A Little Respect

Good Evening: The recovery seen in U.S. stock prices yesterday from the absolute drubbing they suffered on Monday looked to be at risk during today’s session. The corporate news flow was poor, another large hedge fund pulled up the drawbridge on redemptions in its largest fund, investor sentiment continued to be putrid, and a bevy of economic statistics were so awful they made balsa wood look strong by comparison. And yet…stocks rose smartly today. It may be hard to understand, and circumstances could change again tomorrow, but a market that can rally in the face of bad news has to be given some grudging respect.

U.S. stock index futures were weak even before Freeport-McMoran kicked off Wednesday’s action with a resounding thud. Citing “market conditions, which have weakened dramatically in recent weeks”, FCX told its investors it was de-activating some mines, cutting capex for new projects, and eliminating its dividend. FCX fell 17% today, and its news knocked many other commodity-related names for a loop as well. Oddly enough, however, the moves FCX and others are taking to reduce output will speed the eventual recovery of commodities prices. Nothing cures low prices in this sector better than low prices.

As for today’s economic data, they were almost uniformly poor. From the ISM services survey, to the ADP report, to the Challenger layoffs announcement, to the Fed’s Beige Book, all signs pointed to a rapidly decaying economy that is shedding jobs with equal rapidity. Fortress raised the bridge on its large macro hedge fund, sealing itself off from investors clamoring to redeem their investments. It must be pretty bad out there in the hedge fund world if a fund down only 12% for the year can receive redemption requests for 40% of the fund’s assets. And, like consumer sentiment, investor sentiment measures are also plumbing the depths of new lows. No doubt the rising cost of credit default protection and record wide spreads in the junk bond market are weighing on investors’ minds (for details, see the multitude of stories below).

Given this news flow, a 3% drop in the major averages shortly after the opening bell was fairly easy for most investors to rationalize. The lunchtime rally that carried the indexes to gains of between 1% and 2%, however, was harder to understand. Another dip carried the averages back to within shouting distance of the day’s lows, but sellers apparently ran out of ammo because a 3% sprint to the upside closed out the day. Gains registered ran between the Dow’s 2% and the NASDAQ’s 3%. Still in their own world, Treasurys also managed to finish the day in the plus column. Yields fell between 1 and 3 basis points. Despite motion in various currencies, the dollar index didn’t do much and closed virtually unchanged. As if paying homage to the news out of Freeport-McMoran, though, commodities were the only skunk at today’s minor garden party. Crude oil, copper, and gold all fell, leaving the CRB index 1% lower for the day.

So, if all the news was of the pessimistic variety, then how did stocks finish with such a flourish to the upside? It’s a reasonable question, but equities seemed to find a bid based upon the final two stories you see below. The online edition of the Wall Street Journal put out the shorter version this afternoon and put out the second one well after the bell (though it, too, lacks vital details). The hows and whens were clearly lacking in the early version, but the mere mention that our Treasury Department is considering ways to lower mortgage costs down to 4.5% caused more than a few investors to jump for joy.

After all, if housing is the central problem, and if lower mortgage rates will help solve it, then isn’t this story bullish? “Yes!” said investors during the final hour of trading. Skeptics stood aside waiting to either hear more details or see if this potential policy shift was just one of the many trial balloons floating around Washington , D.C. these days. And even though the longer version of the story still lacks the type of elaboration necessary to make important investment decisions, some shorts evidently decided to cover first and find out the answer to these questions later. Depending upon whether this policy shift is done purely via the executive branch or has to make the long and perilous journey through the legislative process is still not known as of this writing, but one way or another this issue will fall to the Obama administration and the next Congress for final disposition.

This latest policy lurch certainly sounds attractive on the surface, since new home buyers will be able to avail themselves of fixed mortgage rates that were once considered “teaser rates” during the height of the housing boom. I can’t pretend to know whether this latest plan out of Treasury will even be proposed, let alone be implemented in a timeframe that stands a chance of doing any real good. But the real purpose of this plan, just as with the two dozen or so that have preceded it, is to restore confidence. It may be impossible to know right now whether this or any of the many other government-sponsored policy responses to the financial crisis of 2008 will work, fail, or have unintended consequences down the road. What’s worth taking note of, even for longer term bears like me, is the fact that the markets were able to seize upon only one potential story of hope and rally in the face of many bearish facts. Dealing with Friday’s nonfarm payrolls figures will be a much tougher test for Mr. Market, but today’s move earns him at least a little respect in my eyes.

— Jack McHugh

U.S. Economy: Service Companies Shrink at Record Pace
http://www.bloomberg.com/apps/news?pid=20601068&sid=amfl0_ktyeFY&refer=home

Fed Says Economy Weakened Across All Areas Since Mid-October
http://www.bloomberg.com/apps/news?pid=20601087&sid=aIZcKB.JMiUA&refer=home

Freeport Falls After Halting Dividend, Cutting Output
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aqZhS_MksbVE

Defaults May Beat Great Depression, Junk Bonds Say
http://www.bloomberg.com/apps/news?pid=20601087&sid=aRvI6WCvliK4&refer=home

Corporate Debt Protection Costs Climb Amid Depression Concern
http://www.bloomberg.com/apps/news?pid=20601087&sid=a9O.8z7S8pD0&refer=home

Fortress Halts Drawbridge Global Fund Withdrawals
http://www.bloomberg.com/apps/news?pid=20601087&sid=asiamTLKlBS0&refer=home

Spectrem Investor Index Drops to Record Low Amid Economic Woes
http://www.bloomberg.com/apps/news?pid=20601213&sid=aVkTeOksblzs&refer=home

Treasury Considers Plan to Stem Home-Prices Decline – Rates Could Be as Low as 4.5% for Newly Issued Loans http://online.wsj.com/article/SB122833771718976731.html