The John McCain Market Selloff
Ever since the Primary on Tuesday, the market's have aggressively sold off. This clearly indicates the equity market's fear of a McCain presidency.
As the charts below show, ever since Tuesday -- when McCain's Intrade price soared -- stocks have been under continual pressure.
Had Barrack Obama knocked out Hillary Clinton, a mano-a-mano contest would have taken place. A well rested, fully funded Democratic nominee would have been a very tough opponent for the aging Arizona Senator.
However, the Democratic nomination now looks certain to go on for much much longer. It is highly likely to:
-Physically and emotionally wear down the two Democratic candidates;
-Force them to consume much of their war chest;
-Lead the electorate to become tired of the rhetoric, and disenchanted with both candidates
-Prevent the candidates from spending time doing much opposition research no McCain.
All of this works to McCain's favor. He can therefore rest, save his campaign warchest, maintain Media presence (but not to the point of over-exposure). All these positives show up at InTrade (see charts below), where McCain's bettors have upped the ante, sending his futures skyward.
And, the stock market has sold off, therefore proving that McCain must be bad for stocks and for the economy.
>
John McCain Futures Rally
>
The John McCain Market Selloff
~~~
Of course, I don't believe a word of that. But you would be surprised as to how many otherwise intelligent people spew variations of this sort of nonsense everyday.
I will unequivocally state that anytime you hear this sort of nonsense, you can rest assured that the speaker is a) an unabashed partisan; 2) relatively clueless about how market's operate; iii) never worked on a trading desk.
Markets operate not as forecastors, but as discounting mechanisms. Consider what has to be discounted to credibly say this: First, we would need to know who is likely to win the next election, 8 months in the future.
Remember, eight months ago, it was a lock that Rudy Giuliani was the GOP nominee, and Hillary was going to easily capture the Dem nomination. In case you haven't been paying attention, eight months is a lifetime in politics.
The next president gets sworn in on January 20, 2009. They have to put together a series of legislative proposals, then get them passed by Congress, then fund them. Then, they have to begin implementing them. The impact of these would likely be felt sometime around 2010.
Hence, the utter absurdity of the short term market twitches somehow reflecting unknown possible events, and their likely macro impact, several years hence. Ridiculous.
Consider these questions as the more likely stimuli this bloody market is actually responding to -- the nearer term events that are still unfolding today:
-Are we in a recession or not?
-Is the credit problem fixed yet?
-How much worse will housing get?
-Will earnings rebound in the second half of 2008?
-Will the US dollar ever stop falling?
-Are US deficits going to continue to skyrocket?
-How much more will consumers pull back on their spending?
-(Did I mention the housing picture is a disaster?)
-The war in Iraq is God-awful expensive, is there any relief in sight?
-Is Oil going to go to $150?
-Can the wobbly banks regain their footing?
-And how much more will inflation heat up?
The markets have enough data to digest before they even remotely begin to consider who might be president in 2009, and what they might do . . .
Friday, March 07, 2008 | 02:00 PM | Permalink
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Tracked on Mar 7, 2008 6:34:39 PM
» Stock Market Politics from The Big Picture
I love when this happens: In the beginning of the month, I jokingly referred to the market correction as The John McCain Market Selloff. I was -- rather sarcastically, I thought -- pre-empting the usual poor analysis that comes from partisan quarters. ... [Read More]
Tracked on Mar 28, 2008 4:01:00 PM
Comments
Are you dissing me?
Posted by: Larry Kudlow | Mar 7, 2008 1:41:38 PM
Do these headlines look like John McCain means d#ck concening our problems? Maybe it's a realization that we are truly screwed, and even the sheeple now somewhat understand that they have been had. By the way, John McCain like the other candidates sucks the big one!
Fri Mar 7 2008
U.S. Mortgage Foreclosures Rise as Owners "Give Up" (bloomberg.com)
House Foreclosures Hit Record High (biz.yahoo.com)
Mortgage Foreclosures Reach All-Time High (washingtonpost.com)
Houseowner Equity Below 50%, Lowest Since Records Started (biz.yahoo.com)
House debt greater than equity for first time (usatoday.com)
Forget the flat-screens, builders are slashing prices (latimesblogs.latimes.com)
Fresh gloom for US housing market (news.bbc.co.uk)
Dollar's Decline a Crisis of Solvency - Not Liquidity (seekingalpha.com)
Bond Markets "Utterly Unhinged" (bloomberg.com)
Bernanke Urges Banks to Forgive Portion of Mortgages (bloomberg.com)
Bernanke Urges Gift For Debtors Only; Screw Savers! (fool.com)
Bernanke Call for Mortgage Forgiveness Puts Pressure on Paulson (bloomberg.com)
Agency Mortgage-Backed Bond Spreads Reach Highest Since 1986 (bloomberg.com)
Credit Swaps Thwart Fed's Ease as Interest Rates Rise (bloomberg.com)
Some saw credit crisis coming three years ago (economist.com)
We're just in the first inning of the housing crash (marketoracle.co.uk)
Prices cut for Oakland condo auction (sfgate.com)
Reduced rental demand noted for the SF Bay Area (lansner.freedomblogging.com)
Posted by: SPECTRE of Deflation | Mar 7, 2008 1:42:17 PM
half the hedgies are getting margin calls....
of course that has nothing to do with it...
Nice sell program that just hit the tape...
Ciao
MS
Posted by: michael schumacher | Mar 7, 2008 1:43:40 PM
Great post. I'm going to have to send this to all my financially illiterate marketing major friends who like blame the current malaise on the pols (who are late to the table on all these issues) instead of the people who actually got us into this mess.
Posted by: kckid816 | Mar 7, 2008 1:44:35 PM
Here's some more that says the candidates don't matter. It's a realization of where we are as country.
Friday, March 07, 2008
Housing crisis gets even worse
The Argus, CA
Realtors celebrate new limit
TheReporter.com, CA
The limits, with a maximum at $729750, are derived from median home prices in each county. For Solano County, Realtors learned Thursday, that means the ...
The Housing Market Is Nowhere Near Bottom
Huffington Post, NY
Maryland Foreclosures Surge!
Lenders were trying to foreclose on more than 13,000 homeowners at the end of last year, up about 150 percent from a year earlier, the Mortgage Bankers Association said yesterday. That's the biggest 12-month increase since the trade group began tracking the state numbers in 1979.
Mortgage dangers skyrocket in state
Baltimore Sun, United States
Americans' home equity lowest since 1945
Philadelphia Inquirer, PA
Sacramento area part of continuing grim foreclosure forecast (CA)
Sacramento Bee, USA
Housing, Bank Troubles Deepen
Wall Street Journal
The unwelcome contrast provides stark evidence of how falling home prices are weighing on consumers. And it could add urgency to efforts by Federal Reserve ...
Drive mounts for US government bailout of banks
World Socialist Web Site, MI
Investors Dump Securities From Fannie, Freddie Mortgage Sector
Washington Post, United States
Mortgage crisis guts Cleveland neighborhoods as it bypasses Buffalo (OH, NY)
Buffalo News, United States
LV not only area suffering home-value Declines (Vegas)
In Business Las Vegas, NV
Stocks Drop To 18-Month Low After Foreclosures Hit Record
Evening Bulletin, PA
Posted by: SPECTRE of Deflation | Mar 7, 2008 1:45:57 PM
I seldom watch CNBC, but was struck this am by the comment from someone that the debate is no longer whether we are in a recession, but how bad and long it would be. No one argued with him.
That is a major paradigm shift by the mainstream investment community..
Posted by: Jay Weinstein | Mar 7, 2008 1:46:36 PM
I wonder why the US finacial press cann't get cogent,accurate and thought provoking articles like this recent article in the Financial Times:
Vicious spiral haunts debt markets
By Gillian Tett
Published: March 6 2008 22:08 | Last updated: March 6 2008 22:08
This weekend the Group of Ten central bankers will convene in Basel for one of their regular pow-wows.
Almost three months ago, a similar gathering paved the way for an unprecedented bout of collective action in the money markets that was supposed to halt the sense of financial panic. Months later, the grisly truth is that market anxiety is seeping back with a vengeance. Thus the crucial question confronting the central bankers this weekend, as they fly in to snowy Switzerland is twofold: first, are we on the verge of a new downward lurch? And second, is there anything the G10 bankers can actually do to stop this?
A downward lurch does look a real danger now, not least because the central bankers themselves are looking increasingly impotent when it comes to tackling the fundamental reasons why sentiment is so fragile.
The western financial system is caught in a trap. On the one hand, there is an urgent need for clearing prices to be established for impaired assets to restore confidence; on the other hand, if this is done in a mark-to-market world, there is a risk that some banks will run out of capital. Policymakers are in the unenviable position of knowing almost any step they take risks denting sentiment further.
First, a bit of background. History suggests a crucial component for ending a financial crisis is to establish some sense of clearing prices. Once goods look cheap – and it does not seem they will soon become cheaper still – buyers tend to rush back in. This, after all, is Economics 101, and it applies as much to houses and cars as collateralised debt obligations.
Now, in theory, there are plenty of reasons to expect investors to start rushing into the credit markets soon, in a manner that could stabilise sentiment. After all, many credit prices have slumped dramatically. And while banks may be capital constrained, plenty of investors are sitting on pots of free cash, such as sovereign wealth funds and even mainstream asset managers and pension groups.
But these groups are notably not buying credit yet, either because they are still paralysed with shock or, more realistically, because they have a nasty feeling that while a leveraged loan, say, looks cheap, it could be cheaper in the future.
How can you combat this? Fifteen years ago, the US government devised a clever trick in the aftermath of the savings and loans crisis, by conducting firesale auctions of S&L assets. This was brilliantly effective in establishing clearing prices and turning sentiment around, because as soon as investors saw some assets being sold at knockdown prices they starting jumping in, meaning that within a few months, prices were rising again.
But these days the US government faces a crucial impediment to repeating this trick. Back in the days of the S&L crisis, US banks were not forced to mark their books to the firesale prices. But now the mark-to-market creed has taken hold. And it is a fair bet that if US banks were forced to mark their books to the initial clearance price for a CDO squared, say, some would run out of capital. Hence the trap: in the modern financial system, you can have mark-to-market accounting systems, or quick action to establish clearing prices, but probably not both, without blowing up some banks.
Of course one way to exit this trap would be to abandon the mark-to-market rules for a while, or loosen capital adequacy standards. Some furtive discussions between policymakers along these lines are already occurring.
But I would be surprised if any action occurs soon. So the risk now is that we will remain trapped in this climate of grinding fear for months – at best. Few institutions have much incentive to voluntarily create clearing prices. However, hedge funds are now being forced to make asset sales in an ad hoc, opaque manner that is adding to the sense of fear. This is forcing the banks to mark books lower and pull in their horns, sparking even more hedge fund sales and fuelling concern about banks. It is a viciously unpleasant spiral.
Let us all hope the G10 have some amazing new tricks up their sleeves; if not, we are moving into dangerous waters.
gillian.tett@ft.com
Posted by: mike carey | Mar 7, 2008 2:00:40 PM
This last two hours is going to be fun.....
Goog and APPL at 52 week lows...and some decisions to be made before the clock strikes 4pm...
make some popcorn and sit tight....
Whoosh won't even begin to describe it....
*notice I did not say which way* ;-)
Ciao
MS
Posted by: michael schumacher | Mar 7, 2008 2:06:54 PM
The Hillary-Obama battle is bad news, not good, for John McCain. They will get all the attention, McCain will be a footnote. Ask Rudy how well having a free ride through the early primaries worked for him in Florida.
Still, a "McCain selloff" is laughable. No candidate in either party has the capacity nor the courage to provide real, long-term solutions to the economic problems we now face. It doesn't matter who the temporary occupant of the White House will be in 2009 and beyond. They will only function as a punching bag for distressed Americans.
Posted by: knifecatcher | Mar 7, 2008 2:07:40 PM
Breaking news on Bloomberg: "Bush says stimulus plan has given the economy a booster shot".
"We recognized the problem EARLY".
This is the same man who just last week said he had not heard that gas prices would likely go to 4 dollars a gallon. Seemed Utterly Flummoxed by the prospect. This week he's lost as to why OPEC won't pump more oil.
The level of Incompetence of this man and his administration is beyond the pale.
Posted by: John | Mar 7, 2008 2:08:18 PM
Sure is funny though.
Posted by: Lord | Mar 7, 2008 2:13:43 PM
BR,
Great post.
The pol's say things like the anticipated election of "x" spooked the markets only because in their little world, politics are all that matter.
But they have it backwards--pol's matter precious little, and is/are always catching up to markets, and running to the front of them and pointing and saying, "there, see what I did?"
Unfortunately, a fair number of the sheeple (props to whomever coined that one) believe it.
Posted by: DonKei | Mar 7, 2008 2:15:59 PM
Exactly what we need to solve a crisis induced by lax banking regulation, a McCain presidency.
Posted by: stormrunner | Mar 7, 2008 2:24:32 PM
Barry, you really do sound like you're channeling Kudlow ... other than you aren't reflexively bashing the Dem. The difference is that you understand that it's bull.
Kudlow has blamed several downturns on Nancy Pelosi since licking his wounds over the 2006 GOP loss. For her part, Nancy must be shocked to find out that she's a major market mover.
Posted by: LFC | Mar 7, 2008 2:27:44 PM
Nice post.
Posted by: Portland Refugee | Mar 7, 2008 2:35:59 PM
"This clearly indicates the equity market's fear of a McCain presidency."
You could say the same thing when looking at Obama's & Clinton's economic plans. I think the market's downdraft is based on the issues you raise and everyone else who believes otherwise is just in denial.
Posted by: Pat G. | Mar 7, 2008 2:36:04 PM
Market goes down far enough some people could pick up a sense of humor - cheap! When the next rally starts it'll be anticipating pinky and the brains departure? Ghosts and empties - Paul Simon
Posted by: cathompson | Mar 7, 2008 2:47:35 PM
The NEXT president? The treasury is being looted NOW. By THIS President. The next President is getting screwed forward. I might vote for the Republican.
Posted by: Marcus Aurelius | Mar 7, 2008 2:49:52 PM
BTW...
how come nobody is making a tradeable bottom/low prediction yet?
Posted by: techy2468 | Mar 7, 2008 2:52:59 PM
All thanks to the Ohio Republicans who jumped party lines to vote overwhelmingly for Hillary. Seems McCain can beat her, but not Obama.
Posted by: Josh | Mar 7, 2008 3:00:19 PM
I almost lost my lunch - until I read below the line. That is no way to treat us loyal readers trying to unwind going into the weekend :)
Posted by: Kurt Milne | Mar 7, 2008 3:00:46 PM
I tried that yesterday with UWM and escaped with my life earlier. Its a runaway train right now.
Posted by: cathompson | Mar 7, 2008 3:00:50 PM
no rumor about AMBAC??
I'm disappointed to say the least....
Marcus-
pondering that as well, let them clean up there own mess. Seriously...neither of them (Hillbama) are electable as stand alone or together. Together they are setting themselves up for failure and handing it to McCain on the backs of conservative demos.
I hate to say it this way but what I see being presented is a choice between " a womin' (and not just any woman IMO) and.....ahem.... an "african-american"
Neither would get much conservative support.
thus allowing us the have to put up with Bush lite for an additional 4 years.
BTW I still think Cheney factors into this at some point.....
Here come the plungers.....right on cue!!
Ciao
MS
Posted by: michael schumacher | Mar 7, 2008 3:01:05 PM
As the keeper of all things inflation related, I thought you would like to see this:
http://cityroom.blogs.nytimes.com/2008/03/06/mmm-pizza-a-slice-but-at-what-price/index.html
NYC Pizza Prices are skyrocketing! A bag of flour has gone from $12 to $28.50 in the past year. Rent and cheese are not the biggest input costs anymore. Mama mia!
Posted by: Brian | Mar 7, 2008 3:04:59 PM
Wow! This entry is a dead ringer for Larry Kudlow and his "Hil-bama" speak.
Posted by: Chief Tomahawk | Mar 7, 2008 3:28:12 PM
