Pardon me, but I’ve got a little trouble with this explanation of the stock market’s tumble.
The problem, Wall Street is telling us, is that investors are afraid of a regulatory crackdown on Wall Street.
Here’s a representative explanation from this morning’s Financial Times: “The lack of clarity from the politicians has shattered confidence,” David Owen, chief European financial economist at Jefferies, told the paper.
If that’s really the case, of course, we should see a huge rally today on the heels of the U.S. Senate’s passage of its version of financial reform. If clarity is what Wall Street wants, it just got a dose yesterday. (The legislation now goes to conference with the House of Representatives, which passed its own version of financial reform months ago.)
But I don’t think clarity is what Wall Street really wants from politicians.
What it wants is a minimum of disruptive new rules that might cut into profits. Wall Street doesn’t want limits on trading for its own accounts—along with or against clients. It doesn’t want to regulations that would require derivatives to trade on exchanges. It doesn’t want limits on what it can charge on credit cards.
The list of the clarity that Wall Street doesn’t want goes on and on.
If you believe in conspiracies (and now that Fringe is done for the season, I for one would love an entertaining real life conspiracy to watch) by this point it’s probably occurred to you that Wall Street could easily buttress it’s arguments against tougher regulation by engineering a stock market drop. I personally think that’s unlikely simply because Wall Street is too competitive to execute something as complicated as that. Too many companies, knowing of the plan, would try to make money on the other side of the trade.
But Wall Street is certainly capable of using a correction based on a very real debt crisis in the Euro Zone and very real worries about a slowdown in China to argue that regulation is the problem. And it certainly helps that case that some politicians have indeed spooked the market by charging off on their own without consulting other countries. Germany’s Chancellor Angela Merkel’s ban on naked short selling of German financial stocks, sovereign debt and credit default swaps comes to mind immediately.
There’s a lot to legitimately not like about the financial reform package that the Senate just passed. In my opinion it accepts too much of the current regulatory framework as a foundation for reform (instead of tearing it down) and then tries to tinker with it giving the final the feel of an animal designed by committee. (The traditional “A camel is a horse designed by a committee” has always struck me as insulting to camels, by the way.)
On credit default swaps, for example, the Senate should have finally decided that since these are insurance, they should be regulated like insurance. You aren’t allowed to take out insurance against your neighbor’s house burning down—too much temptation when you don’t have a house of your own actually at risk—and regulating swaps as insurance would prevent speculators from taking out insurance against default when they don’t own any bonds or shares that would be damaged by a default.
But hoping that the still pending legislation will actually do the job that we need to have done is very different from pointing to regulation and saying, See that’s why the stock market is falling.
Puleeze!
I agree with this completely:
“On credit default swaps, for example, the Senate should have finally decided that since these are insurance, they should be regulated like insurance. You aren’t allowed to take out insurance against your neighbor’s house burning down—too much temptation when you don’t have a house of your own actually at risk—and regulating swaps as insurance would prevent speculators from taking out insurance against default when they don’t own any bonds or shares that would be damaged by a default.”
The issuance of insurance should be required to be issued only against ownership of the underlying asset. I e-mailed the White House to this effect over a year ago. That got me no real response, but did get me on a spam e-mail list from Rahm Emanuel for awhile! Oh well, I tried.
They really ought to just reinstitute Glass Steagall to keep banks out of the investment business. Bankers are stupid and greedy. That is exactly what the Wall Street pros thrive on.
OJunker:
Jim mentioned in the previous comment section that updates for TC and MXWL were in the works. Earning season is a busy time for the man.
we don’t need new regulation, we need to enforce the rules we already have
Just how did we get into a situation where regulators didn’t want to regulate? Remember Jim Watts? This was a policy decision.
andante:
Well said.
Wall Street is correct. Problems with regulation have caused the financial market problems. However, it is the lack of appropriate regulation and regulators not performing their jobs, not the presence of regulation, that has created the problems.
I have an update on TC…He’s doing great. He doesn’t fly the copter for Magnum anymore, but he does make a good living renting the copter out to Fed Chair Helicopter Ben
“Wall Street blames regulation for the stock market’s drop”
They also say that all the money on the sidelines, people’s 401k’s, etc need to be invested if we are ever to get a solid recovery.
I think they need to decide which they want
Jim, can you puleeze update ABV? It’s been like 4 whole days since you last mentioned it.
OJunker
Each portfolio and investor is different.
Decide what’s best for yourself.
Jim mentioned that commodity stocks were struggling.
In Jim’s Portfolio TC is a small stake. If you have one third of your money in TC, then that might be a concern.
Personally, I think the richest, most powerful, smartest in the world do have some influence in moving markets up or down big-time in cycles.
As luck would have it, we the retail investors can do an independent “value” analysis and go along for the ride.
So far, so good since August 2008.
Great article, Jim!
For OJunker:
You could find what the street thinks about TC at this link:
http://www.theglobeandmail.com/globe-investor/markets/stocks/analyst-ratings/?q=TCM-T
That’s the quote on the TSX, you can also look up the American one “TC” there too.
Myself, I think they are a good value right now, but it depends on world wide steel demand.
You might find MXWL and FLS in there too.
ellinzo,
It would make a good movie, wouldn’t it?
I’m a bit of a conspiracy nut, could that be the reason for the 1000 point drop? they were tinkering with it?
Puleese, can you all stop bugging on updates on TC, MXWL, FLS or whatever.
Jim is a very hard working and diligent man. If he is not saying anything, he probably does not have anything to say or he probably does not want you to sell at the bottom.
Again, take Jim’s recommendations as advice and make up your own minds. I sold all poor performers on Jim’s list long time ago and made decent profits on all except broke even on TC and QCOM. I waited several months on TC and QCOM. When I had chance to break-even, I immediately did before I Jim said anything.
Has anyone found out what consumers will win or loose from this new bill?
I searched around, found one on Reuter, but it’s not clear what’s in the bill for consumer.
Puleeze!
Can you update on TC, MXWL, FLS?
“Puleeze” is right! Lately, things like Wall Street’s remarks and Washington’s inept solutions remind me that these two are on a date, watching the movie, “Gone With the Wind”. That moment comes when Rhett says, “Frankly, my dear, I don’t give a damn!” They look at each other and say, “Frankfurters and ham…is that what he said?”
It’s either bad hearing, not paying attention or wishing they were watching “Happy Days”. Clearly, Wall Street and Washington haven’t been on the same page in a long time, Jim, as indicated by the stupid remarks. Forget the camel, the ostritch is a better animal for them both to imitate…they’re already doing a good job of it!!