Sam Collins

Politicos Thwart Progress

by Sam Collins   09/23/08

It is said that the market reacts worst to uncertainty, and there was lots of uncertainty Monday as to whether the Treasury Department's $700-billion solution to the financial crisis could satisfy all of the factions involved.

The Congress thrashed about as the political parties tried to turn the crisis to political advantage, while questions arose about the advisability of the SEC's action to stop the practice of short-selling in a list of financial stocks.

Then there was the discussion for the need to turn the two remaining investment banking companies into bank holding companies. The move would allow the two survivors access to the Fed's discount window, which is an advantage, but it would also place them under the oversight of the banking system.

In a move that seemed to major on the minor, the Democrats are holding things up by insisting that executives be limited to salaries equivalent to senior government workers and balking at the Treasury Department's move to take an equity stake in the troubled financial companies.

Meanwhile some Republicans are carping about the philosophical problems inherent in government "bailing out" private sector companies. But others, like economist Ed Yardeni, pondered, "Whether so much government intervention will avert the most dreaded consequences of Wall Street's excesses, namely a financial meltdown and an economic depression."

Shocking to almost everyone was the sudden drop of the U.S. dollar and a related jump in the prices of gold and crude oil. Crude oil futures climbed more than 20% for the biggest one-day gain in more than 30 years.

At the close, the Dow Jones Industrials (DJI) had given up all of Friday's gain and were off 373 points to 11,016. The S&P 500 (SPX) was down 48 points to 1,207 and the Nasdaq (NASD) fell 95 points to 2,179.

Volume was sharply lower on the New York Stock Exchange, which traded just 1.2 billion shares with breadth at a negative 5-to-1. The Nasdaq traded 786 million shares, with breadth there at a negative 3-to-1.

Crude oil (October contract) rose $16.37 to $120.92 a barrel, and the Amex Energy SPDR (XLE) fell $1.25 to $70 a share.

The December gold contract rose $44.30 to $909 per troy ounce as a result of the Treasury Department's need to set up a $700-billion reserve to back the purchases of bad debt instruments and raise the statutory limit on the national debt from $10.6 trillion to 11.3 trillion. The PHLX Gold/Silver Index (XAU) closed at $141.64, up $10.25.

What the Markets Are Saying

As noted in yesterday's comments, things looked pretty good following Friday's reversal. I said "It is likely that unless some glitch holds up approval of the government's rescue package stocks will continue to rally this week…."

But "The Glitch" hit yesterday as one politician after another tried to gain a foothold in front of the cameras to voice some personal opinion about the Treasury Department's plan, and attempt to shoot down the opposition instead of focusing on the more important issues of the proposal. Down went the market, and fully 50% of the gains from Thursday's reversal and the subsequent follow-up advance vanished.

Is all lost? Not necessarily, as long as those now in charge of the rescue effort are able to gain the investors' confidence before the markets break again to new lows.

There is talk of dividing the package with some of the Treasury's points receiving swift approval and the rest to be worked out later. Perhaps that would restore investors' confidence by providing a more reasoned approach rather than pushing to "get something done immediately" while ignoring the consequences of what could be just a quick fix.

Technical analysis in situations like this, as with fundamental analysis, is of limited help since we are dealing with factors outside of the normal investing relationships. For that reason, it is probably best for both traders and investors to stand aside until those now in charge forge an agreement.

But if you feel, as I do, that certain commodity-based investments have merit like the contra-Exchange-Traded Funds (ETF), you might consider them as well.

Let's hope that not only Mr. Paulson -- who according to this morning's Wall Street Journal has made many concessions -- but the Congress, too, gets to the laborious task of repairing the engine that drives the ship. I hate to revert to worn-out clichés but "Rearranging the deck chairs on the Titanic" does have a certain ring to it.

Today's Trading Landscape

Earnings to be reported include: Diedrich Coffee (DDRX), Evolution Petroleum Corp (EPM), FactSet Research Systems (FDS), Lennar Corp (LEN), LightPath Technologies (LPTH), Qualstar Corp (QBAK), Versar (VSR) and Worthington Industries (WOR).

The economic reports due today are: International Council of Shopping Centers (ICSC) Chain Store Sales Index for Sept. 20, the Redbook Retail Sales Index for Sept. 20, the September Richmond Fed Mfg Survey and the ABC/Washington Post Consumer Confidence for Sept. 21.

Some brokers are taking steps to limit customers' options activity in light of the SEC's ban on short sales in hundreds of financial stocks.

General Electric (GE) was cut to neutral from buy by Merrill Lynch (MER).

Treasury Secretary Paulson is urging bailout passage now and says that reform can wait. The SEC revised Friday's statement regarding short selling and said, "Those engaged in bona fide market making and hedging activity, including in derivative contracts, could continue to short … The purpose of this accommodation is to permit market makers to continue to provide liquidity to the markets."

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