Market Rallies as K Street WinsPosted: July 30, 2009
I never really thought that we would see a truly “progressive” agenda coming out of the Washington, D.C. this year, but with such huge democratic majorities, I did have some thought we might get something done for the people for a change. Remember, those campaign promises last year did seem pretty liberal even though most of us here on TC doubted we’d see even half of them come to fruition. Now it’s looking apparent that what’s coming out is more corporate loot fest than progress for the people. Is that why we have a market rally in what still appears to be a very poor economy?
There’s an interesting hypothesis floating around The Hill today that Wall Street may have bought into the hope and change agenda and is now rallying because it appears to now be all hype and no change. I’m not sure if I’d consider this a good hypothesis as a financial economist, but as some one more firmly planted on the behavioral finance side of things than the rational markets gang, I’m willing to give the idea an airing.
The Democratic agenda in Washington has gone off the rails just as markets are enjoying their best run of the Obama presidency, and there’s a school of thought on Wall Street that it’s no coincidence.
While a string of better-than-expected earnings reports from U.S. companies has been credited for the upswing, analysts such as Axel Merk, the portfolio manger of Merk Investments, said the stalled agenda in Congress has also helped the Dow Jones Industrial Average spike above 9,000.
So what items on the liberal Wall-Street-Hating-agenda did they fear? Well, first and foremost on the list was legislation on executive compensation. I doubt the populist outrage against the bonus class has gone any where, but now that we have a Pay Czar to oversee the problem, nothing has happened. Yesterday, I talked about the Citibank Energy Trader, Andrew Hall waiting in the wings for his $100 million bonus for driving up our energy prices last year while Citibank itself has taken $45 million in TARP funds and remains on a some kind of double secret probation with its regulators. All this while that market’s regulator is investigating issues with the traders. The Hall bonus has floated around the MSM and the news programs while CNBC, the Wall Street equivalent to the Hornet’s Honeybees here in New Orleans, continues to champion big pay for risk taking and innovation. I guess adding a little liquidity to the market was worth the worst financial crisis since The Great Depression in their eyes.
Let’s just forget that THAT risk taking likely contributed to the increased chance of home foreclosures and likely worsened the financial crisis. Let me ask you if you think driving up prices on an economically required commodity should be rewarded like that? I guess the general feeling on the street is that since we’re seeing our 401ks improve, we’re less likely now to storm the castle. I’m actually getting to the point now I think it’s possible that Goldman Sachs is buying and selling stuff within its own subsidiaries (the looted, dirt cheap AIG assets) just enough to make that happen.
There’s so much concentration in that market at the moment, I actually am beginning to think it’s possible for them to move a few of portfolios around enough to kick in some automated trading programs and stage a mini rally. If you look at market volume and participation at the moment, it’s mostly big institutional players. There’s a lot of money still on the side tables trying to figure out wtf is going on.
The other agendas opposed by corporations are of course, the health care plan, which is still on the table but appears substantially weakened and full of things to incent drug companies, insurance companies, and the AMA to let it go through. Then there’s that highly watered down credit card legislation we got. Don’t forget the climate change bill has stalled too and any idea of direct carbon taxes was stripped out months ago.
Brian Gardner, an analyst with Keefe, Bruyette & Woods, explains that when markets cratered in March, investors worried the Obama administration would nationalize the country’s banks, impose punitive rules on credit card issuers and allow judges to lower the principal and interest payments on mortgages. They saw ever-widening deficits and buckets of debt set to increase with massive healthcare legislation.
Since then, the bankruptcy bill has fizzled and nationalization talk has died out. President Barack Obama did sign a credit card bill into law, but its provisions were much weaker than the industry feared.
How’s this one data point as anecdotal evidence? It’s from yesterday’s market wrap up from Forbes on line.
Shares of U.S. health insurers rose broadly on Tuesday on hopes a health reform bill would not include a government-run option, which has drawn strong opposition from insurers who fear it would destroy the private marketplace.
The S&P Managed Health Care index of large U.S. health insurers closed 6.5 percent higher.
Aetna rose 12.6 percent, Coventry was up 12.7 percent and Cigna was 7.7 percent higher, all on the New York Stock Exchange. Centene rose 7.9 percent.
Of course, the Republicans are pitching this all as the death of socialism as we know it which is really untrue. I don’t know how many times I have to continually explain to these knuckle-draggers that socialism is not equivalent to providing regulations to prevent monopoly and oligopoly behaviors. Socialism is public ownership of most assets. Health insurance is NOT an asset, it’s a third party payer industry. Free markets depend on low information asymmetry, lack of moral hazard, a large enough number of players that no one can manipulate the price, dispersed market concentration, and basically rules and transparency known to all and respected by all. The entire raison-de-etre of K Street is to rent seek to get their clients increased market share and power. When market power and share are concentrated, what we have is the antithesis to free market capitalism.
So, again, I have to assert that there is Democratic control over the law making process right now. Why are we seeing a rally based on celebration of continued cheating? There’s still plenty of time to storm the castle, kids!