For the week, I underestimated the negative impact of two appearances by the auto executives in front of Congress. This has cast a pall over the markets analogous to the October appearances by Bernanke and Paulson as they lobbied for the TARP program.
When we have this high profile media appearances, it forces the market to focus on the bad things that are happening in the economy. While I did warn that this was the last/next shoe to drop on the stock market, I underestimated (how could I!) how poorly the executives would be handled by Congress. I'm sure they are wondering whether they will get their cash as they head back to Detroit on their private jets.
It looks like the Dow is set to return to the 2002 lows (7,183) and a 50% retracement from the highs of last year takes you to around 7,200. As a percentage of my portfolio, cash keeps rising automatically! (This is not a good thing...) There are a few positives happening like the European bond issuance going up, US commercial paper market issuance going up, and the price of gasoline rapidly dropping.
However, there is a void in government leadership in the United States. As we know, Congress doesn't fill it very well and outgoing Bush administration is hamstrung by a new incoming administration. How dangerous it has become for the President-elect to take his time naming his key economic staff while the stock market/economy burns? Watching all the financial stocks and insurance companies melt down yesterday tells me the systemic risk is far from over.
- With Auto Bailout Stalled, Congress Seeks New Plan
The FOMC minutes back this up and raises the specter of deflation. The big fear for Xmas sales is that consumers believe they can continue to wait for sales to get lower prices. Lastly, asset sales by financial institutions may continue. Why? The de-leveraging of hedge funds may not have run its course if managers decide it's better to shut down the fund, sell the remaining assets, and start up a new fund with better payout metrics. This further deflates asset prices.
On the panel discussion at IIT last night, Rich Lindsey from the Callcott Group reminded the audience that finance and markets are built on faith. Without it, they can't operate. Right now, faith is lacking and fear remains the religion. It's time for out new leader to materialize some of that hope and change he so readily discussed during the campaign. I expect a Rubinesque appearance by top US officials on the steps of the US Treasury soon.