Good Evening: U.S. stocks broke out of their mid April doldrums with authority today. With almost every major average setting post-March 6 highs, many investors are hoping this move signals stocks are trying to break out to the upside. The reasons behind today’s leap in equities are numerous enough to change the format of tonight’s commentary. I’m going to post some of the major stories of the day in sequential order, thus trying to give readers a better sense of how Wednesday unfolded. I will finish with some questions and/or observations about some other stories that hit the tape today.

Fox-Pitt Kelton Upgrades U.S. Banks to Marketweight After 5-year Underweight

U.S. stock index futures were on the firm side overnight in sympathy with rallies in Asia (ex Japan , which was closed) and Europe . Some positive earnings news out of Time Warner, DreamWorks, and Jones Apparel also helped, but the biggest boost came from the article you see above. Fox-Pitt Kelton upgraded shares of the U.S. banking sector to neutral from its long-standing sell recommendation. The KBW bank index rallied 5% in response, as investors reasoned that any permabear on the banks that now sees fit to upgrade them must mean these institutions have indeed turned the corner. Perhaps, but I would ask bank stock longs that if Fox-Pitt Kelton was in fact going to be right on this call, are they ready for FPK to be a few years early? FPK went to an underweight on the banks back in 2004, but the BKX didn’t peak until 2007.

Why the stock market loves a -6% GDP print

With the stock index futures sporting gains of between 1% and 2% for the reasons cited above, the widely anticipated GDP figures for Q1 were released at 8:30 am edt. When it was revealed that real GDP registered a decline of -6.1% versus the -4.7% than had been expected, the S&P futures initially buckled when they saw what looked like a depressing release. One has to look back more than a few decades to see back to back drops in GDP of more than 6%, as well as two consecutive quarterly declines in nominal GDP. But because consumer spending rose and because government outlays inexplicably fell, many economists were quick to hail this negative performance in Q1 as a sign of future strength. BAC-MER economist, David Rosenberg does a nice job of explaining this rationale in the story you see above. Like Mr. Rosenberg, I didn’t see as much to like in this report as the crowd did, but this report kicked off an explosive rally once trading commenced.

Volcker Says the U.S. Economy Is ‘Leveling Off’

The major averages were up 2% to 3% within an hour’s time. They paused as the S&P 500 found resistance at the April 17 high of 875. The ensuing retreat was hard to even notice, thanks, in part, to a pronouncement by former Fed Chairman, Paul Volcker (see above). Since Mr. Volcker is so highly respected, market participants were thrilled to see him opine that the economy is “leveling off”. Had they bothered to drill through the whole story, they would have seen that while Mr. Volcker doesn’t see things getting much worse, he also doesn’t see a return to anything approaching economic growth for quite some time. Stock prices then hovered near their highs until our current Fed Chairman and his FOMC chipped in their own views on the economy at 2:15 pm edt.

Fed Keeps Purchase Targets Unchanged, Sees Stability

The FOMC said it spied signs of economic stability and thus didn’t announce a need to step up their purchases of fixed income securities. This statement was initially received with some disappointment (no expansion in the quantitative easing already under way), but seeing the “stabilization” phrase from another source caused investors to push stocks to new highs with 90 minutes left in the session. Prices wobbled a bit when sources at the White House said Chrysler faced bankruptcy as soon as tomorrow, but the averages finished with the type of healthy gains that have technicians predicting an imminent upside breakout for equities. The Dow, S&P and NASDAQ all logged gains just north of 2%, while the Transports and Russell 2000 both skied nearly 4%. Treasurys were once again quite heavy, with yields rising between 1 and 10 bps. I find it interesting that while bond market participants seemed to notice that inflation actually ticked up to 2.9% in the Q1 GDP report, their equity brethren didn’t let the specter of stagflation bother them one bit. The dollar fell 1% and commodities reacted by rising. The CRB index gained almost 4%.

Obama Said to Ready Plan For Chrysler Bankruptcy, Fiat Alliance

I might be misinterpreting the following paragraph from the story you see above, and it is possible that the Bloomberg reporter is slanting the story the wrong way, but it is a disconcerting read nonetheless:

“April 29 (Bloomberg) — President Barack Obama aims to announce tomorrow that Chrysler LLC will be placed into Chapter 11 bankruptcy, leading to an alliance with Italian automaker Fiat SpA, people involved in the matter said.” (source:

Since when does a sitting U.S. President place a privately held company into bankruptcy? Yes, this statement might represent a last ditch negotiating ploy, and, yes, I know taxpayers have a seat at the table via a previous loan to Chrysler. But I wish our government would let any Chapter 11 filing remain the province of the courts if management cannot strike a deal with creditors, labor, and other stakeholders.

GM’s ‘Silent Sufferers’ Say Debt Plan Fails Small Bondholders

Speaking of government intervention in Big 3 financial matters, small holders of GM debt are calling on the government auto task force to give them a better deal than the one they see on the table (see above). In attempt to put a face on the plight of small GM bondholders (and no doubt evoke some sympathy in the process), a 70 year-old woman stepped up and said the following:

“We’re hoping to get the attention of the task force,” said Patricia St. Pierre, 70, of Grosse Ile , Michigan , adding that she and her husband depend on the interest from their bonds to help cover their expenses. She declined to give the size of their holdings in Detroit-based GM’s bonds. “Social Security isn’t enough,” she said. “I hope we’ll at least get something. I don’t want to be one of those ladies packing groceries at the store.” (source:

Well, I’m sorry, Ms. St. Pierre, and I do sympathize with you. But if Social Security is not enough, and if a GM restructuring or bankruptcy will blow such a hole in your retirement income that you will have to bag groceries, then that’s just the price you’ll have to pay for reaching for yield without proper diversification. I’m sorry you’ll get hurt in the process, but it’s high time bondholders started to share the pain. Capitalism requires both risk and reward in order for our economic system to properly function, and we need folks to stop embracing the bailout mentality.

Mack, Lewis Blame Pay Limits for Executive Departures

I’ll be the among the first to decry the notion that Washington should be allowed to set pay limits for employees of financial institutions, but I have no sympathy for the employee retention woes facing Morgan Stanley’s John Mack and Bank of America’s Ken Lewis. Why these CEOs would groan about this in public is beyond me, but the following complaint by Mr. Lewis is priceless:

“We have lost strong revenue generators over the past three months to competitors that are not facing the same compensation restrictions that we are,” Lewis said. (source:

Well, Mr. Lewis, if you had foregone massive leverage and run your business properly, then you wouldn’t have needed the TARP and all of the ridiculous, ex-post-facto restrictions that are now causing your revenue generators to take flight. I’m sure you learned somewhere along the line about competition and survival of the fittest. If your competitors don’t face the same restrictions you do, it’s because they didn’t take the same foolish risks you did. No wonder your shareholders want you to split duties with someone else, and you should feel quite lucky to even remain employed at BAC.

The unfortunate thread that links these three vignettes together is a very unhealthy sense of how capitalism is supposed to work in the land that used to be cited as its last bastion. Whether its government intervention in companies like Chrysler and GM, the wails and moans by investors in risky securities, or crybaby capitalists at the financial institutions that cry foul when the taxpayer funds they needed to survive came with strings attached, it seems to me that far too many Americans and the politicians that represent them need to reacquaint themselves with the fundamental laws of economics. The breakout we all need is not seeing the S&P 500 scoot above 900; it lies in escaping the bailout mentality.

— Jack McHugh

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