Good Afternoon: Volatile days like today, ones that see poor news flow met with calls for more government action, may defy description for some. For me, though, days like today do a pretty good job of actually defining the state of our markets and our nation’s haphazard (freighted, ironically, with moral hazard) responses to the escalating number of problems. Unfortunately, it’s hard to imagine our markets getting much traction until the extent of the economic damage done to the economy by the credit crisis of 2008 can be assessed. There’s also the issue of whether the myriad governmental policy prescriptions can help without actually making things worse.
After U.S. markets reversed to the downside yesterday, markets around the world were mostly lower as we headed into this morning’s open in New York. Since today is Veteran’s Day (a heartfelt “thank you” to any reader who has served in our armed forces), there were no economic releases and the bond market was closed. Holiday or not, however, the rest of the markets were open and had plenty to chew on. U.S. stocks opened to the downside by roughly 2%, as GM’s problems only intensified. Once the S&P 500 punctured the 900 mark the selling quickened, and the major averages were down some 4% at lunchtime. It was hard to identify a theme, other than the selling looked broad-based. Oil continued to drop, and its move below $60/bbl. definitely hurt commodity-related names (see below).. During the mid day din, House Speaker, Nancy Pelosi, once again called for Congressional action to “save” the automakers (see below). And, befitting their status as wards of the state, Fannie Mae and Freddie Mac both announced a new program to help avert more home foreclosures (see below). They were matched by a similar announcement from Citigroup.
While I doubt that any program, whether public or private in nature, can “solve” the housing mess, there were perhaps a few who thought these latest attempts might succeed. Goldman Sachs, the subject of so much angst in recent days, dug in its heels and started to rally in the early afternoon. Once GS turned positive, many took it as a sign the broad market should follow. A quick buying frenzy.then erupted, one that carried the major averages to within spitting distance of unchanged. Goldman continued to rally (it finished 5% higher), but the rest of the market sagged during the final hour of trading. The major indexes closed with declines of between 1.5% ( Dow Transports) and 2.2% ( NASDAQ) The bond market may have been closed, but there was plenty of motion in both the currency and commodities markets. Gaining 1.5%, the U.S. dollar was quite firm, a development which sat poorly with commodity longs. Oil led the way lower, but it had help from both the grains and the metals. The CRB index declined more than 3.5%.
“We’re from the government, and we’re here to help” is a derisive phrase that has been hauled out in recent weeks to describe the huge number of financial aid programs and bailout initiatives that seem to spring up almost daily. By the looks of things, the U.S. government is nowhere near done trying to fix everything. The TARP, to pick a prominent example, has been patched so often it should more properly be called the QUILT (Quietly Undoing Idiotic Leveraged Transactions). AIG received just yesterday a third alteration to its rescue plan, and Fannie Mae implied its care package may not be enough. Today brought more calls to help GM and the other U.S. automakers. Now that Uncle Sam has his checkbook out, the impassioned pleas for help are coming from everywhere.
Don’t get me wrong. I have stated before and I’ll say it again: I have no problem with the measures our government has taken to prevent an utter collapse of our financial system. The problem with bailouts, though, is that once they start, it gets harder and harder to know where to stop. Now that the harmful effects of the ongoing credit crisis are becoming evident in the real economy, our lawmakers will likely just keep the bailouts coming. But when will we stop to ask ourselves (and our elected officials) whether or not the U.S. of 2008 is becoming the Japan of the 1990’s? Are we saving firms that are likely to become the “zombies” we smugly castigated Japan for creating a decade and a half ago? (see Bloomberg article below) Likewise, it may be nice to allow folks who can’t afford to live where they do to receive new and more lenient mortgages, but won’t it only prolong the housing crisis instead of “solving” it? How can the creative destruction of poor business models and poorly underwritten loans take place if we continue to be creative about preventing the destruction? Is it not sad that the only leadership, whether well-intended, misguided, or dangerous, is coming from politicians in Washington instead of capitalists in Wall Street. Just like the Tokyo traders who went crying into the arms of the Diet and Prime Minister during Japan’s lost decade. Are we turning Japanese? Well, as the song says, “I really think so”.
U.S. Stocks Drop on Concern Over Worsening Economy; GM Slumps
Oil Drops Below $59 a Barrel for Second Day on Demand Outlook
Pelosi Calls for `Emergency’ Aid to U.S. Automakers
Fannie, Freddie Boost Effort to Minimize Foreclosures
Revised AIG Terms Begin Treasury Transfusions to ‘Zombie’ Firms