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Thursday, February 22, 2024

Testy Tuesday – Can We Handle The Truth?

Last night Obama warned: "This is not your ordinary run of the mill recession."

Apparently Obama feels we CAN handle the truth – this has not been tried by a US president since Carter told us we should learn to conserve energy and wear sweaters indoors – that did not go well for him…   "The plan is not perfect. No plan is. I can't tell you for sure that everything in this plan will work exactly as we hope, but I can tell you with complete confidence that a failure to act will only deepen this crisis as well as the pain felt by millions of Americans," he said.

Ouch!  This is no "Shining City Upon A Hill, Thousand Points of Light" kind of rhetoric.  Obama's first major address of his Presidency was very much like a cardiologist telling you why you had a heart attack and laying out a very difficult recovery program.  No promises of bouncing out of bed and doing back flips next week from Obama who said "the problems are accelerating instead of getting better."  But he also said "I'm absolutely confident that we can solve this problem BUT it's going to require US to take some significant, important steps." 

Step #1 is, of course, the passage of the economic reinvestment plan, which the Senate voted a filibuster-proof 61-38 to cut off debate and vote on the package today.  Specter, Snow and Collins jumped ship and voted with the Dems after 7 days of delays.  I warned members yesterday that all this does is let the Senate vote the package through but, since it’s different from the House bill, they now have to move into a joint committee that will have to go back to both Houses for approval again.  To the extent that people don’t understand this process, there could be some disappointment as we’re still a week away from a bill that Obama can sign, even if all goes well.  That is what held us bearish throughout yesterday's choppy trading.

Asia was mixed this morning with the deceleration of the Shanghai continuing as they go from a 2.5% gain yesterday to a 1.35% gain today.  Close enough to the 5% rule for us to expect a reversal, just as we did when the Nikkei acted similarly.  The Nikkei was fairly flat holding just over the 7,900 line I predicted would be tested in yesterday's post.  The Hang Seng gained about a point and is also running out of gas just under 14,000.  China's January PPI fell, making it more likely the government would be able to further ease monetary policy so we are still in stimulation mode over there but, of course, all eyes are on the US, waiting to see what programs are rolled out by our Treasury today.

Europe is down about a point in morning trading (8am).  UBS reported a $7.5Bn loss for Q4, which sounds a lot worse when you say 20Bn Swiss Francs lost in 2008, especially to people who keep their money in Swiss accounts to be "safe."  Still this loss was not unexpected and the bank is cutting 2,000 jobs so investors are buying at what they hope is a bottom for the bank as the Swiss National Bank prepares to take over $39Bn worth of the bank's "toxic assets."  The Euro took a dive this morning as Russia seeks to "reschedule" $400Bn worth of loan repayments.  On top of this worrisome news, Axel Weber, the biggest hawk in the ECB said "Central Banks shouldn't worry about the longer-term impact of loose monetary policy at a time when aggressive cuts are needed to counter the economic downturn."  OK, now I AM worried!  Of course we were prepared for this.  As I just said to members yesterday: "I think the people selling off gold today are nuts."

Speaking of nuts – $2Tn is the price-tag on Geithner's proposal, as estimated by the WSJ.  We don't have the whole story yet but it seems that banks will have to pass a "stress test" to prove that they are healthy enough to lend money before recieving Federal assistance.  That means we need to place our bets on banks very carefully because a rejection by the Fed can doom a bank to failure now, possibly betting individual banks short while going long on the sector as a hedge will be an interesting play.  The administration is discussing spending between $100 billion and $200 billion investing new funds in banks, up to $100 billion to expand the Federal Reserve facility and $50 billion to help homeowners. The Treasury wants to keep some money available "in case of emergencies," as if this isn't one…

President Obama said last night: "We don't know whether we need additional money or how much we need, until we see how successful we are in restoring confidence."  Obama avoided discussing Geithner's proposal and it seemed to me that he was playing the role of "bad cop" and Geithner is supposed to come out today and be the "good cop" raising back the expectations that Obama knocked down last night.  This is a good plan market-wise as we will get more positive momentum if they time it right but not good if Geither's plan is seen as weak or not going far enough to save the Financials. 

Efforts to date to boost the financial sector have been "inadequate," and now the government needs to focus on ways to help make banks' balance sheets stronger, Geithner is prepared to say in a speech later Tuesday.  "We're going to require banking institutions to go through a carefully designed comprehensive stress test, to use the medical term," Mr. Geithner will say, according to excerpts of his speech. "We want their balance sheets cleaner, and stronger. And we are going to help this process by providing a new program of capital support for those institutions which need it."

We held our levels yesterday and we'll be watching the same ones today.  Let's not forget the idea of a stress test is to get an accurate measurement of the health of the patiend.  That is what investors are waiting for – putting a real number, for good or bad, on all those toxic assets that are jamming up the financial system and today is the testiest Tuesday of all – hopefully we can pass it.



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