Washington Campaigns for Wall Street?
Optimism, rule changes could send markets higher.
Trading commenced last week with the S&P 500 registering a new 12-and-a-half-year closing low on Monday. That low was followed by 4 consecutive positive sessions, with a cumulative 11.8% gain.
The upside momentum was fueled by an assortment of better-than-expected (though weak) economic data, bank CEOs emerging from hiding to talk up their operating businesses, and government talk of relief for issues which vanilla investors highly value.
The White House has reversed course and is starting to talk up the economy in order to advance its agenda. A couple of weeks ago, the president said the stock market was an attractive long-term investment. On Friday, National Economic Council Director Larry Summers referred to the current market environment as being "on sale."
"While there could be many ways to question this calculation, that the market would be at essentially the same real level as it was in 1966 when there were no PCs, no Internet, no flexible manufacturing, no software industry, and when our workforce was half and our net capital stock was a third of what it is today, may be regarded by some as the sale of the century. For policy-makers, it suggests the magnitude of the gains from restoring sustained economic growth."
This marketing blitz was capped by Chairman Bernanke's appearance on 60 Minutes. The Chairman's comments were nothing new, but it's significant that he took his case and his expectations for recovery to the American people. Such bold comments appeal to investors, because they link the administration's credibility with the performance of the market.
While it's hard to say if this new sentiment will last, it's a nearly 180-degree shift from the administration's earlier rhetoric. Interestingly, Bernanke also made comments similar to those of JPMorgan (JPM) CEO Jamie Dimon - that the primary obstacle to success is the lack of political will.
The other news from Washington focused on restoring the uptick rule and the adjustment of mark-to-market accounting. Both issues fall under the purview of the SEC. Congress notably ratcheted up the political pressure to adjust these policies. Representative Paul Kanjorski, who held Thursday's subcommittee hearing on mark-to-market, set the tone early:
"Take the case of the Federal Home Loan Bank of Atlanta. Last September the bank estimated that it would lose $44,000 in cash flows on 3 private label mortgage-backed securities starting in about 15 years. The magic of mark-to-market accounting required this relatively minor shortfall to be treated as an other than temporary impairment loss of $87.3 million. I find this accounting result to be absurd."
To be clear, almost none of the recent highly vocal critics are advocating suspension. Instead, they're calling for additional guidelines on the application of the rule because, in Kanjorski's words, "It fails to reflect the economic reality. We must correct the rules to prevent such gross distortions."
During the hearing, the House Members came down hard on FASB Chairman Robert Herz to give better guidance regarding Fair Value Accounting. Kanjorski made other market-friendly comments: "Bank regulators must also consider liberalizing regulatory capital requirements and granting reasonable forbearance in the current economic environment."
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