Parsing the President
In a state of economic crisis, it is natural for investors to pay attention to any public statement by President Obama.
There is a natural sequence of timing to the moves of the new administration. Some policies can be changed by the stroke of a pen, through Executive Orders. These are Presidential directives that have the force of law. They state how the government will implement existing law.
Today's News and Market Action
The President issued some widely-expected executive orders today. These involved some changes in signs at workplaces and relatively minor rules on how union informational costs were allocated. For example, one of the rules has bounced back and forth — from the first President Bush, to Clinton, to the next Bush, and now to Obama. It is a natural partisan shift.
The announcement, symbolically important to organized labor, was made to an audience including labor representatives. The President was speaking to the audience in front of him, including core supporters, and not to the market. In a typical over-reaction, the market commentators flipped out as President Obama talked about the importance of organized labor.
Separating Rhetoric from Substance
The real market test of the Obama Presidency will come on the key issues of taxation of dividends, capital gains, and free trade. We believe that the course will be a moderate one. Our conclusion is based upon the Cabinet appointments and the strong overtures to Republicans. We shall see.
Those with a bias, perhaps anti-union, are hard-wired to see the worst in any statements, no matter what the significance. There were many such commentaries today.
The Bad Bank Plan
A similar scenario is playing out on the so-called "Bad Bank" plan. We are encouraged that the Obama Administration is looking to a root cause — the hard-to-value assets held by many financial institutions. There are several ways of addressing this problem. Regular readers of "A Dash" know our priorities:
- Best — a suspension of mark-to-market accounting. Provide plenty of footnotes. Heaven knows there will be plenty of attacks on the footnoting firms, so investors will be informed. The key is that there will not be the destruction of regulatory capital, so "sensible lending" can resume.
- Second Best — a method of price discovery. Since the securities on the balance sheets are complex, we need a good method of finding a true market price, one which reflects the value if held to maturity. This is not reflected in existing markets.
- Third Best — the "good bank, bad bank" idea. If this concept is to get traction, the participants must quit thinking of the taxpayer as an investor, trying to make an astute buy. The only justification for taxpayer involvement is the systemic effect.
There is a valuation for troubled assets that is both fair for the taxpayer and also acceptable to banks. There is no more important problem for restoring economic strength. There are many wise people on the Obama team, and they are consulting with key players.
We expect a favorable conclusion, but it will face a skeptical audience. This helps to explain why we continue a generally bearish short-term market stance, while believing that the entire year will be quite positive. The heavily biased Wall Street audience will remain skeptical.