Good Evening: The news flow that affected our capital markets today actually started last night when Fed Ex and Texas Instruments posted negative profit guidance. A number of other companies joined them with pre-announcements of their own, pending home sales declined, and the auto bailout hit a snag, all of which combined to hit stock prices today. There was also some unsavory news on the political front, showing that Wall Street was not alone in seeing its leaders suffer a breakdown of ethics during the last cycle.
On top of the warnings issued by FDX and TXN, Broadcom and National Semiconductor also warned last night, and they were joined this morning by Con-Way freight. U.S. stock index futures were under pressure for most of last night and this morning as a result of these confessions, but after a brief dip at the open, most of the averages were actually able to climb into positive territory in short order. Pending home sales figures dropped 0.7%, and though this number came in above expectations, Merrill Lynch is of the opinion the report revealed continuing weakness in housing demand (see MER report below). Another interesting development that helped support stock prices in the early going was the surprising strength in the NASDAQ. I say surprising because the tech-heavy index managed to shrug off the negative pre-announcements by so many tech companies. Perhaps investors are trying to rationalize that the “bad news” is already reflected in the stock prices of these companies. If so, I would argue that the rally under way since the November 21 lows has further to go, but there will be plenty more “tests” of this bullish logic in the days ahead.
After the morning pop, equities then settled into a sideways range until just after lunch. Apparently the FedEx/Con-Way drag on the Dow Transportation average exerted a gravitational pull on the other averages as the afternoon wore on, and the major averages were down 2% to 5% with 90 minutes to go in the trading session. Word that the financial aid package had hit a snag in Congress may have hurt the psychological backdrop somewhat, but watching the legislative sausage being made is almost never a pretty sight (see below). A rally halving the day’s losses ensued, but a drop of nearly the same proportion in the final hour left the indexes near their lows for the day. The NASAQ (-1.5%) held in best, while the Dow Transports (-5.6%) understandably lagged. The Treasury market resumed its northward journey this afternoon, taking yields on short dated T-Bills down to zero (or, briefly, even into negative territory — see below). I don’t know about everyone else, but I don’t feel comfortable paying Hank Paulson to hold my money. That yields now have to reach up to scratch a snake’s belly didn’t hurt the dollar today, though. The greenback eked out a gain of 0.25%, and commodities responded by resuming their sinking spell. Precious metals held tough, but declines in crude oil and base metals like copper caused the CRB index to lose 1.75%.
Politics and money have long been intertwined in ways that undoubtedly contribute to the decision by many Americans to stay home when elections roll around. It’s also been said that all politics are local, but that notion is belied by the final two stories you see below. In the latter, my own Governor, Illinois’ Rod Blagojevich, was led away in handcuffs this morning to face multiple corruption charges. The most humorous (in a sad way, of course) of the accusations he faces is that he essentially put up for auction President-elect Obama’s vacant senate seat. If, as seems likely, he winds up serving a prison term, Blagojevich will be the third of Illinois’ previous five Governors to end up in the prison systems they once oversaw. Talk about an ethical lapse!
But before the folks residing in executive suites of modern financial entities start feeling a relative sense of moral superiority over politicians, they should read Franklin Raines’ account of just who was responsible for the virtual collapse of Freddie Mac and Fannie Mae. The former FNM CEO pointed fingers at every party involved – except at himself — saying, “It’s remarkable that during the period that Fannie Mae substantially increased its exposure to credit risk its regulator made no visible efforts to enforce any limits”. Excuse me, Mr. Raines, but what is truly remarkable is that you expect sentient beings to accept this explanation.
Are you really saying you took on the huge risks that ultimately led to the demise of your company — at a huge expense to taxpayers — because no one stopped you? You’re the CEO, for crying out loud; take responsibility for the reckless path upon which you set your company, to say nothing of the tens of millions you directed to be spent on lobbying efforts to anesthetize the very regulator you now accuse of being asleep at the time! Please…you had a simple business model (borrow at favorable rates and lend against qualifying home loans until you could package them up and profitably sell them to Wall Street) and you messed it up by buying too much of what you were supposed to be offloading to the markets. Fannie and Freddie are supposed to be in the moving business, not the storage business. Mr. Raines, you sir, have no shame.
Of the two offenders I’ve just cited, I see Mr. Raines (among many others) and his attempt to shift the blame that is rightly his to be the more pernicious of the two. After all, Mr. Blagojevich’s follies didn’t come within a whisker of bringing down our entire financial system. Since Blagojevich, Raines, and their ilk seem never to really get what they deserve, perhaps we should modestly propose the Russian model for a suitable form of punishment. A modern day Gulag would fit the bill. Maybe a stint down in Guantanamo for these folks and others like them would set a proper example for the ethically challenged members of our society. But this concept will have to remain a tongue-in-cheek dream, and since the line between tragedy and comedy is indeed a thin one, I’d like to close with an attempt at some humor. Imagine what Russian (actually, Ukrainian) comic, Yakov Smirnoff, might say about today’s developments: “Cozy jail and no Gulag for corrupt officials…What a country!”
— Jack McHugh