Dallas, TX
January 21, 2010, 08:00 EST		 Dr. Joe Duarte's Market I.Q.


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Is It Back To Glass-Steagall?
What's Hot Today:
U.S. stock index futures are pointing to a flat opening on Thursday. Earnings, politics, and a heavy economic calendar should make things interesting.
Today's Economic Calendar:
  • Jobless Claims 8:30 AM ET

  • Leading Indicators 10:00 AM ET

  • Philadelphia Fed Survey 10:00 AM ET

  • EIA Natural Gas Report 10:30 AM ET

  • EIA Petroleum Status Report 11:00 AM ET

  • 3-Month Bill Announcement 11:00 AM ET

  • 6-Month Bill Announcement 11:00 AM ET

  • 2-Yr Note Announcement 11:00 AM ET

  • 5-Yr Note Announcement 11:00 AM ET

  • 7-Yr Note Announcement 11:00 AM ET

  • Fed Balance Sheet 4:30 PM ET

  • Money Supply 4:30 PM ET
News For Thought

White House blames economy for loss. According to The Washington Post: "President Obama on Wednesday blamed the Democrats' stunning loss of their filibuster-proof majority in the Senate on his administration's failure to give voice to the economic frustrations of the middle class, a disconnect that White House aides vowed to quickly address as they continue to work to advance the president's agenda."

Rasmussen polls says it was many things. According to Rasmussen Reports.com: "Massachusetts voters named health care as the most important issue. That suggests it was a big issue, but Democrat Martha Coakley actually won among those voters by a 53% to 46% margin. Among the 25% who named the economy as the top issue, Republican Scott Brown came out narrowly ahead, 52% to 47%. Only two other issues—national security and taxes—were named as most important by at least five percent (5%) of voters. Brown clearly had the edge on both. Among those who named national security as most important, Brown won 67% to 29%. For those who saw taxes as number one, it was Brown 87%, Coakley 13%."

Bottom line: Obama is bruised, and he may pull back from his extreme left positions. But he still doesn't get it. Jobs, taxes, and national security are more important to people than screwing up their relationship with their health care.

What's the likely outocome of this? Nothing different that what we've seen over the last few years. The Bush taxes will expire and the Democrats will continue to push their agenda forward, albeit in a piecemeal and drawn out fashion. If and when the Republicans get back in, we'll get lower taxes, maybe. Otherwise, more of the same, lots of talk and little else.

Is It Back To Glass-Steagall?
Obama Has A Chance To Do The Right Thing With Banking
The Obama administration is about to attempt to make the banking system less risky. Yet, the real question is whether the president's embracing of Paul Volcker's principles, which some are calling a return to the Glass-Steagall act, what they seem to be or just another tricky attempt to further the left leaning agenda?

First, a little history. After the Great Depression, Congress passed the Glass-Steagall act, which essentially prevented your neighborhood bank from acting like a speculative Wall Street firm. It worked. Most of the recessions prior to the most recent one weren't as widespread in as many ways because more normal people's money wasn't as affected.

When president Clinton, at the behest of Alan Greenspan repealed the Glass-Steagall act, it put the financial system back into a higher risk model that linked Wall Street to Main Street via the comingling of commercial banking and investment banking under the same roof. That's why when subprime mortage derivatives melted down so did everything else.

We're on the record as being for the Glass-Steagall act being resurrected, which is why we're very interested in what the president is likely to propose. We should also note that Senator McCain and others have been pushing for a return to Glass-Steagall and have been putting together legislation, which means that there is likely to be something along those lines at some point before Obama's first term ends.

So here's what we've found out. Mr. Obama is going to announce some kind of new rules today. No one really knows what the rules are, but Paul Volcker has reportedly influenced this proposal. According to The Wall Street Journal: "Mr. Obama's proposal is expected to include new scale restrictions on the size of the country's largest financial institutions. The goal would be to deter banks from becoming so large they put the broader economy at risk and to also prevent banks from becoming so large they distort normal competitive forces." The Journal added: "Mr. Obama is also expected to endorse, for the first time publicly, measures pushed by former Federal Reserve Chairman Paul Volcker, which would place restrictions on the proprietary trading done by commercial banks, essentially limiting the way banks bet with their own capital."

Also "The rules could also keep banks out of the business of running hedge funds, investing in real estate or private equity, all businesses that have become important, profitable parts of these banks."

Here's what troubles us. The Journal reported: "The White House's proposal, one aide said, wouldn't resurrect the exact limits put in place by the Depression-era Glass Steagall Act, which essentially walled off commercial banks from investment banks and was repealed in 1999. Instead, the White House proposal would seek to return the "spirit of Glass Steagall," meant to limit large banks from becoming too big and complex that create enormous risk."

What's the focus of these rules? Is it to cut down the size of the banks for political and ideological purposes? Or is it to put back the safeguards that kept neighborhood banks from becoming speculators on weird derivatives?

So far, it's not clear. We'll know more as the news gets out and the information becomes more available.

Conclusion

WHy are we so worried? Because before the Massachussetts election, the health care bill before Congress was a major step toward socialized medicine and a threat to not just the medical sector but also to the economy as the repercussions of higher taxes, fees, and less access to health care for the public loomed.

Mr. Obama has an excellent chance to do the right thing here, by doing something very simple, return to the Glass-Steagall act as it was, as it was shown to work for decades.

Instead, there is the chance that the White House and Congress if it gets involved will once again let ideology and the agenda color the tone of whatever bill they put together, leading to what could be another colossal failure, or even worse, the passage of a law that actually hurts the banking system, warts and all.

Wall Street will kick and scream no matter what. And yes, there is a need for some change here, as with health care. Our point is that reason and the founding principles of America should prevail.

Which means that as always, the devil is in the details. If the details are good, we would be for a return to a Glass-Steagall like environment. But if it's another veiled swipe at private enterprise, capitalism, and entrepeneurship, we hope that it fails.

We'll see what happens, but this is the next battle zone.

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Market Moves - Stock Of The Day
SPDR Financial Sector ETF (NYSE: XLF) Takes Wait And See Approach
The SPDR Financial Sector ETF (NYSE: XLF) is in a holding pattern as traders parse Goldman Sachs' (NYSE: GS) earnings results and details of Washington's latest proposals.



Chart Courtesy of StockCharts.com




Earnings for banks have been fairly robust, all things considered. So XLF has held up. But there has been no rally.

The Goldman earnings report, released just before we went to press was a blockbuster on earnings, but was light on revenues. The stock was holding up fairly well in knee jerk trading. Yet, there is no telling what will happen as the details of the report get more attention.

More important is what comes out of Washington, with revival of Glass-Steagall coming to the surface in th enext few days.

XLF has support at 14.63 and resistance above 15. Trade carefully.
 

 


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