Wall Street: Obama, Bush Need to Take Action Now
Despite their deep political and philosophical differences, Barack Obama and George W. Bush are being counted on by Wall Street to work together in the next two months to tackle the financial crisis.
The market greeted with enthusiasm big government moves like the Citigroup bailout and President-elect Obama's plans for economic stimulus and the formation of his economic team.
But if these major steps continue to be one-off events with no follow-through until the next calamity hits, they'll continue to have little lasting effects on the markets, investment professionals say.
"It can't just be a little bit here and a little there," says Quincy Krosby, chief investment strategist at The Hartford. "It's obvious that this meltdown is demanding something massive and something transformational. There's a sense that Washington right now is worn out, that it doesn't have the stamina to deal with the problem. We can't wait until late January. You need the energy, you need the discipline, you need the desire to help staunch the deterioration."
So while the market cheered the Citi rescueand mostly approved of Obama's introduction of his economic team, there's a threat that the good feelings will go away as soon as the next round of bad news hits Wall Street.
The burden to make sure that doesn't happen lies both on Obama, who has faced some criticism for seeming to be reticent at unveiling his economic plan, and Bush, whose administration too has been hit for lacking a clear policy on how to handle the financial crisis.
"This is about the economy. The stock market provides an instantaneous referendum on economic activity," Krosby says. "For the sake of the economy, you cannot have an interregnum, as attractive as that might be for a president-elect who's been campaigning for two years. You have to have the energy poured into this."
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Since winning the election three weeks ago Obama has been careful to steer clear from stepping on President Bush's toes.
Yet with an economy staggering into a recession and the nation's largest banks in peril, Wall Street pros have been looking for clarity about the incoming administration's policies when Obama takes over Jan. 20. Obama's news conference Monday was being looked at as key to providing some of that direction, but the major averages shaved off about one-third of the gains they achieved prior to the president-elect's remarks.
Getting Confidence Back
After the news conference, Wall Street began parsing Obama's words to see what to expect, with an eye towards how seamless the transition will be between the political rivals.
The immediate reaction from the trading floor was mixed: Traders were pleased to get certainty on who will lead the next administration's economic policies, but were less enthused about wavering over when the next stimulus package will be enacted and how much it will be.
During the campaign, Obama indicated the stimulus would be about $150 billion; Sen. Charles Schumer (D-N.Y.) recently suggested the number would hit $750 billion, and there were even some rumblings that the number could hit $1 trillion.
"I think the transition is going to be smooth," says Dave Rovelli, managing director of US equity trading for Canaccord Adams. "What I'm interested to see is if they are enacting a stimulus package, why are they waiting until the 20th (of January)? I don't think Bush wants to do it. I just don't understand. We all know the economy is in dire straits. Why are they going to wait until Obama gets in?
One part of Monday's message investors seemed to like was when Obama stressed that he has been in daily contact with current administration officials such as Treasury Secretary Henry Paulson and designated successor Timothy Geithner.
"I don't think you're ever going to see Obama and Bush cuddling up to the other," says Diane de Vries Ashley, managing partner of Zenith Capital Partners in Coral Gables, Fla. "But everything I have read has led me to believe that this has so far been the closest, almost most intimate power transition between two utterly different administrations."
The general market expectation is for some short-term bounce in stocks, with the future heading into the Obama administration clouded by the various problems facing the markets, primarily from the financial and housing sectors.
But analysts are also paying close attention to Treasury yields, particularly in short-dated notes that are more sensitive to economic vagaries such as the turmoil with Citigroup and the other major Wall Street institutions.
Yields on one- and three-month t-bills remained near historic lows even as stocks rose in Monday trading, suggesting an underlying pessimism about the economy.
"If you look at credit markets, look at yields, they're reflecting a downturn that mirrors the Great Depression if not worse," Krosby says.
Indeed, it seems to be the short term that concerns investors the most right now, with sentiment suggesting that over the long haul the markets will recover.
"We're more comfortable with this market two years from now than two months from now," Krosby adds. "We have confidence we're going to get through this and that the valuations are very compelling. What we're going through now is this massive deleveraging. It's not a drizzle anymore, it's a hurricane, a daily hurricane through the markets."
In this climate, investors are expected to protect principle but not get locked into long-term investments that will prevent them from capitalizing when the market moves higher.
Rebuilding confidence, though, is a process that will take time and clear signs that the government won't need to take such aggressive steps to prevent market blowouts.
"In a word, it's huge," de Vries Ashley says of the Citi bailout. "I'm a little less convinced about the stimulus package. Quite honestly I am much more thrilled about the idea of putting floors under something like a Citigroup. I think that is a very, very substantial and important move on the part of the government."
But, she adds, "I think we would all be a little happier without the whack-a-mole approach."
There is, rather, a desire to see that Obama has a clear plan that he will implement immediately upon assuming the presidency in January.
"That is absolutely imperative," says Michael Kresh, of M.D. Kresh Financial Services in Islandia, N.Y. "Obama is going to be putting a plan into place that he wants to see approved the day after he takes office. That stimulus plan is going to be worked on between now and then. That's going to be very helpful."
"Clearly we want to see Paulson work with Geithner and see everyone work together and not go to the point where we have this 60-day period where nothing is going to happen--because that will petrify the market."