Not a Good Time for Anti-Business Rhetoric

January 22, 2010 Edition, Volume IV

Inside Signature Update

- The Market & Economy – Not a Good Time for Anti-Business Rhetoric
- The Takeaway – There’s Opportunity in Pullbacks


THE MARKET & ECONOMY – Not a Good Time for Anti-Business Rhetoric

We often discuss the equities market as an indicator of economic activity six to nine months in the future; and while this is largely accurate, it doesn’t mean the markets won’t offer short-term reactions to contemporary events. The volatility in the markets this week has been a mixture of short-term reactions and longer-term concerns.

Since the earliest days of the Obama administration, the President and his advisors have been unable to maintain a consistent posture regarding business. Whether through Senior Economic Advisor Larry Summers, Treasury Secretary Timothy Geithner, Chief of Staff Rahm Emanuel, Chairperson of the White House Council of Economic Advisors Christina Romer, or the President himself, the administration has vacillated between pro and anti-business rhetoric. The back and forth has confused the markets and now tends to yield more downside volatility than anything else. The markets appear to have come to generally accept the administration as being anti-business, regardless of what the President or his advisors may offer in the media. It’s unfortunate and not at all necessary; but after more than a year of observing the President and his aides, US businesses have come to realize that they may need to defend themselves against the administration rather than rely on it to help move the nation’s economy forward. The Supreme Court’s recent allowance for business and unions to open up their wallets in support of election campaigns may become the tool used by businesses for their defense.

The most recent barrage from policy makers has been aimed squarely at the banking and investment industry. Twice since the beginning of the year, the administration has either announced or backed plans to limit and tax that part of the economy which extends credit to households and firms and creates value for investors - a growing number of whom are current or near-term retirees. Each time the administration or congress announces plans contrary to the well being of corporate America, the markets react with volatility and short-term losses. Invariably, within a short-time period, administration officials then issue statements or leak comments to the press in support of business in an effort to undo the damage. Each time, the weight of the damage makes it harder for the markets to bounce back.

When the administration announced the 2009 Economic Stimulus Package, administration officials claimed passage and implementation of the plan would keep unemployment levels from rising above 8%. Now, with unemployment at 10% the President’s party is under pressure; and rightfully so. Regardless of how effective the stimulus package may or may not have been, businesses have had to deal with a host of credit, employee benefits, and taxation concerns effectively limiting potential growth and putting a damper on hiring plans.

The President’s early January announcement of a plan to impose higher fees on banks in an effort to recapture TARP funds may ultimately be the most effective way of applying the requirement imposed by the original legislation, but the time could not have been much worse. Likewise, his announcement on Thursday to limit banking’s ability to create profits only serves to exaggerate ongoing credit market concerns by limiting the resources available for borrowers. The administration’s outward intent has been to bring long-term stability to an industry now proven to have the ability to bring the nation’s economy to its knees, but the shorter-term reality is more likely to be one of exaggerated deleveraging.

In the wake of the 2008 credit crisis, we saw US businesses and households deleverage, or reduce borrowing, so rapidly that the economy was pushed to the brink of collapse. After deft action on the part of the Treasury and Federal Reserve, credit resources slowly began to work their way back into the markets. Unfortunately, the impact on the labor markets became inevitable as businesses lost needed volumes and revenues to keep workers employed. While reducing the use of credit may offer long-term benefits, both for households and businesses, it’s dangerous to attempt to engineer such a move during brittle economic times. The Chinese announced plans this week to slow down their economy by curtailing lending in an attempt to keep their economy from overheating, but overheating isn’t exactly a problem in the US. We’re still working to keep the fire lit rather than being concerned that it may be out of control.

Some of the recent plans announced have been to limit the size and impact of any particular bank so as not to allow for ‘too big to fail’ operations. These plans call for a separation of a bank’s depository and capital market operations, not unlike the intent of the now defunct Glass-Steagall Act of 1933. While the intent may be appropriate, policy makers must understand that it has been the capital market operations of these banks that have returned them to profitability and improved banks’ capital ratios required to expand lending operations. There are numerous ways in which the government or marketplace can safeguard the economy against failing banking operations without limiting their ability to create capital - the FDIC’s recent proposal being one of them.

The US markets experienced three triple digit loss/gain days on the DOW this week, largely in response to the administration’s announcements and Chinese plans. The markets, already into a meaningful earnings reporting season, would likely have pushed forward through the week. Now they’re simply trying to keep from dropping below January 1st levels.

The upset pulled off by Scott Brown in winning Edward Kennedy’s Senate seat is being hailed as a blow to the Democratic Party and the President’s agenda, and many suggest it’s the second round in a shift back towards conservative control of the House and Senate - the first round being the November election of Bob McDonnell (R-VA) and Chris Christie (R-NJ) to their states’ Governor’s offices. While it remains to be seen if the Republicans can turn these events into a trend, it appears clear that the country is beginning to understand that small and large businesses, though possibly overly generous in handing out bonus compensation, are the engine of our economy and need support rather than disparagement.

The markets have been in recovery mode for over nine months now and have a long way to go before reaching 2007 highs. While many expect 2010 to see the DOW break past 12,000, most recognize that it’s likely to be a few years before we see 14,000+. The economy needs to experience multiple quarters of GDP growth in excess of 4% or 5% and unemployment below 6% before policy makers need to consider efforts to cool things down. In the mean time, we need to make sure our elected representatives understand that the only way to return millions of the nation’s unemployed to the workforce is to keep pressure off of businesses, especially those responsible for creating the credit capital so necessary in a capitalist market system.


THE TAKEAWAY – There’s Opportunity in Pullbacks

- The recent pullback in the market has been led by the banking sector and may represent a buying opportunity for investors confident that banks and investment operations aren’t likely to be separated by Obama administration plans.

- Encouraging signs at GE, American Express, Google and other market bell weathers offer hope for employment gains, despite December and January job losses. Top line sales growth continues to be the most sought after hope of recovery in employment.

- The Senate’s composition after the election of Scott Brown may be enough to keep healthcare and banking legislation from passing, but likely doesn’t represent as much cause for celebration as many conservatives might suppose. There’s a long way to go before the mid-term elections in November and both parties are well known for their inability to ‘handle the ball’ during times of potential opportunity.




Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC