FRANK BEING SENSIBLE
By Charles Payne, CEO & Principal Analyst
5/25/2010 2:13:45 PM Eastern Time
In the midst of a classic freefall an unlikely hero stepped forward. Representative Barney Frank uttered statements on the final financial regulatory reform bill that seems to put intelligence ahead of ideology. Of course, it's a long way from where true reform should be, but at this stage of the game, there are only a few options that would make the bill more palatable for society at large. If the goal is to wreck banks completely it belies the rationale used to push through the TARP bailout. The notion to make banks spin off units trading derivatives means issues of capital requirements and strains on liquidity. If these are weapons of mass destruction, does it make sense to deposit them in a bunch of smaller entities with no other sources of revenue and capital? Or, should they remain with larger entities that might be able to weather a severe hiccup? Then there are the legitimate hedging usages that promote the kind of risk-taking needed to move the economy.
Barney Frank may be seeing the light as he now thinks that making banks spin off units that trade derivatives "goes too far." I only wish he had gone a little further and nipped the so-called "Volker Rule" in the bud. Instead, it looks like some kind of grand compromise, the kind of deal that angers the Left and the Right. (Does anyone think Representative Frank would touch the favorite idea from the White House and economic legend? Yes, sure, I was hoping but wouldn't bet money on it occurring.) I think the only reason the derivates stuff is on the bill was to aid Blanche Lincoln in her tough reelection campaign, and as soon as the runoff vote is finished June 8, it will be junked. There has to be some fiscally responsible Democrats on Capitol Hill. There has to be some politicians watching the market and how the wheels have come off as this bill approaches law. There has to be some out there that must wonder why so much taxpayer money was used to save banks that are now being pushed back on the cusp of extinction.
Even if the word "extinction" feels hyperbolic, there is no doubt less capital would be available for Main Street, and that's the message Congress and the White House fail to understand or get, or simply just don't care about. The bill is expected to be signed into law between now and July 4, which means a dark cloud overhead for a long time. Yet, of all the things pressuring the market, it's unlikely others will be resolved this quickly. We had former UN Ambassador John Bolten on Varney & Co. this morning and he downplayed North Korea, but this time it's different. Sure, we've seen this movie and heard all the lines, but this time there is a sunken ship and more than 40 dead South Koreans. What is South Korea to do? If the answer is more isolation, then Kim Jong Il beat you to the punch as he cut off economic ties with the southern portion of the peninsula this morning.
It is time to move away from appeasement of North Korea and take a much firmer stance.
By the way, has another person told the governments in the United States and Europe that trying to eliminate too-big-fail is important? St. Louis Fed President James Bullard says he's "not particularly worried the global economic recovery will be undone because guarantees are in place to "guarantee" major financial institutions that are too-big-too fail." He is more concerned with inflation than deflation, which is a way of saying policies will be so successful that excessive enthusiasm could be a byproduct.
Enthusiasm
On the topic of enthusiasm, the latest reading on consumer confidence via the Conference Board was a major, positive surprise. The headline confidence reading came in at 63.3 versus the consensus of 59.0. As great as the report was vis-a-vis expectations, and the current trend, it's still worrisome from historic comparisons. Note: the reading is still in recession territory!
In the last recession, the low reading was 84.9 in November 2001 (the official end of the recession, which in my mind was called six months to a year too early). Today's headline news matches the dip in confidence as America entered the Gulf War, where the reading slipped to 61.4. Overall confidence is up three months in a row, and gaining momentum, but there are glaring issues. Expectations leaped to 85.3 from 77.4 (revised from 77.6), reflecting a sense things are going to get substantially better in the next six months. On the other hand, present conditions continue to limp along even as the reading crept to a 12-month high. People are mired in doubt about what's happening in the here and now.
Case-Schiller
The 20-city index was mixed again, but on balance disappointing. The 2.3% year over year increase was the best 12-month gain since October 2006, but only seven cities saw home prices increase. In fact, home prices are down two months in a row even as Los Angeles, Phoenix, and Las Vegas appear to have finally hit a bottom.
Remainder of the Session
Right now, it looks like a bottom has been put in for the session, but the last hour of trading has been a crap shoot...and it's usually snake eyes.
I think the market is oversold, and judging from some of the emails I've gotten, I know it's about time to load up. People that are panicking now have unrealistic expectations about investing in stocks. Selling stocks simply because they are lower is for day traders and people that haven't read an income statement or balance sheet. Of course, I understand the fear. After the last 20 years people have been burned, and there are times to take losses, but it's not predicated on being part of the thundering herd but has to be determined on a stock by stock basis. Overall, the question is will the market be higher or lower one month, three months, and six months from now. The legitimate response could be lower for all time periods, but I don't think so. I hope expectations come down as a result of this selloff. The economy will not be robust, although estimates were already absurdly low.
On a closing basis, 9,900 is a very important support point for the market, while the intraday low of 9,774 is now key support.