Good Evening: After blasting off and reaching breakout altitudes this morning, U.S. stocks fell back to earth in the afternoon. That most of the major averages finished Thursday just about where Wednesday left off could easily be attributed to noise and random motion. But before we dismiss today’s action with a casual shrug, it may be worth examining why today’s breakout attempt failed.
U.S. stock index futures were up strongly this morning in response to some large gains overnight in Asia and some decent gains in Europe. A parade of earnings reports contributed to the good mood early on, as positive results for Dow, First Solar, Visa, and Comcast more than offset disappointments from Exxon, Travelers, and Procter and Gamble. At 8:30 edt, a bevy of economic releases were deemed a mixed bag and thus didn’t interrupt the festivities (see above). The weakest piece of data was a drop in consumer spending in March, a figure which ran counter to yesterday’s GDP data portraying U.S. consumers as being on the mend. Personal income levels were also weaker than expected, but employment costs were well contained. The number cited most in this motley bunch was a drop in jobless claims figures during the latest reporting week. Any drop in this statistic is welcome, of course, but it should be remembered that jobless claims are still well above the 600K mark, a level first breached only a couple of months ago (and more than a year into the recession). BAC-MER economist, David Rosenberg, breaks down the jobless claims data above, and he thinks they show next week’s unemployment number will hit the 9% mark.
Equities opened to the upside and, depending upon the average, were between 1% and 3% to the good in the early going. NASDAQ was the early leader, possibly due to some reaching for beta by portfolio managers that were concerned the rally was starting to get away from them. Headlines such as those you see above were scrolling across terminals all morning and probably contributed to this sense of “stocks are breaking out and I’m not long enough!” With the S&P within a good push or two from breakeven for 2009, stocks paused for a breather as lunchtime approached. Chrysler was forced into bankruptcy, but few were surprised by this outcome.
What did surprise and disappoint quite a few investors, however, was President Obama’s reaction to the Chrysler saga. Mistaking senior creditors for what he called “a small group of speculators”, our President had the following to say: “A group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout…”They were hoping that everybody else would make sacrifices and they would have to make none…“Some demanded twice the return that other lenders were getting” (source: Bloomberg article above). In response to this broadside, a group of senior creditors dubbing themselves the “Committee of Chrysler Non-TARP Lenders” said they were treated like junior creditors, contrary to “long-recognized legal and business principles.” (op.cit.)
The more investors read this war of words over Chrysler, the less they felt like celebrating the ongoing equity rally and the more they felt like taking profits. The major averages retreated all the way back into red territory before struggling back to finish mixed. In a break from their recent pattern, the Dow Transports (+1.2%) and the Russell 2000 (-0.8%) moved in opposite directions. As for what this divergence means, I will only say that of the two indexes, the Russell 2000 has been the more dependable directional leader since October of 2007. Treasury prices were likewise flattish, though it should be noted the longer dated maturities did edge lower. In keeping with today’s theme, the dollar also finished virtually unchanged. Marching to their own drummer, commodities rose and the CRB index finished with a modest gain of 0.6%
So what, if any, directional clues did the stock market give us in first breaking out and then falling back? Obviously it is too soon to say, but the action and the spat over Chrysler did leave many market participants with a bad taste in their mouths as they headed home. Just as stocks were breaking out and achieving the type of “escape velocity” that might enable them to orbit at prices above unchanged for the year, gravity inconveniently pulled them back down. President Obama’s harsh words for Chrysler’s creditors were shocking to many who think he should know a bit more about contract law and the bankruptcy process. Our president did, after all, graduate from Harvard Law School and he also taught at the University of Chicago Law School.
If the verbal spitball throwing contest over Chrysler had taken place in one of Mr. Obama’s old classrooms, we could chalk it up to the passion of the educational process and move on. But he is now the President who represents all of us, debtors and creditors alike. As for his interpretation that some creditors were holding out “for the prospect of an unjustified taxpayer-funded bailout”, I can only offer a simple “gee…I wonder where the creditors got that idea?” Starting with Bear Stearns and not ending with the TARP, the many bailouts offered from Washington require a scorecard in order for one to keep track. The resulting bailout mentality has the unintended consequence of causing behaviors among investors to shift in directions Adam Smith’s invisible hand might not have otherwise silently guided them. I wish Paul Volcker would pull Mr. Obama and the rest of his economic team aside and explain to them why the rule of law is so vital to commerce and industry. Contract disputes and bankruptcy proceedings take place in the courts precisely because those venues are apolitical and less prone to partisan wrangling.
And, finally tonight, if the last story you see above is true and the results of the stress test will now have to be delayed, then I fear another of Washington’s offers to help may yet go awry. The stress test was supposed to help us all by improving transparency, but, according to the story, the process seems to be taking a political turn toward opacity. After worrying for weeks about what the stress test results would mean for our nation’s largest banks, market participants recently came to the conclusion that the test was rigged to be passable and therefore was much ado about nothing.
If this story about the delay is true and is not just media hype, then brows may start to knit once more and the concerns about the health of our banks could start to resurface. Since, like the Russell 2000, the banks have been directional leaders, today’s 2% drop in the BKX may be telling us the upside breakout was just a head fake. Of course, the bulls could always decide to ignore this stuff and move another rocket into launch position come Friday morning. I see the odds tilted toward a market that for now doesn’t reach escape velocity, but rather tips over in a terminal velocity dive toward a retest of the March lows. The prudent will be prepared for either outcome.
— Jack McHugh