Good Evening: Reversing its recent trend, U.S. stocks went up this morning before selling off and finishing lower. The S&P 500 broke its 21 session streak — barely — when it fell just more than 0.5% for the first time since July 7. Since the news flow was decidedly mixed, the catalyst was likely nothing more than profit taking ahead of the nonfarm payrolls release tomorrow. With little in the way of a theme to today’s trading, I thought I would briefly cover the market action before musing about a few random subjects.
Cisco reported an earnings beat last night and John Chambers was his usual self in proclaiming the fourth straight bottom in his company’s business in almost as many quarters. If he ever decides to retire, Mr. Chambers would immediately qualify to become a prominent economist. U.S. stock futures were higher prior to this morning’s open, though less because of the Cisco news and more because the Bank of England decided to up its purchases of British Gilts. Printing $50 billion in fresh Sterling with which to make these “investments”, the BOE is the first central bank that has anted up for a follow on round of quantitative easing. Former policy maker Charles Goodhart told Bloomberg Television yesterday that he favored an expansion of the bank’s purchase program, saying:
“The economy is still fragile, monetary figures are still very low, bank lending hasn’t increased yet and quantitative easing has the great advantage that it can be reversed very quickly,” Goodhart said yesterday. “We don’t lose anything if we continue, and we might gain.” (source: Bloomberg article above).
What’s amazing about this incredibly naive statement is that it could pass as the current thinking at almost any central bank these days. My curt response to Mr. Goodhart is that Great Britain has at least two things to lose instead of the zero he foresees — first, a sound currency (the pound was smacked today); and second, the potential to unleash inflation down the road. Reversing a quantitative easing policy is definitely not the quick and painless exercise Mr. Goodhart claims. I’m glad this gentleman is now a former policy maker, but there are still far too many like him in high places.
The other reason stock futures were on the firm side this morning was a better than expected initial jobless claims report. As BAC-MER describes above, however, the good news on the initial claims front was offset by a resumption of the uptrend in continuing claims. Even if initial claims went to zero tomorrow, it won’t do much good if those already out of work can’t find jobs. Underscoring this point, the Monster employment index ticked down again today. Of course, tomorrow’s employment data will trump all these others, at least to the extent that a constantly revised, seasonally adjusted, governmentally interpreted survey can do so.
Opening 0.5% higher this morning, the major averages were almost immediately hit by profit takers that wanted to flatten up a bit ahead of tomorrow’s numbers. The S&P was down 1% within sixty minutes of trading before it and the other indexes settled into a sluggish range. Prices were boosted a bit by some less worse than expected chain store sales, but no rally attempts could find footing. The averages all finished lower, with the losses ranging from the Dow’s 0.3%, to 1.5% for the Russell 2000. The action in the Russell is notable in that many of the small, high-fliers I watch were really on the defensive today. As for the other markets, Treasurys were flat after trying to rally early in the day, the dollar rose (especially against the pound), and commodities gave back some of their recent gains. Energy was a non factor as heavy grain and meat prices paced the 1.4% decline in the CRB index.
Many of the projects in the stimulus package passed this winter were supposed to be “shovel ready”, but many of the provisions in the legislation itself are keeping the shovels idle. As you’ll read in the above article, many of the water projects funded by the stimulus bill can’t proceed because the filters they need aren’t made in the U.S. The filters are indeed made by an American company (GE), but since the factory is in Canada , the filters violate the “buy American” provision in the legislation. Terrific. I can’t wait to see what happens to health care once Congress gets its arms around it.
I’ve given CNBC’s Jim Cramer a hard time in these commentaries on occasion, but I have to give him credit for his “outrage of the day” yesterday. If Bank of America’s management (read: Ken Lewis) did indeed mislead investors about his company, then why in the world are the investors paying the price for management’s misdeeds? I made a similar complaint about GE earlier this week, pointing out that under Sarbanes-Oxley, the folks who sign off on the financial statements are supposed to be personally liable. Ken Lewis should indeed be shouldering at least a good portion of the fine levied by the SEC, especially since former AIG CEO, Hank Greenberg, paid his fine out of his own pocket. Of course, given how Mr. Greenberg violated SOX himself (and structured the company in a way that led to its spectacular failure), the question begging to be asked is why Mr. Greenberg himself isn’t the subject of legal proceedings. Perhaps Jim Cramer could spread his outrage around a little, though I doubt he’ll ever take his boss, Jeff Immelt, to task on the issue. But who knows? Waggling an accusatory finger at the parent of the network that broadcasts his show might in one fell swoop raise CNBC’s flagging ratings and give Mr. Cramer protection as a “whistle-blower” in the process.
I’d like to close with an observation about the latest twist of the knife in the backs of the hapless investors who allowed themselves to be swindled by Bernie Madoff. Most will think the real story is that greedy lawyers are feasting on what remains of the carcasses that used to be a sizeable herd of investors in Madoff’s fund. $14.7 million does seem a little steep for a few months worth of work, but a judge approved it, so that’s that. What struck me about the story is that only now, for the first time since they happily wrote checks to Mr. Madoff, are investors finally starting to care about what is happening to their money. If they had taken the same care during the due diligence process, then the largest Ponzi scheme in history (outside of central banking) would have had trouble getting off the ground in the first place.
— Jack McHugh