Market Wrap-up: market has its worst week since March ’09 as populism takes hold

2010-01-22

Even though in negative territory, the market seemed to hold up for most of the day, until in the late afternoon rumors started floating that Bernanke might not have the votes required to be re-confirmed at the end of the month.  Investors were terrified because Bernanke is considered to be someone who understands how important it is to continue supporting the system until it is clear that it has healed, whereas Main Street policies risk removing life support too early and going through a double dip (this might be similar to what caused the double-dip in the Great Depression). 

The Dow was down 217 points or 2.1%, while the S&P and the Nasdaq fared even worse, down 25 pts (2.2%) and 60 pts (2.7%) respectively.  Banks were naturally the worst-performing stocks, since a double-dip would imply higher unemployment and lower home prices, threatening their capital and potentially permanently impairing their earnings power by requiring additional highly-dilutive capital raises.  Even though credit card companies such as American Express – AXP and Capital One – COF reported strong results at the close the prior day, they were down by 8% and 12% respectively as murky guidance was exacerbated by concerns around potentially ever higher unemployment levels.

A desperate government is the worst government for the markets.  As polls increasingly reflect the government’s failures, populism takes hold.  Senators up for re-election this November are particularly weary of the situation.  Democrats are willing to oppose the President in order to cling on to their voters.  Obviously, a suffering public is most upset at whoever makes the most money, so the easiest scapegoat are the bankers, who are going to be whipped by government officials for as long as they can take it.  On the other hand, financial services may be close to their breaking point, so a balance should be reached at some point.  The latest populist reaction has been to vote ‘nay’ at Bernanke’s re-election, which is up on January 31 and was supposed to be a foregone conclusion up until this morning.

Morgan Stanley's Roach says Obama plan is "bank bashing".  Bank bashing is becoming a favored sport for all politicians.  Hopeful that the debate becomes more balanced to recognize that certainly the banks were not solely responsible, with huge failure of regulatory policy and political oversight.  Interesting interpretation of China's very strong GDP numbers, saying it mostly comes from Chinese stimulus in the investment sector, which already accounts for 45% of GDP, is the highest of any country, and is not sustainable.  [video link: http://bit.ly/5uLmQe]

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