Markets Rise After Tax Day Tea Parties
Good Evening: Keying upon a positive earnings announcement this morning from JP Morgan, stocks were able to overcome some mixed economic data and two fairly large corporate bankruptcies to once again post solid gains. Believers that the worst is now behind us still hold sway in our capital markets, and their presence could be seen if one peeks at the internal characteristics of today’s trading. As they have so often since the March lows, advancing issues outpaced decliners by a substantial margin ( today it was 4 to 1), and volume, while still not heavy, is picking up. The bulls have come out of hiding and now easily outnumber the bears — confirmation of which has been evident in the continuing slide in the volatility index, or VIX. Against this seemingly happy backdrop for investors is the mounting frustration many others feel as they eye the mountains of debt piling up in Washington, D.C.
Stock index futures were on the defensive this morning until JP Morgan reported its first quarter results. Jamie Dimon took on all comers during the ensuing conference call, and investors celebrated by pushing stock index futures back into the green. Interestingly, JPM’s opening print of 34.01 (+ 6%) proved to be its high for the day. Jamie Dimon’s pride and joy did finish more than 2% to the good, but it could not spark anything more than grudging gains among the rest of the financial stocks. Since the financial names have been the leaders since the March 6 low point, it will be interesting to see whether they are becoming winded after the 100% sprint in the BKX over the last six weeks.
After opening 0.5% higher, the major averages settled into a fairly narrow range around the unchanged mark. The economic data released this morning was less than helpful to those who like clarity (see below). A large drop in jobless claims and a decent rise in continuing claims were interpreted to be somewhere on the positive side of inconclusive. The teeter-totter went up and down again with a Philly Fed survey that was less bad than expected, while the housing starts figures fell well short of expectations. Perhaps tempering investor enthusiasm during the first half of the trading session were Chapter 11 filings by General Growth Properties and AbitibiBowater (see below). For readers who remember the 1990-1991 period, I’m sure they’ll agree with me that no real recession is complete without prominent casualties in the commercial real estate and the paper industries.
And yet, despite these bankruptcy filings, the mixed economic data, and the desultory action in the financial stocks, the major averages refused to venture very far into red territory. Whether they were comforted by the firm technical underpinnings described above or were just operating on the theory that won’t go down must go up, market participants sent stocks soaring during the final two hours of trading. Google was quite firm ahead of its earnings release tonight, and the NASDAQ was an obvious beneficiary.
The Dow Transports (+2.9%) snuck past the NASDAQ and Russell 2000 to finish as Thursday’s leading index, while the Dow Industrials (+1.2%) hung back a bit. Treasurys were on the heavy side and yields rose between 5 and 7 bps across the coupon curve. The dollar tacked on 0.5%, while commodities were moribund. Except for the precious metals, most sectors within the CRB had rising and falling components. Gold and silver, however, were smacked in the wake of another call to have the IMF liquidate its gold holdings, this time by officials in both China and India. Both nations have an interest in seeing the IMF dump its gold; India’s jewelry industry would benefit from any drop in the price of the yellow metal, while China would like to see the proceeds flow into the global economy via loans that could help revive their sagging exports. Even though any such sales are a long shot and months away at the earliest, it wouldn’t shock me a bit if China tapped the IMF on the shoulder and said “mine” to any bullion sales. The Mandarins in the People’s Bank of China might see such a move as a good way to hedge its large holdings of U.S. debt obligations. In any event, today’s drop in the precious metals were the difference maker in the 0.25% drop in the CRB index.
In closing let me share with you an interesting experience I had while trying to mail off my tax returns over the lunch hour yesterday. As I wandered over to the downtown post office, I ran smack into Chicago’s version of the “Tax Day Tea Party”. Having its praises sung by none other than CNBC’s Rick Santelli earlier that morning, this “tea party” swelled to fill most of the Federal Plaza around the post office. This was no dull gathering of a few disaffected rabble-rousers, either. The 2000 or so I saw were young and old, male and female; and looked like they came from different backgrounds. Though some wore suits and some wore hard hats, all of them were appalled with the amount of spending going on in Washington. If you’ve ever wondered how Ross Perot garnered 20% of the vote in the presidential election of 1992, the “tax day tea party” will help you understand.
It didn’t seem to matter to them whether the money gushing forth as if the Potomac had sprung a giant leak was earmarked for stimulus programs, loan guarantees, the TARP, or the PPIC — this crowd decried them all as wasteful bailouts. None of them enjoyed the prospect of paying higher taxes down the road to pay for it all, either. When I returned to my office with cheers from the Chicago Tea Party ringing in my ears, I decided to check the internet to see whether this gathering was simply a local phenomenon or something more. As you will see if you click on the final link below, there were “tea parties” taking place yesterday in every state in the Union. Curious to find out just how many cities were involved in each state, I clicked on South Dakota and saw tea parties planned for 3 different cities in the state Tom Daschle calls home. And despite the attention crowds like this are receiving from the Fox network, the crowd I saw was clearly displeased with politicians from both major parties. The root of the frustration I saw on display yesterday was fiscal, not political.
I’ve consistently agreed with those who’ve remarked that “the prudent are bailing out the reckless”. And the money is indeed leaving some wise pockets and winding up in the hands of those who took on more risk than they could handle. Unfortunately, without the TARP and some of the earlier programs, the financial system would likely have imploded. The whole mess is causing some of these prudent folks to find ways to vent their frustration. No doubt inspired by Rick Santelli’s famous rant on CNBC earlier this year, many of them are using the internet to organize. Below is a list of some of the more humorous signs I saw being hoisted in Chicago. The most prevalent aerial display was the old yellow flag with the coiled snake on it that says, “Don’t Tread on Me”. The prudent are starting to find their voices; let’s hope they don’t become reckless.
– Jack McHugh
Signs seen at the Chicago “Tax Day Tea Party”:
“I’ve listed the federal government as a dependent on my tax return”
“If Our Treasury Secretary Doesn’t Have to Pay His Taxes, Then Why Do I Have to?”
“You can’t borrow your way out of debt”
“Jesus Saves — Obama Spends”
“Read My Lips — No New Bailouts!”
“Free Markets, Not Freeloaders”
U.S. Stocks Rise, Led by Tech Shares, as Hewlett-Packard Gains
U.S. Economy: Jobless Claims Fall, Housing Stabilizes
JPMorgan Profit Beats Estimates on Fixed-Income Revenue Surge
General Growth Files Biggest U.S. Property Bankruptcy
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April 17th, 2009 at 1:00 am
Snail mailing tax returns??? E-File is a much better way to file. I have used TurboTax which includes free Federal e-file. I only had to pay $20 to do the state e-file. Add in the $50 cost of the program and my total cost was $70, a nice savings from the $350 I used to pay the CPA!
Speaking of taxes, this is interesting. California has taken in ~$4.5 billion LESS in taxes as of April 15, 2009 compared to the same day in 2008.
http://www.sco.ca.gov/taxtracker.html
April 17th, 2009 at 2:43 am
Thanks for a very nice post Jack I do enjoy them. My sister in law visited Chicago a year or two ago for a La Leche League conference. I hope I get the chance too one day.
http://www.llli.org/
April 17th, 2009 at 4:28 am
The financial system would not have imploded without TARP. A few big banks do not a financial system make. Securities and operations can be sold. That is not the end of the world; just the end of a delusion. Further, the Lehman bankruptcy was not a mistake. Because of it , Wall Street got its head somewhat out of the sand about bank solvency. The policy mistake with Lehman was leading on the markets to believe there would be a bail-out. That caused any disorderliness in the bankruptcy process. The bail-out of AIG was another huge mistake. AIG was writing an insurance-like product, CDS’s on CDO tranches, without reserving for the losses. This procedure has a name in real-world, highly regulated insurance markets: insurance fraud. The bail-out of AIG rewarded the perpetrators by preventing the clawbacks bankruptcy proceedings would have made possible and then also rewarded the counterparties who were all self-professed professionals hedged for and/or certainly capable of hedging for counterparty risks. So counterparty malfeasance and neglect were rewarded also. But the worst mistakes were the November/December bail-outs of Citi and BAC/MER with more cash and almost $.5tn in guarantees. These actions announced a major policy change: no politically important — pardon, “systemically” important–bank would be allowed to fail under any circumstances, no matter how incompetent the management and no matter how what actions it undertook. Until November, the US still had some illusions about retaining the rule of law and accountability. These staged, Fox/CNBC publicized tea-bagger non-events are not about bail-outs. If they were, they would have occurred in October or November. Their direction is purely partisan with no policy focus whatsoever.
April 17th, 2009 at 10:30 am
Awareness is percolating to the surface, Jack. I am sure it will be a long hot summer.
Now, let me see, puts expiring, shorts chased out of the market, P/E overvalued and rising.
What happens next? Look out below.
April 17th, 2009 at 11:25 am
Finally, some evidence supporting my pet theory about forced buying from hedge funds:
http://zerohedge.blogspot.com/2009/04/open-letter-to-quant-funds.html
April 17th, 2009 at 11:51 am
d4winds,
Let me ask you a few questions:
1. Have you ever worked in an investment bank?
2. If so, for how long?
3. In what position?
I have worked for Wall Street firms, large and small for more than 30 years. Three of them — First LaSalle, Thomson McKinnon, and Drexel Burnham — went into bankruptcy. I saw firsthand what is involved in an investment banking chapter 11 proceeding when Drexel hit the wall, and I can tell you for a fact that the Lehman of 2008 was an entirely different animal.
The amount of leverage taken on by LEH and the others, as well as the complexity and interconnectedness of their holdings, was orders of magnitude larger than what sank Drexel on February 13, 1990. Without the TARP and other programs patching the system together as events were tearing it apart at the seams, we would all be facing a very dark time right now. The real risk, the one keeping politicians up on weekends back then, wasn’t just seeing a lot of people lose money. It was the risk that the bonds holding our society together would have weakened to the point of unraveling.
As the tea parties showed, this “societal risk” still has a non-zero probability of occurring, but the odds are longer now than they were in the wake of Lehman’s failure.
Jack McHugh
April 17th, 2009 at 10:43 pm
@tranchefoot: Thanks for the ZH link.
People here frequently j0ke about the PPT. If I were a gambling person I would say someone inside the market has some very smart quants that have figured out how to push the market where they want it. And it could easily be a big trader, you know one of our favorite “banks”. So at least it becomes known that Wall Street is not an “efficient” market. To everyone except the little guys watching Cramer and CNBC.
April 18th, 2009 at 6:49 am
Jack McHugh,
No, never worked at an Ibank (FYI, training is in economics, econometrics, and actuarial science with some dabbling in lower level quant fin. readings a la Duffie, Wilmott, Cont&Tankov). Everyone saw the LEH bankruptcy unfold in plain view, and, no, it was not in and of itself that big of deal. What was significant was that the Treasury did not come to the rescue after having implcitly promised to do so with Bear Stearns without having explicitly eschewed the BS policy, so private parties expecting a bail-out did not take the elementary steps necessary to protect themselves, steps that would have allowed LEH bonds to gradually approach expected recovery levels (the CDS’s on LEH bonds paid off without a hitch). As a result, e.g., the Reserve Fund lost on LEH bonds and broke the buck, setting off the money market fund panic and the CP collapse. That was the principal unintended consequence of the non-bail-out of LEH. Fed action–not TARP, not the AIG bail-out–supported the CP and money market.
For a month and a half before the LEH filing, bank credit spreads vs. Treasuries had spiked and the interbank lending market was de facto frozen in early Aug. The LEH fall did not increase those spreads. The Fed had dramatically increased banks reserves beginning early Aug. (and has continued to do so; excess reserves are now over $.8 tn) to little effect on those spreads, though the Fed funds rate fell, of course. Not until Oct./Nov., as I recall, did the Fed and other central banks collaboratively move to guarantee interbank lending. LIBOR subsequently steadily fell. Again, it was Fed/ECB/BOE action–not the TARP, not the AIG bail-out–that had impact.
In early 2009 the new orgination F&F-conforming, non-jumbo mortgage market was assisted by the Fed, leading to the current refi boom, and now the TALF extends this support to privates, legacies, and also ABS. Yet again, it has been Fed action that has helped to unfreeze credit markets, not the TARP, not the AIG bail-out and not the banks.
As previously noted parenthetically, the commercial banking system is now sitting on $.8tn in excess reserves. Yes, the commercial banks can appear to be lending; but, compared to their all-time high capacity, they are not– despite an era of high credit spreads and a steeply increasing yield curve. I see little cure to this credit crisis coming from support of insolvent Ibanks via TARP and the AIG counterparty bail-out. It has been the Fed that has alleviated the credit crunch, not the TARP, not the AIG bail-out.
Both of those programs are simply welfare payments. But they themselves do directly destroy the social bonds, since they maintain intact and without material modification a set of institutions of proved, incomparable economic destructiveness and since they completely undermine the rule of law (Chapter 11/FDIC receivership for the Indymac holding company/commercial bank; $45 bn in TARP and $.3tn in guarantees for Citi with more to come) and the notion of accountability.