Good Evening: U.S. stock averages opened and closed near the unchanged mark today, but those levels belie quite a bit of activity between the bells. Tales of falling home prices and concerns about the freshening supply of equity issuance pushed stocks lower during the first half of the session, while some positive comments from Alan Greenspan about housing and the economy supported an afternoon comeback. The rally left market participants hoping today’s dip cum reversal was a successful test of support at the 900 level in the S&P 500. But why anyone still listens to the Maestro is a mystery to me; I much prefer reading the thoughtful views of John Hussman.
Stocks overseas were on the mushy side overnight, but our stock index futures were pointing to a higher open in New York prior to the release of the latest trade deficit figures. For once, the economists had it right, as the U.S. balance of trade did indeed worsen only slightly in March. That both imports and exports fell and damaged some green shoots in the process generated little concern, except among those who trade the greenback for a living. The dollar continued its recent slide as is now back down to where it was in early January. The only other economic release came in the form of a home price survey that indicated foreclosures were hurting home prices in the many U.S. cities not covered by the Case-Shiller survey (see below).
This report spawned some fresh concerns about the banks, which were already a little woozy from all the secondary deals that keep marching across the tape. After opening 0.5% higher, the major averages started to leak in sympathy with the weakness in bank stocks. Fresh supply and fears of dilution have been the province of financial institutions since this bear market started, but today brought new supply from both Ford and GM. In Ford’s case, the company hit the market with a 300 million share secondary that left F shareholders more than 17% poorer by day’s end. And because it’s common for those occupying the executive suites in Detroit to copy one another, it should have come as little surprise that GM’s executives also decided to offer shares to the public — in this case, their own! There’s been no word yet how the move by GM’s top executives to dump every last share prior to the June 1 restructuring deadline will be received in Washington, but the news sent GM common down to levels not seen since 1933.
With this news flow as the backdrop, investors added some equity supply of their own in the form of sell tickets. By 1 pm edt, the averages were off between 0.75% and 3%, and the S&P 500 had broken below the psychologically important 900 mark. An attempt to retake the 900 level was already under way when the Maestro’s latest “views” started scrolling across the screens (see below). After trying to bail out a broken stock bubble that he couldn’t see with a housing bubble he said couldn’t happen, and then unapologetically retiring to leave others to clean up what has become a multi-trillion dollar mess, how our former Fed Chairman’s latest forecast of an improving economy can find any willing listeners at all leaves me flummoxed. Most of the averages scooted up until they were in the green before settling back a bit at the close. Even if we leave aside his easy money policy errors, Mr. Greenspan’s track record for predicting the economy displays a consistent lack of foresight.
Whether it was because the Maestro said what investors wanted to hear, or whether the market was ready for a bounce doesn’t really matter. Stocks rallied enough to enable the Dow to finish with a gain of 0.6%, while their cousins in the Dow Transport average (-2.25%) continued to lag. The other averages finished somewhere in between these two results, though it should be noted that the Maestro’s rosy scenario did little to help the banks (the BKX was down 4.2%). Treasurys were a mirror image of stocks, as a morning rally sputtered in the afternoon and left yields little changed. The sinking dollar seemed to buoy commodities a bit, though. Plus, quietly, and with little fanfare, the precious metals are creeping higher. Smallish gains in the energy complex also contributed as the CRB index finished almost 0.5% higher.
Though his pieces are always thoughtful and do much to teach investors the importance of patience and a disciplined approach to investing, John Hussman’s “Banks Pass Stress Test — Regulators Fail Ethics Test” is a must read (see below). President of the investment funds that bear his name, Mr. Hussman tackles market action, valuation and his game plan for these variables going forward, but he saves his best ink for bailouts in general and the stress test in particular. He breaks down the components of the stress test and how politics morphed the process into an almost meaningless exercise. He leaves readers thinking the stress test and its results would be funny if they weren’t so misleadingly dangerous.
When his analytical stare focuses on the unintended consequences of financial bailouts and the ethical lapses by regulators, the insights really start to flow. The keenest of these is his argument that while saving the financial system is a worthy goal, we are going about it in a way that prevents the system from clearing. At the same time, and quite unfairly, we are handing the bill to taxpayers instead of to those who took risk throughout the capital structure (especially bond investors). In short, trying to bail out too much private debt with equally massive amounts of public debt won’t work — at least not without creating big problems of their own. But rather than placing my words in Mr. Hussman’s mouth, I will close with a two paragraph passage from his piece that I found especially enlightening:
“Notice that by bailing out the financial companies, there is a massive crowding out of private investment, because for every dollar of losses that should have been wiped off the ledger, we are forced to retain and service two dollars of overall debt – the debt securities owed by the financial companies to their bondholders continue to exist, and we now have an equal amount of new debt issued by the Treasury. The rescued bank debt is a drain on the public because it has to be serviced through a combination of higher interest rates to borrowers, and lower deposit rates to savers. Meanwhile, the Treasury debt is also a drain, because except for some income from the Treasury’s holdings of preferred stock, the debt has to be serviced from tax receipts.
“The bailout is not something “neutral” that cancels itself out, but instead amounts to a transfer of trillions of dollars of purchasing power directly and indirectly from those who didn’t finance reckless mortgage loans to those who did. Farewell to the projects, innovation, research, investment, and growth that might have been financed by the savings and retained earnings of good stewards of capital. Those funds are being diverted to the careless stewards who now stand to be made whole.” (source: Hussman Funds)
— Jack McHugh