Sometimes it doesn’t matter what the news is. When prices move rapidly to one side or the other, a rebound effect occurs – pulling prices closer to what is known as the average mean price.
So it was today.
The Conference Board’s consumer confidence index for February totaled 25.0, the lowest reading on record, and well below the 35.0 anticipated by Wall Street analysts.
Earlier, the S&P/Case-Schiller report on home prices showed that home prices fell a record 18.5% last year, the December 12-month reading. The drop is the larges decline seen in the history of the 21-year old survey. The worst declines occurred in the sunbelt, where prices in Phoenix and Las Vegas fell by more than 30%, year over year.
And to top it off, Bernanke faced Congress in the first session of his 2-day grilling and semiannual testimony on monetary policy and declared that “the view of policymakers is that a full recovery of the economy from the current recession is likely to take more than two or three years.” – suggesting that a bottom to this chaos may not be seen until sometime in 2010.
But Bernanke was resolute and calm this time, unlike the many times before when he has looked nervous. I watched some of his presentation and there was a calm clarity to his description of the economy and the rationale the Fed has taken with regard to the bank bail out strategies.
While many have complained about helping out those who have been most irresponsible, I particularly liked his analogy of the alternative.
In a surreal moment of clarity, the Fed chief faced the critics of government support to the financial sector in the form of government stakes and subsidies that could be seen as rewarding bad behavior. He offered the analogy of a neighbor smoking in bed and setting his house on fire in a neighborhood of wooden houses. The policy options are letting that neighbor's house burn to the ground to teach him a lesson, at the risk of burning the whole neighborhood, or calling out the fire department to put the fire out.
Bernanke chose to call the fire brigade, while imposing sanctions against the neighbor to punish future reckless behavior.
(Business Week, Feb 24, 2009)
Comparing Bernanke’s remarks to the action in the stock market, it appeared as though investors were comforted by the plans laid out by Mr. Bernanke. Perhaps Geithner ought to see if Ben can make the Geithner deliveries in the future.
Though Bernanke didn’t deliver a presentation on “nationalization” it was sure on everyone’s mind as lawmakers peppered Bernanke on his views regarding the nationalization of banks.
Bernanke noted the great technical difficulty in shutting down a major bank or holding company, given its size, many components, and international position. Bernanke also said until it is "safe to close down a big bank, you have to try to avoid it." The Fed also doesn't have the authority to shut down a bank, he said. What's missing currently is a comprehensive resolution authority. Bernanke also believes major banks have significant franchise values, and when the government starts to take over, the companies lose their name value. He believes increasing transparency via stress tests, and putting the asset purchase plan in effect is feasible and will be beneficial in stabilizing the system.
Bernanke said the regulators are not proposing a bank nationalization. He characterized the aid one of the big banks might receive as a "private-public partnership," echoing the Treasury, but declined to call such aid "nationalization" as the government would not wholly own, or even be a majority owner of a bank. Bernanke also reminded lawmakers that should one of the major banks become insolvent, we have the rule of law to outline subsequent procedures. Without the Troubled Asset Relief Program (TARP) aid last fall, many big banks would have failed.
As to why an investor would purchase common stock in a bank today, the Fed chief answered one would not, but the appeal would resurface eventually once stability is restored.
(Business Week, Feb 24, 2009)
Bernanke’s explanations satisfied nervous investors and the financial stocks, along with the broader market, rallied at major support levels and ended the day strongly to the upside.
It looks like Geithner and Obama may need to take speaking lessons from Bernanke. Since they came into office, every time Geithner or Obama have made economic announcements the markets have collapsed in strong disapproval. It may be all in how you say it and the tone conveyed.
Bernanke is very conciliatory, yet firm in his belief, while the Geithner/Obama deliveries have been lacking in detail and more of “this is how it is and you better learn to like it”.
Obama has his chance at redemption tonight, as he once again goes before the cameras to address the nation. There are many who feel that Obama may be overexposing himself and his ideas and that the public may be getting nervous since each time he makes a delivery the markets fall. Check out the DOW chart, below:
The high for the DOW was reached on January 6th, at 9088. The low was reached yesterday, at 7105. The decline from the high on January 6th to yesterday’s low was a whopping -21.8%. The worst declines were the days that Geithner or Obama spoke, introducing plans to fix our ailing economy. The market has no faith in the plans because they lack concrete details.
Let’s hope tonight is different for Obama, that the message he delivers will have strong policy statements that allow the stock market to draw a line in the sand and move forward. If this new address is more of the same, with lots of political rhetoric, then the markets will announce their displeasure with more selling.
I am finally hoping for a “change” – a change in the way the administration has prepared and delivered policy and economic plans for bringing this economic collapse to a halt, if not a rebound.
From a technical basis, Obama has a lot going for him. The broader market indexes are clearly remaining just above the November lows, with today’s strong advance looking like a bullish double bottom.
Bear in mind that while the DOW has collapsed below the November lows and the 2002 lows the other indexes have not. Even the S&P 500 remains above its November low, even though it closed yesterday at a lower closing price. The broader market still remains at support – though barely.
What Obama says tonight and how he delivers the message is important. I believe the message from the “Fiscal Responsibility Summit” yesterday is that deficit spending must come to an end. Obama has hinted at this - and all at the tail end of passing the largest spending bill in the history of the United States.
If this is what Obama wants to say and it becomes an imminent policy that he is intent on pursuing, given the large commitment made to spending our way out of this economic mess, the only resulting conclusion is that taxes are going to go way up for someone or the government is going to seriously go into the money printing business, both of which are bad for the economy and/or the taxpayers.
The market will not like it.
If Obama has a plan that does not crucify the taxpayer during such on onerous economic recession, then the stock market may feel that the implementation is a long way off and not necessarily cast in concrete – and this rebound rally may lift off for a while.
Lots of drama this week – stay tuned and stay on the defense.
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