Dead Cat Bounce or a Hint of Bull?

The equity markets some times experience good days even in the worst of bear times.  These up days are frequently just the dread dead cat bounce.  This label comes from the saying that even a dead cat bounces if you throw it.  You’re going to hear two things from me today; probably in two different posts.  The first is just a line by line look at the Obama and McCain approaches to the economic panic.  The second is the Paulson announcement to make $250 billion available to banks to help them recapitalize.  I’m watching some of the interbank lending markets unfreeze, so it might be more than a dead cat bounce.  There might be a hint of the bottom which would be something to celebrate.

I was trying to read this last night as well as a some literature on the Bank Capital Channel of Monetary Policy (something only an economist could love but is important in terms of looking at the possible outcomes for this move).  I unfortunately chose to do it at my local bar and became the immediate target of the shriek of the Obamatrons and all the usual stuff:  “racism, Palin is a c*nt, it’s okay for us to call her that because McCain called his wife that, no Obama NEVER said women get third trimester abortions because they’re blue, do you get all your information from fox news? racism, racism, racism.” I’m beginning to wonder if they hand out an instruction card with the koolaid on how to insult the unindoctrinated? 

Sigh, so I’m working on this for your this morning instead.  You’ll have to give me a wide berth as I try to do this in the peace and quiet of my house over coffee instead of red wine.  Oh, also, just so you know I am now Miss Perfect and Miss Know it all.  It felt like high school ALL over again.  I think they were trying to ensure that the other two ex-Hillary supporters who were resigned to voting for the “ONE” would not leave the fold with anything as meaningless as facts and the truth.  There was also a Republican and a Ron Paul supporter in the room to make things nice and interesting.  For some reason, I got the brunt of the abuse. I can’t tell you how many times I was told to just get over Hillary.

So, any way, here goes the girl with the glasses again.  While the market chews on the Paulson plan, I’ll start with my take on the McCain and Obama crisis plans in this post.

Obama’s plan seems centered on unemployment.  This is a bit odd because the problem at the moment is not unemployment for most of the country.  The only thing I can figure is this, combined with his plan to double the government’s loan guarantees for automakers, is a pander for votes in places like Michigan.  Since the rust belt is important to winning the election, and the rust belt is the only place where unemployment is above normal at the moment, I have to cynically say this has nothing to do with financial crisis but everything to do with the electoral college.

I think giving employers a $3,000 tax credit for each new hire to encourage job creation is a good economic policy.  At the moment, however it is not necessary and expensive.  Until it looks like unemployment in the country as a whole is going to be a problem, I’m sticking with my view that this is just a pander to folks in important swing states in a not so subtle disguise.

His second idea is just plain awful and would create incredible long term problems.  This is the idea that you should allow Americans of all ages to borrow/withdraw from retirementsavings without a tax penalty.  One of our biggest problem right now (long and short) is that folks are NOT saving enough for retirement. Pulling anything out right now ensures those folks will be worse off in the future.  Also, withdrawing funds from these accounts at the bottom of the market is like stealing future life style from people.  People that do not need to do this will be encouraged to do so and it will make their lives worse in the long run.  This is a stinker and I hope folks don’t follow through with it.  If you’re thinking about doing this, please, please don’t.

I’m more hopeful about Obama’s suggestion of creating a mechanism to lend monies to cities and states with fiscal problems if this is done in a reasonable, thoughtful way.  We’d need to see that current Treasury work in the markets is helping the municipal bond function and we need to be careful about exactly how the funds will be used.  I’m afraid this could be turned into an expensive giveaway to interests rather than a real problem solver.  For this suggestion, the devil will be in the details.  This is my same take on his proposal to allow struggling small businesses to apply for loans from the SBA’s disaster funds to the tune of $5 billion.  This sounds good on the surface and could help getting much need operating loans to some of the hardest hit players.  I’d like to see the exact nature of the terms, however.  You need to know what the terms of borrowing are and what kind of things the funds can be used for.  Also, is this for existing businesses or new start-ups?  The new-start ups would be highly risky propositions and subject to fraud.

Obama rehashed the Hillary suggestion of a 90-day moratorium on most home foreclosures.  This would be geared to folks that are trying to make payments or partial payments.  This is a good start, but again, it has to be followed by some kind of way to renegotiate the foreclosures or it’s basically just a few months grace.  Some details are needed on what to do with the frozen mortgages.  My hope is those details may be forthcoming, but I’m not holding my breath.

All of the Obama suggestions are very costly and there are no funding suggestions.  At one time he was talking about windfall profits on oil companies but given the state of the economy now, I doubt there’s going to be any windfall profts on which to draw.  The gas around here is running less than $3.00 a gallon.  I can’t help but think the record level profits of the oil companies are not going to be around the next few quarters.  Oil futures are about $80 a barrel right now, so my guess is no windfall profits to tax.  So, another dimension of all Obama’s points is where is he getting the money?  I always liked Hillary’s plans because they came with funding sources so they were grounded in realism and not promises.

The McCain Plan was introduced today with the Hillary suggestion of the Treasury Departmentbuying troubled mortgages at face value and giving qualified homeowners instead government-guaranteed, low interest mortgages.  I’m already on the record supporting this in earlier posts since I firmly believe the short term solution is to bottom house prices.  The mortgages would be based on the residences’ reduced value.  We need to focus here on the details of ‘qualified’ homeowners because it does not need to be done with speculators or vacation properties.  McCain has said there would be two possible funds for the valuation differences so I’m not clear which one he’s going for or if it’s giong to be some combination of both.  Basically, either the taxpayer or the lenders would pay the difference.

Several other of his proposals are pretty typical of Republican approaches which focus on tax reduction.  They are targeted tax reductions which is something I’m particularly big on.  This is different than just throwing money at the entire market and hoping some of it trickles down and sidewise.  McCain’s first proposal focuses on seniors (an important voting group) and allows them to withdraw from the IRAs or 401k’s in 2009 and 2010 while reducing their taxes to a flat 10 percent.  Since this only applies to those over 59, there are no penalties so it’s different than the Obama plan.  This is okay, since these folks ARE retired and a worktime of compounding is not something they will need in the future.  This plan would cost about $36 billion and I’m assuming it will be financed with deficit spending because there are no specified funding sources.  This would giving a few years of buying power which would be stimulatory to the economy.  It also protects seniors from any unknown problems.  It’s probably partially motivated to get seniors into the McCain camp but it would impact the country as a whole.

There are three other tax measures put forth by McCain.  The first is a 50 % reduction in the capital gains tax on stock profits.  It is currently 15% to 7.5% for a period of two years.  This plan has a price tag of about $10 billion.  If any one is getting many capital gains right now, I’d sure like to meet them.  This probably only benefits the Warren Buffet type and is a nod to Republican business interests.  The more interesting plan is the accelerated tax write off for stock losses.  Americans will be able to deduct $15,000 in losses for the tax years 2008 and 2009.  This is a change from the current $3,000 losses.  He would also suspend taxes on unemployment insurance benefits for both 2008 and 2009.  These targeted proposals may actually help the little guy who is panicking right now and pulling whatever money he has out of stocks.  It would definitely help any one that does become unemployed also.  I’m not sure how big the effect of these would be, but they are not bad ideas.

So, you can chomp on this while I go work out on the details of the Paulson announcement and watch what appears to be a stablizing stock market.  I’ll also go check for bulls, bears, and any bouncing dead cats.  Also, some earnings reports are coming out today, so that should provide some good information to the market.