Wednesday, February 24, 2010

February 24, 2010 Market Commentary By Art Cashin


On this day in 1803, the U.S. Supreme Court assumed immense power by announcing

that it lacked power. In that single act it threw a curveball past a hostile President and

redefined the Constitution. And this is how it happened.

When John Adams lost the Presidency to his adversary, Thomas Jefferson, he rushed

to fill lots of political posts before the new guy got in. In that rush, the Secretary of

State forgot to get all the appointments posted before Adams' term expired. So,

Jefferson said the appointments were invalid and he could appoint his own guys.

One of Adams' appointees decided, in what has become an American tradition, to sue

to get the job he was promised. His name was William Marbury, and he sued the

incoming Secretary of State, a guy named James Madison. So, naturally when it hit

the Supreme Court docket, it was called "Marbury vs. Madison" (now known as,

perhaps, the most important judicial decision in U.S. History).

The Chief Justice was a guy named John Marshall. Since he was appointed to the

Court by Adams, Messrs. Jefferson and Madison figured they would not get a fair

shake. So they told associates that if Marshall found for Marbury they would ignore

the Court and hide all its quill pens.

So, Marshall was in a quandary. He knew that Marbury had a good case but to

decide in his favor could destroy the Court. He decided to throw one of the biggest

curveballs in judicial history.

He wrote that Jefferson & Madison were probably wrong guys who might have put

gum on folks’ seats during the Constitutional Convention. He said Marbury clearly

deserved his post. EXCEPT - - - - (and this was the big one) - - - - the act under which

Congress had granted to the Supreme Court the right to mediate appointment

disputes (the Judiciary Act of 1789) was unconstitutional.

Thus Jefferson was presented with a decision that said - - You don't have to give

Marbury the job because I don't have the power to make you give Marbury the job

because I have decided the law that gave me that power was unconstitutional. (And

now since I demonstrated that I have the power to interpret the Constitution that

gives me more power than you or Congress now have). The decision forever changed

American history, politics and government. Marshall is universally renowned as the

most important Chief Justice in history (mainly for this decision).

But the answer to one of the twelve best bar bets of all time (call our 900 number for

clues) is - - - - who was Adams' dopey Secretary of State, whose error set up the

whole crisis. Okay so you guessed it. Yup! The same John Marshall - - himself a last

minute appointment - - to the Supreme Court.

The markets thought less about the balance of powers Tuesday, and more about the

balance between the buck and other asset classes.

Confidence Crumbles And So Do Markets The stock market began trading Tuesday in a slightly nervous fashion. At 10:00, the mood turned from nervous to somewhat panicky. The catalyst was a surprise plunge in Consumer Confidence – in particular, current expectations.

Not only was the headline confidence number a disappointment, the current expectations segment hit a 27 year low. The reaction was a bit perverse. The dollar shot up sending stocks, oil and gold into a tailspin. Traders were hard-pressed to see how the low confidence data was bullish for the dollar.

After about an hour of puzzled rumination, they concluded that the relationship was more

coincident than causative. They thought the dollar rise had more to do with the Mervyn King comments than the confidence number. King had suggested that the recovery in the Euro-zone had stalled. That started a simmering rally in the dollar which came to a boil on chatter about the lack of a concrete proposal on Greece. As the dollar rally was shifting into overdrive, the confidence data hit. That exacerbated the negative impact on stocks.

The dollar influence remained evident in the weakness of several asset classes that might not have been influenced by the confidence number.

The overall impact was a rather ugly day. The advance/decline mix was over 10 to 1 negative. Once again, a down day brought us higher volume. One day does not make a trend but the bulls were hurt by Tuesday. The recovery from the February lows took a hit. Traders will look to see if the bulls regroup.

Doubts From Greenspan In a speech yesterday, Former Fed Chairman, Alan Greenspan gave a rather downbeat assessment of the economy. Here’s a bit on the speech from the Financial Post:

WASHINGTON -- Former Federal Reserve Chairman Alan Greenspan said on Tuesday the U.S. economic recovery was "extremely unbalanced," driven largely by high earners benefiting from recovering stock markets and large corporations.

Small businesses and the jobless are still suffering from the aftermath of a credit crunch that was "by far the greatest financial crisis, globally, ever" - including the 1930s Great Depression, said Mr. Greenspan in an address to a Credit Union National Association conference. "It's really an extraordinarily unbalanced system because we're dealing with small businesses who are doing badly, small banks in trouble, and of course there is an extraordinarily large proportion of the unemployed in this country who have been out of work for more than six months and many more than a year," said Mr. Greenspan, who headed the Fed from 1987 to 2006.

With both housing starts and auto sales "dead in the water," he said he thought it would be difficult to make the case that the economy is poised for a strong rebound. Traders were struck by Mr. G’s assertion that the financial crisis was worse than that of the Great Depression. Wow!

Doubts From Yellen In a speech Monday, Janet Yellen of the San Francisco Fed also sounded a bit downbeat on the economic rebound. Here’s a key part of that speech:

Unfortunately, I’m not at all convinced that a V-shaped recovery is in the cards. That fourth-quarter leap in GDP overstates the underlying momentum of the economy. Much of it was due to a slowdown in the pace at which businesses were drawing down inventory stocks compared with earlier in the year. Less than half of the fourthquarter growth reflected higher sales to customers. Those sales did grow, but at a lackluster 2.2 percent. It appears that businesses are getting their inventories closer in line with sales, which is a good thing. But such inventory adjustments can be a potent source of growth only for a few quarters. I’d feel much more confident about the prospect for a sustained robust recovery if I saw evidence of more vigorous growth in actual sales. Apparently, Chairman Greenspan and President Yellen share some of those skeptical concerns that showed up in Consumer Confidence.

Cocktail Napkin Charting – Tuesday’s selloff took the S&P down through the initial support of 1098/1102. The intra-day low of 1092 rested on the top of the next support 1088/1092. Several top technicians note that the bounce from the February low has had trouble with the 50 day moving averages.

The S&P needs to stay above 1082 to keep the rebound alive. For today, we’ll start with support at 1088/1092 with a backup at 1080/1083. Resistance looks like 1102/1106 and then 1113/1118.

A Picture Is Worth A Thousand Words – We were particularly struck by the cover of this week’s Economist magazine. Under the headline “What’s Gone Wrong In Washington?”, there is an image of President Lincoln. It is a variation of the statue in the Lincoln Memorial. On the cover Lincoln is portrayed as clearly distraught, holding his left hand to his head in anguish. It says a lot about the current state of American politics and how it is perceived by others. Next time you are at the magazine stand, take a peek.

Consensus – Bernanke should draw lots of attention as will any spillover of the strikes in Greece. As usual, the course of the dollar will call the tune. Stay very nimble.

Trivia Corner

Answer - The person in the portrait is the daughter of the speaker.

Today's Question - And, they never played football either. There are nine U.S. President who never attended college. Can you name all nine?

1 comment:

  1. That's a funny story about Marshall - and Europe probably needs a Marshall plan it it goes on like that. they shouldn't have pushed through the Euro as a synthetic currency in the first place, then NOT let ANYONE join as all the members didn't fulfill the entrance criteria. That would have saved everyone a bundle ...