Wednesday, January 20, 2010
I'm about to take off from Puerto Rico to Newark, so will be out of touch until mid-afternoon. I am, however, interested in the early market reactions to yesterday's Brown-in up in the Bay State and the other news.
Will health care stocks, or some subset of them, be up today, or was the Brown victory already baked in to their prices? The Street says that they will be, but I'm not so sure. Device stocks have lagged the market for more than a year, so they certainly have some room to run if the risk of excise tax goes away, but they've had a nice run recently, probably because health care "reform" looks in trouble. Buy rumor, sell fact? My prediction: Device and drug stocks will be up this morning, down this afternoon, but up over the next few months if the current legislation is well and truly dead.
The dollar is surging against the Euro. Any traders out there want to tell us why? If Brown is responsible for today's 1% rise, he has added literally hundreds of billions of wealth to the American economy overnight! But I'll go with the more plausible non-partisan explanation: Markets (and businesses) much prefer legislative gridlock to regulatory uncertainty, and we just got more of the former and less of the latter here in the USA. Cramer:
Cramer says regardless of whether a Republican or a Democrat sits in the White House, the markets like nothing better than gridlock, which stalls legislative reforms that might be bad for stocks. The Republican victory for the Massachusetts Senate seat vacated by the late Senator Edward Kennedy has wrecked the Democrats' majority in the Senate and made Healthcare reforms, the passage of Cap and Trade emissions reform and the Employee Free Choice Act more fraught with difficulties and the threat of filibusters. Cramer welcomes the new era of political stagnation; “Gridlock is what gave us those fantastic rallies during the Clinton years,” Cramer said, and “maybe it’s coming back.”
Indeed. With rare exceptions (such as in the financial markets interventions last October), government destroys wealth when it acts aggressively.
Of course, your results may vary.
Since we're making market predictions, I offer mine. A short-term prediction: the market anticipated a Brown victory yesterday, and it got one. Today, the market will be flat to down (profit-taking on the short run). On the week, the market will be up, but this rise will be indistinguishable from the the rest of the rise in the current Bear rally. Longer term, the market will be down. Why? Because the Democrats will pass Health Care Deform despite Mr Brown's victory, with all the economic damage that will do, regardless of what their bosses (you remember them--all those right-wing extremist, unAmerican, unpatriotic, swastika-carrying racist citizen-voters who disagree with Mr Obama and don't want the current Health Care Deform bill) instruct them to do. They'll pass it with the nuclear option, if necessary; Mr Schumer has said all year they'll do this, and Mr Reid officially denied in the last few days that he would use the tactic. And then the Democrats will have achieved their damage--I mean gotten their way--as there won't be elected in 2010 a veto-proof majority in each house, so the Deform legislation won't be repealed. The Democrats will be in the wilderness for a couple of election cycles, but they've made plain they're willing to suffer a couple of cycles of pain to inflict their will.
Cramer, as usual, gets carried away with his own rhetoric. He might think of a Democrat majority in the Senate that's greater than any GOP majority of the last 75 years as "gridlock" but I don't. Electing Scott Brwon was an earthshaking event for lots of reasons, but saying it "wrecked the Democrats' majority in the Senate" is just wrong.
It was earthshaking for lots of reasons: the GOP hadn't won an open election in 48 years in Massachusetts, and no Republican has been elected to the Senate from Mass since Sen Brooks. Massachusetts voters elected Brown even though 72% of the electorate knew when they voted for him that he's either "conservative" or "very conservative". In the only state in the union that went for George McGovern, they voted for him even though Martha Coakley is the very picture of a good prospective Democrat candidate (her campaign flaws aside): a successful, well-known Attorney General, well-liked within the state machine, a stock liberal. The voters of Massachusetts voted against the Obama agenda in this election, pure and simple and they held their noses doing it (ideologically speaking), but by no means did they vote for him thinking they were reintroducing gridlock to DC by doing so.
Cramer reacted this way out of hope the Congressional Democrats will regain some sanity and step back from Obama's agenda. But that ignores the fact that Pelosi may be even more to the left than Obama, and that a significant part of the Democrat caucus in Congress are as well. It remains to be seen if they will "wake up" after this election and moderate their efforts. Until thats clearer I'm a hold, and not yet a buy in stocks.
I suspect the dollar surge against the Euro is equally attributable to Brown's victory and to the publicity surrounding Greece's inevitable sovereign default.
Credit default swaps for Greek sovereign debt hit a record high today and are spiking way, way up. The EU must either rescue Greece or expel Greece from the EU. A large portion of the population in Greece wants out of the EU so they can control their own monetary policy (read: devalue their currency).
Today it is Greece, but Portugal, Italy, and Belgium and not far behind. Nor are Austria and Ireland, both of which have massive hidden losses in their banking systems. Austria could quite possibly pull an Iceland.
The EU is faced with a choice between three terrible options. One: massive tax increases on the more fiscally responsible member states to rescue the fiscally irresponsible member states. Two: start printing Euros to fund the rescue of the fiscally irresponsible member states. Three: do nothing and let weak member states leave the EU.
All three of these options are bad for the Euro. Option 3 is the most likely outcome. If Greece leaves the EU it will begin the slow dissolution of the EU, which will likely be complete within our lifetime.
Demographics are at the core of the EU's demise. A social welfare state coupled to an inverted age pyramid inevitably results in national bankruptcy. The math is inevitable. Greece is the tip of the iceberg. The rest will follow in 10-30 years. And if the Democrats succeed the U.S. will follow soon too.
Many years ago I was the campaign treasurer for a local mayoral candidate. He was a nice guy, a Republican, but had one endearing quality, he would most likely do nothing, no big government programs and best of all, no new taxes. Gridlock, I love it.