Pre-Employment Jitters & the Role of Ethics in our Financial Crisis

Good Evening: Today saw another fascinating turn in the ongoing wrist-wrestling match between Adam Smith’s Invisible Hand and the very visible fist of government. Powered by another batch of weak economic statistics and yet another bout of falling commodity prices, the Invisible Hand was able to overcome various moves (dramatic interest rate cuts & hints of more bailouts to come) by governments around the world to combat the financial crisis. Judging by the action in U.S. stock prices alone, these forces were evenly matched for most of the day. The outcome (a late drop in equity prices) probably hinged on growing fears about tomorrow’s nonfarm payrolls release.

The trading during a Thursday before “nonfarm Friday” is, during normal times, not very volatile. These are anything but normal times, but the markets followed this script for most of the session. Equities traded within a 2% range around the unchanged mark, perhaps since the bullish and bearish news seemed to each offset the other. The BOE hacked another 100 bps off its policy rate, while Jean Claude Trichet’s ECB showed it also has the moxy to wield the rate cut machete. Rather than the expected 50 bps, the ECB cut its short term rate target by 75 bps. Here in the U.S., federal officials continued to discuss ways of encouraging consumer borrowing, as well as ways to lower mortgage rates. Finally, a rescue package for Detroit’s automakers now looks to be close at hand.

Looking at this morning’s economic data, all of the above plans will be needed. The Monster Employment index dropped 5%, jobless claims stayed above the 500K mark, continuing claims reached heights last scaled in 1982, and factory orders dropped an astonishing 5.1% (see below). In addition (though subtraction might be a better word), retail chain stores announced very ragged same store sales comps for November. Investors were able to shrug off these news items for most of the day, but as oil and other commodity prices continued sinking, so did many of the commodity-related names.

Fears that tomorrow’s employment data might show job losses approaching 500,000 finally broke into the open with 90 minutes to go before the close. The major averages were soon down approximately 4%, though a last second rally cut into those losses. A beneficiary of the decline in energy prices, the Dow Transports (- 1%) suffered least, while the NASDAQ and Russell 2000 (each down 3.15%) took the largest hits. It will be interesting to see how stocks react to tomorrow’s jobs report. I suspect that an ugly number might just lead to a whoosh to the downside before buyers step in and attempt to force a comeback. But that’s just my guess, and why Treasurys continue to scream higher is anyone’s guess. Yields fell across the board by 6 to 12 basis points, and the 30 year yield is now hovering just above 3%. One of the reasons I wouldn’t feel comfortable lending our government my money for 30 years at 3% is the long term harm I see coming to our currency. Those concerns were not evident today, however, as the dollar index shed only 0.2%. And, as mentioned above, commodities had another brutal day. Merrill Lynch put out a report saying crude oil might fall to $25/bbl., a prospect that sent a shudder through the energy pits. The CRB index fell almost 4%.

In early 2000, I was an institutional salesperson focusing most of my time and energy on my futures and options client base for a large bank that shall remain nameless (hint: it wouldn’t exist but for the good graces of Uncle Sam). I was invited that spring to become one of only 20 global equity derivatives salespeople, and I flew out to New York to meet with the folks who ran the division. When asked how I conducted my current business, I replied, “I speak with clients, help them assess their needs, and then help them implement the resulting strategy in the futures and options markets. In essence, I try to treat my clients as if I’m working more for them than for the firm.” My two interviewers were completely taken aback, telling me in no uncertain terms what my new position would entail. I was to put the firm first and clients second. The firm signs my paycheck, they reminded me, not the clients. As they further explained the bank’s “firm first” philosophy, it was my turn to be taken aback. I soon left to start up a desk for a smaller competitor, one that freed itself of potential conflicts by acting only as an agent and not as a principal in derivatives transactions.

I dredge up this past experience as an introduction to the last article you see below. Greycourt’s White Paper No. 44 is entitled, “The Financial Crisis and the Collapse of Ethical Behavior”. It is the position of the authors that my experience during the year 2000 was not unique, that putting the interests of Wall Street firms above the interests of clients has led to an ethical collapse in the way too many big firms are now run. It’s long and gets a bit preachy at times, but it’s a worthy read. I don’t know if the author’s recommendations stand a snowball’s chance of being adopted, but putting clients first would be a great start.

— Jack McHugh

U.S. Stocks Drop, Led by GM; Exxon Falls on $25 Crude Forecast
U.S. Economy: Jobless Rolls Climb to 26-Year High
Oil Falls Below $44, Lowest Since January 2005, as Demand Drops
Citadel Funds Lose 13% in November, 47% This Year
Greycourt: The Financial Crisis and the Collapse of Eithical Behavior

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