Wednesday, January 14, 2009

Behind the Stock Swoon

Stocks are swooning again — down seven straight days — and threatening to break below a November 20 bottom. Part of this stems from bad economic data, including today’s announced plunge in December retail sales. This of course follows last Friday’s outsized drop in payroll employment.

Bank stocks are getting clobbered as Citigroup is falling apart. This bank has virtually become a ward of the state, including $45 billion of government capital and a roughly $300 billion government guarantee for toxic assets. Robert Rubin is out, and there’s talk of a bank breakup that would leave Citi only one-third its current size.

Speaking of wards of the state, the TARP debate has unsettled banks big-time, and investors are now pulling out left and right. If some of TARP is passed for the next $350 billion, conditions will be very onerous: dividend limits, restraints of stock buybacks for bank mergers, the usual ranting about compensation and bonuses and airplanes, and even a retroactive clawback of past executive bonuses. Private investors don’t much like the idea that the House and Senate banking committees are gonna run our biggest lenders.

But now comes the news that Obama Treasury-designate Tim Geithner might not make it because of his failure to pay payroll taxes totaling about $45,000 when he worked at the IMF. Geithner paid some of the back taxes in 2006 after an IRS audit, but it was only recently — after his Treasury appointment by Obama — that he paid back earlier taxes from 2001 and 2002. For a guy who will reside over the IRS, this is certainly a major embarrassment.

The financial world likes Geithner because of his detailed knowledge of the banking and credit crunch. And the possibility now that for a while there will be no Treasury secretary to handle a possible emergency is quite unsettling.

Team Obama is putting it out that Geithner will survive. And in fact senators on both sides of the aisle are generally supportive. But a Wall Street Journal story this afternoon reports that Geithner’s Friday hearing has been postponed, and that it is now scheduled for next Wednesday, January 21 — the day after Obama’s inauguration. The delay was prompted by senators Kyl and Bunning. So Mr. Obama will be president, but he won’t have a Treasury man.

But back to the market problem overall: Investors continue to ignore one of the very brightest spots in the firmament: Namely, the credit freeze is thawing, according to all manner of key interest rates and spreads. In fact, LIBOR is around 1 percent now, back to where it was in the early summer of 2007 before the crunch started. This means that much of the uncertainty about lending, borrowing, investing, and hiring is receding from the market. This is a very positive sign. While retail sales and jobs are lagging indicators, the credit-market improvement is a leading indicator — pointing to recovery in the economy sometime this spring or summer.

I’m gonna bet that after the bank earnings come out in the next week or so that we’ll see a better stock market. But investors will certainly be happier with a strong Treasury secretary confirmed, in place, and on the job.