The Audacity of Hope

Good Evening: Hopeful during his campaign and dour since, President Obama used a national stage last night to resume his optimistic stance on America’s future. It’s as if his handlers finally decided to echo Ronald Reagan’s advisors to just “let Obama be Obama”. Our president tackled many subjects and promised many things, but he essentially punted on the subject of giving more detail about how to tackle the financial crisis. And, since President Obama’s audacious spending plans didn’t seem to square with his promise to “cut the deficit in half” in four short years, investors spent much of Wednesday brooding about what might come next.

Stock index futures didn’t have much reaction overnight to Mr. Obama’s address, and they were pointing to a modestly lower open prior to the release of today’s economic data. Mortgage purchase applications once again fell and now sit very close to the lows of this cycle. Reinforcing the message that housing still remains a sore spot in our economy, existing home sales also slumped while inventories increased. Since this horrible sales figure was actually flattered by a spate of foreclosure sales, the picture of demand for U.S. housing remains a grim one. On a positive note, however, Fed Chairman Bernanke did offer a little more insight into the administration’s plan to have banks undergo a “stress test” (for BAC-MER’s take, see below). Mr. Bernanke backed even further away from what Barry Ritholtz calls the new “N word” (Nationalization), but even his explanation about the stress tests our banks will soon undergo lacked enough detail for investors to feel an emerging sense of clarity.

What emerged after the opening bell rang at the NYSE was a decline in stock prices. Though the major averages never did give back all of yesterday’s gains, they were sacked for a 3% loss less than two hours into the session. Mr. Bernanke’s testimony before the House did seem to help prices recover at mid day, but disappointment over the President’s missed chance to announce a sweeping approach to the credit crisis exerted a gravitational pull on equities by day’s end. Despite strength in both bank stocks and tech stocks, the major averages fell between 1.1% (S&P 500) and 4% (Dow Transports). Treasury market participants were none too happy with all the new spending outlined by President Obama last night and prices across the entire spectrum of fixed income declined today. For its part, the dollar was less concerned about deficits in the U.S. as it was about potentially even larger ones looming in Europe. The dollar index advanced 1.25%, while commodities ignored every other market and rose. Another gain in the energy and grain complexes more than offset another weak day for precious metals as the CRB index rose more than 2%.

Back when he was just a candidate for the U.S. Senate, Barack Obama was invited to give the keynote speech for the Democratic national convention. Entitled, “The Audacity of Hope”, this optimistic piece of oratory made Mr. Obama famous and helped catapult him not only into the Senate but into the national spotlight. In 2006, then Senator Obama released a book by the same title and it set the tone for a campaign that eventually landed him in the most powerful office on earth. His speech last night before a joint session of Congress was no less bold and optimistic. Investors wanted him to unveil a comprehensive plan for addressing our nation’s financial woes, but this topic was covered only in general before our President moved on to his real agenda.

Expanding upon some of the themes touched on in his book, Mr. Obama asked Americans to back his vision to help the banks, promote clean energy technologies, reform education, and completely transform the health care system. Our audaciously hopeful president even promised, presumably once these first four issues are dealt with, to touch the third rail of politics in offering to also reform Social Security. Oh, and did I mention that President Obama also stated a clear goal to “cut our deficit in half” during his first term? I guess that writing trillion dollar checks to help our banks and our economy must make programs costing “only” in the hundreds of billions (each!) to look downright cheap by comparison.

When Ronald Reagan was swept into office in 1980, he also promised bold reform while cutting the deficit. Unfortunately, the numbers never did add up properly and our nation has spent far too much time in the red ever since. Now President Obama wants us to embark on plans that amount to the New Deal and the Great Society rolled up into one? I have no problem with short run deficit spending during an economic collapse, but there is no way in HE double toothpicks our nation’s deficit will be halved. It will likely explode. Could this vision of an endless supply of Treasury auctions be one of the reasons the bond market fell today despite a weak stock market? Perhaps I’m missing something, and perhaps my arithmetic is a little rusty. Maybe Mr. Obama really has found $2 trillion in “wasteful spending” (like the $800 billion stimulus bill?) to pay for all these new programs. I truly hope his foresight is 20-20, but I will continue to hold my gold and precious metals mining stocks just in case. The audacity of hope? Though it’s better than pessimism, this form of hope is audacious indeed.

— Jack McHugh

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