Wall Street’s Week of Uncertainty and Exhaustion
This is what a bottoming process in the stock market looks like. Unfathomable twists, where a market that had given up 14% of its value in four days can rebound in the span of an hour on the barest thread of clarity related to the incoming presidential administration.
By and large, those in this industry still gainfully employed are exhausted. They’ve watched the invention of a series of lending programs to restore normalcy in the financial system and seen much of it bang into the brick wall of uncertainty that drives investor thinking.
The pessimism in the equity market can be forgiven — it’s a snapshot of investors’ best guess as to what the cash flow and earnings power of a company will be at some point in the future. But the eruption in credit markets, such as the secured loan markets and commercial mortgage-backed markets, carries to a dire conclusion: when entities once well-regarded are being questioned as to their ability to pay their debts, nothing can be trusted. And this manifests in the acceptance, or rather, enthusiastic embrace of getting paid a measly 0.02% to buy a government security for three months, or get back a whole dollar for $100 spent on a two-year Treasury security.
Because when the collective leadership of corporate America and Washington, D.C. seems rudderless, there’s an aversion to any asset that does not automatically guarantee the return of one’s capital. And as Treasury Secretary Hank Paulson again took the time out to assure everyone that all was being done and give kudos for all that had been done, and as Deputy Secretary Neel Kashkari proclaimed markets stabilized, the markets continued to hemorrhage, as Citigroup lostmore than half of its value (which had already contracted drastically) in four days.
But with all things, life goes on. And while New York Federal Reserve head Tim Geithner is not King Midas, the news of a transition to something other than indifference provided a jolt that took all major averages higher, even pushing the banking stocks into positive territory at the end of Friday’s trade. This is not the end of the selling, not yet, but the market at least climbed back above the 1997-era lows reached Thursday in the Standard & Poor’s 500-stock index. And some of the “Depression-lite” discussions may recede next week.
“Stock prices are saying, ‘We are sinking, and all we can see is a downslope or uncertainty — there is no sign of the turn in the economy,’” says David Kotok, chief investment advisor at Cumberland Advisors in Vineland, N.J. “Markets bottom at the very time when all you can see economically is either sinking or uncertainty.”
To be sure, certain options are nearly depleted. The federal-funds rate is at 1%, and the Federal Reserve’s reserves are mostly in securities other than Treasurys these days. The Treasury’s Garbage Barge has been set adrift, and the CEOs of the three largest U.S. automakers retreated to their private jets without the bailout they wanted. Rumors of a reinstatement of the short-selling ban abound, as if it was the federal government’s job to make large corporations feel better about their share price.
The difficulties cannot be washed away with an exuberant hour of action. But they are at least a sign that some believe value exists in the equity market. Many will remain cautious as the problems bedeviling banks continue and investors try to offset short-term risk aversion with longer-term expectations.
At least next week brings one day when the market will not trade; many will give thanks to that much.
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