Bernanke bounce or an Obama tumble?
That was the question on the minds of traders about markets Wednesday, another day in which Fed Chairman Ben Bernanke testifies before a Congressional committee and after President Obama's Tuesday night speech on the state of the nation.
Bernanke Tuesday managed to soothe a market that had been displaying little faith in the government's handling of the financial crisis. He dashed speculation about the nationalization of banks and started to build support for the Treasury's financial stability plan. In testimony before the Senate Banking Committee, he said nationalizing banks would "destroy the franchise value or create high legal uncertainty." He also said if the government holds common stock in banks, it would be along side private shareholders.
Stocks jumped as Bernanke spoke, with the S&P financial sector surging nearly 12 percent. The Dow rose 3.3 percent, or 236 points, to 7350. The S&P rose 29, or 4 percent to 773. This comes in a week in which stocks fell through 11-year lows on fears major banks would be nationalized and that the government does not have a well formed plan to handle the banking crisis. This fear has been rampant in markets since Treasury Secretary Tim Geithner unveiled his financial bailout plan, which lacked the detail to give markets confidence.
Some traders were ready to call the start of a short-term rally Tuesday, but others were more concerned that the Bernanke bounce would be short-lived. "He's a savior for this minute," said one trader.
"What was new I think today was we had a man in power giving us clarity and telling us what is going to happen next," said Tony Crescenzi, chief bond market strategist at Miller Tabak. "We have been missing that, devoid of it. You could say with the Treasury Department and even the Obama Administration (are) not giving us clarity about what's next, and Bernanke put his weight behind a critical element within (Treasury Secretary Timothy) Geithner's plan which is the plan to provide a public private investment fund. It cannot be accomplished without the Fed's balance sheet."
The Dow has fallen more than 2,000 points since Election Day, and traders said they were watching for details in the President's Tuesday night speech that would give the market some confidence. "The President needs to make sure the perception is the government is going to do everything it can do to address the problems. People are very leery of Wall Street and they're very leery of Washington," said Peter Costa of Empire Executions. Talk of new taxes would also make the markets nervous.
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In early excerpts released by the White House, it was clear the President's speech would be cautious on economic recovery, telling Americans it would take sacrifice and time for the economy to turn around. But he also clearly was aiming to strike an optimistic balance. He promoted the stimulus program and talked about America's ability to rebound. "Now is the time to jump-start job creation, re-start lending and invest in areas like energy, health care and education that will grow our economy, even as we make hard choices to bring our deficit down," the President said.
On Wednesday, Bernanke testifies at 10 a.m. before the House Financial Services Committee. He will repeat remarks made before the Senate panel and then answer questions for several hours.
Also on Wednesday, there could be news of a new effort to shore up Citigroup , with a plan that would give the government an even bigger stake in Citi. Bernanke had this to say about the ownership of banks: "We don't need majority ownership to work with the banks - we have very strong supervisory oversight we can work with them now to get them to do whatever is necessary to become profitable again. We don't have to take them over to do that."
Bernanke also talked about the stress tests that would be conducted on 19 major banks.
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"He doesn't think any banks will need any intervention after the the stress test and that we will have clarity on these institutions for out to two years, either because we'll see in the stress test that they can make it through the two years or that they'll get the capital they'll need to do that. We can feel a little bit better about these institutions, relying in part on the good will of Bernanke and what he knows on banks," said Crescenzi on "Closing Bell."
Robert Harrington, head of the equities block desk at UBS, said Bernanke has been gaining credibility because of the Fed's programs. "I think some of the things he's done have actually worked. Rates have come in. The commercial paper program worked. He has credibility," he said.
"We'll have a lot of fits and starts an this thing is going to take some time. We've had a barrage of negativity in the last couple of weeks since Geithner. This is the first positive, first non-negative branch we had extended to us," said Harrington.
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One of the biggest hurdles for regulators trying to fix the banking system is to get toxic assets moving from bank balance sheets. Harrington said it was helpful that Bernanke gave a little more information on the private-public partnership raised by Geithner. "If they can survive the stress test, they have some value," he said of the banks.
Crescenzi said that the Fed's TALF program for consumer debt could be a model for clearing the other toxic debt from banks' books. "For every billion dollars you buy, the government puts in $900 million as a way of assuring investors that you'll be safe. I think that's a model to get this stuff off the books of banks," he suggested.
"We still need, at the end of the day, for the Treasury to put forward a plan so the Fed can use its balance sheet in a way to remove those assets for the books of the banks," Crescenzi said.
The markets will also watch for housing data. Existing home sales for January are reported at 10 a.m. There are a few early morning earnings, including CMS Energy, J.M. Smuckers, Liberty Media, TJX, Washington Post, and Martha Stewart Omnimedia. Express Scripts and Limited Brands report after the bell.
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