State Street was an anomaly among the asset-gathering banks. Equities jumped 2% in the early going today, but an awful housing market index reading thirty minutes into the day put an immediate halt to the rally (see Merrill’s take below). The major averages headed back down and tested the unchanged mark before stabilizing.
But hopes for some positive news out of Apple this evening (and they delivered) and some assurances from team Obama that the economy was indeed priority #1 helped spark a rise in stock prices that didn’t stop until the closing bell rang. It was disclosed during the trading session that Bank of America CEO, Ken Lewis, and 5 directors bought BAC stock. The whole financial sector levitated on the news. By day’s end, the Dow’s 3.5% gain paled in comparison to the 5.3% advance in the Russell 2000. Treasurys, however, choked at the prospect of absorbing more than half a trillion of new debt issuance during the next three weeks (see below). The yield curve steepened in response, with 10’s and 30’s seeing their yields rise 15 bps and 18 bps respectively. Also reversing today was the U.S. dollar, which gave back 1.3% against its major competitors. Commodity prices responded by posting a nice gain of their own. Led by a 6% rise in crude oil, the CRB index gained almost 2% today.
Below you will find the latest “Investment Outlook” from PIMCO’s Bill Gross. Entitled, “Andrew Mellon vs. Bailout Nation”, Mr. Gross tackles the subject of our government’s response thus far to the credit crisis still roiling our markets. Not only does Mr. Gross not apologize for backing the “bailout nation” approach, he points out that we would likely be much worse off if we had taken Andrew Mellon’s advice (he was Treasury Secretary under Herbert Hoover) and let Mr. Market sort it all out. I agree with him in that I think our entire financial system would have utterly collapsed, followed by a collapse in the economy that would have made the recession now under way look robust by comparison. I also agree that we cannot “prove a negative nor recreate history to show what might have been”. We’ve chosen our interventionist path, says Mr. Gross, so let’s get on with deciding the best way forward.
President Obama may have his own ideas, but given all the positive feedback I’ve received about my “matching gift” idea for the TARP, I want to revisit the concept to answer concerns posed by readers. More than one worried about the pricing of the toxic assets that would wind up in the TARP, and they especially worried about the government’s role in picking the proper price. Fear not, I say, since the government doesn’t have to make these pricing decisions. The banks themselves pick the price that their bonus pools are willing to pay and the government simply matches by paying the same price (either 1 to 1, 2 to 1, or some other, debatably optimal ratio). If the banks pick too low a price, then both the bonus pool and the TARP will do well. If the banks pick too high a price, then they are only sticking it to themselves, as well as to taxpayers. The banks will thus have an incentive to mark the assets properly for sale to both their employees and the TARP.
Other readers were quite enthusiastic about this “matching gift” idea, so much so that a few want to forward it to Washington. I can only say that I don’t see why it couldn’t work. Warren Buffett came up with a similar idea (find a market price and then match with government funds), so I’m just building on his idea using Credit Suisse’s equally excellent plan. The concept is to put the employees and senior management at the banks on the hook while giving them an incentive to properly mark all this drek. Done well, with market-based incentives and help from the taxpayers who will have to pay up, anyway, we could all win. I know of at least two readers who are trying to find a way to get my idea in front of the Treasury Department, and I’m sure there are other good ideas out there. Let’s share them, improve upon them, and forward them on for consideration. It would be a shame if good ideas simply received a quiet nod before the delete key rendered them to electronic heaven.
— Jack McHugh