Posts by Michael Santoli
Wall Street absorbed the shock and economic disruption of Superstorm Sandy. And equity investors were prepared to make their peace with a status quo electoral outcome, with President Obama remaining at one end of the Mall and a divided Congress on the other. But one external force that stocks have not yet persuasively proven themselves inured to is a U.S. dollar that rises in value against other currencies.
The rise in the U.S. Dollar Index to a two-month high Wednesday is not in itself the driver of a stock sell-off that sent the Dow Jones Industrial Average plummeting more than 300 points at its nadir. But it is the dominant symptom of the broad flare-up in global market anxiety.
Following a presidential election, the stock market usually renders a swift verdict on the winner. The trouble is, the market's decision is often overturned on appeal in the weeks and months to come.
Economic forces and unforeseen events soon take over, rendering those hasty bets based on the final Electoral College tally little better than a coin flip.
Over the past 14 presidential races, the stock market rallied on the Wednesday following Election Day six times and declined eight. In those six years when the market responded to the upside, stocks continued higher for the subsequent week every time, according to a study by www.SentimenTrader.com.
The other eight years, the market's negative response persisted over the following week six times, a pronounced record of weakness given stocks' general historical tendency to rise in any given week.
Predictions Often Fail
The relative ease with which Goldman Sachs Group (GS) managed through the assault of Hurricane Sandy, with self-generated power illuminating its headquarters in an otherwise blacked-out Lower Manhattan, drew a predictable number of cynical online jibes. For some people, the firm's knack for hyper-competent preparedness in every pursuit comes off as another instance of a privileged elite's insistence on serving itself first.
Less discussed, though, is a different disaster in Goldman's neighborhood that stands to benefit the powerful firm by emphasizing its comparative strength and staying power. This was the dramatic decision this week by UBS AG (UBS), the huge Swiss bank, to radically shrink itself in large part by exiting the bond underwriting and trading business. The UBS restructuring will cost 10,000 employees their jobs, while removing one important player from the highly competitive bond-trading game, which is Wall Street's largest single profit center.
It is an ever-deepening irony that near the start of his tenure as chief executive of The Walt Disney Co. (DIS) seven years ago, Robert Iger was tagged as a management technocrat who didn't think much of the film business as it was commonly practiced in Hollywood.
That's right, the man whose three boldest, multi-billion-dollar deals have been the purchases of Pixar, Marvel and now Lucasfilm — perhaps the leading studios in the production of emotion-stirring Hollywood magic and slam-bang blockbuster spectacles — long carried the reputation of a spoilsport and a scold on the subject of film economics.
The "Franchise" Model
A professional manager with roots in the television business, Iger indeed has been open in charging that studios, including his own at times, made too many movies each year for their own good. But his real point was that the industry made too many generic, me-too movies that crowded one another out of the audience's field of attention.
The "MF" in MF Global Ltd. may not have really stood for "malfunction," but one year after the brokerage firm succumbed to trading losses and customer defections by entering bankruptcy protection, it's clear the story of the company's demise was multifaceted.
Most immediately, former MF Global chief executive Jon Corzine's decision to use the firm's own capital to buy the spurned debt of some peripheral European countries generated losses, drew credit-agency downgrades and spooked trading clients, many of whom withdrew their funds before the bankruptcy, which stranded $1.6 billion in customer money within MF.
Financial controls also appear to have been lacking for years before MF's undoing, according to retrospective accounts, with the broker's accountants unable to get a firm handle on its cash balances in a timely way.
In the blur of a prizefight, it's not always easy to determine whether a boxer who refuses to go down has an iron jaw or is simply punch-drunk.
The stock market of the past few weeks is a bit like that fighter, absorbing punishing combinations of corporate earnings shortfalls, hit-and-miss economic data and renewed stirrings of worry about the European debt drama.
About a third of the 30 companies in the Dow Jones Industrial Average came in undeniably light on some combination of third-quarter profits, revenues and forward guidance, including International Business Machines (IBM), Caterpillar (CAT) and 3M (MMM).
In Monday's debate, Governor Mitt Romney reiterated his promise to use his first day in office to formally designate China a "currency manipulator," or a trading partner that keeps the value of its currency artificially low so its exports are cheaper for Americans and others to buy. If he ordered his Treasury secretary to issue such a declaration, it would force contentious formal negotiations on China's foreign-exchange policies, which, if unsuccessful, could lead to outright trade sanctions on China imports.
U.S. politicians have complained for years that China unfairly gives its manufacturers an advantage by preventing its currency, known as the renminbi, from rising in value against the dollar.
While China does indeed restrict the amount that its currency is allowed to appreciate against the dollar and other currencies, confronting Chinese leaders about their currency management and trade practices would be politically tricky, and wouldn't necessarily be economically effective.
Currency Rising in Value
Years of financial tumult have given brokers a new and resonant sales message: "Be afraid." Whether it's good investment advice is almost beside the point — the financial-services industry has determined that fear sells:
-- In the current retirement issue of Money magazine, which lacks even a single article or advertisement that promises glorious investment returns, Prudential Financial bought a full-page ad to offer "A responsible answer to an era full of risk."
-- Elsewhere in the popular press, leading asset manager BlackRock begins its pitch for its funds by asserting, "Today's markets are as uncertain as ever."
-- Main Street brokerage house Raymond James, sympatico with the message of most of its peers, asks in a recent marketing brochure: "In these volatile times, is your portfolio structured as it should be?"
There's nothing mysterious about how things arrived at this point. By their words and actions, individuals have shown an abiding disdain for the stock market.
If economists, business executives and investors have been sure of one thing this year, it is that uncertainty — over economic policies, political leadership and central-bank actions — is largely to blame for the shambling global economic pace, spotty job growth and serial bouts of anxiety in financial markets.
But the bull market in "uncertainty" has likely peaked -- not that many have noticed amid the political noise and unsettled stock market, which is falling sharply Tuesday amid disappointing earnings and worries over Spain.
Like most overplayed market themes, there's a set of plausible facts and resonant conditions at the core of the uncertainty obsession:
For sure, some business investment spending seems truly to have been postponed as executives wait to see how the fiscal situation shakes up. Lend an ear to a few company earnings conference calls and it begins to seem the same "uncertain" investor-relations staff is writing all the scripts.