What Did We Learn from Last Week's Market?

by: Bill Cara

Capital markets are on tenterhooks. General Electric (NYSE:GE), arguably America’s most impressive private sector company, is under fire for misleading the country with its recent statements that earnings expectations would be met, when they were not, and that the economy and the financial system is in good shape, when a couple weeks later they are saying it is not.

So this week General Electric and its CEO Jeff Immelt are in the spotlight. When the news broke near the end of the week, the equity market was crushed and capital fled to the supposedly safe-haven of short-term US Treasury bills and notes.

On Friday, GE stock dropped -12.8%, causing a loss W/W of -14.7%. The S&P 500 futures plunged -2.0% on Friday, ending the week down -2.6%. Clearly the Bulls have lost the leadership of the General. If the equity market is to stave off collapse, the pretense that Goldilocks is alive and well must be saved and new leadership step up in the equity market.

What could that possibly be? Let’s see; the Financials (NYSEARCA:XLF) were down -4.7% this week, next worst performer of all the market sectors. Hmmm, the Consumer Discretionary stocks (NYSEARCA:XLY) also were hammered -3.8%, so the American consumer is not spending enough to protect the consumer economy.

So, you have the manufacturers, financials and consumers all leading the market south, and only Energy (love those record high prices at the fuel pumps) ((NYSEARCA:XLE) up +0.3%) and Healthcare (need I say more) ((NYSEARCA:IYH) -0.83%) trying to support a sinking ship.

You have been entertained by GE’s CNBC long enough to conclude whether your experience in listening to “personalities” is worth it. Is it time to turn Financial TV’s version of a reality show off the air and get serious by studying capital market price trends and cycles?

This week, many of you have been listening to the concerns of the leaders of the European Economic Community [EEC] and the International Monetary Fund [IMF]. They, and others like them, are only saying what many of you already know. To wit: Just because market prices are high, doesn’t mean that economic value exists and that there will not be a reversion to the mean.

Obviously, you all learned that with the 2005 US housing market, and subsequent events.

We still need these bankers to come clean as to the value of their holdings of securitized mortgage-backed asset paper. Our portfolios don’t operate well in fantasy land.

If the financial backing is missing, then the bankers’ securities need to be fully written down. So far, the best estimates are that such write-downs are perhaps 25% of what they need to be. Also, the house foreclosures situation is worsening, and US home-owners and investors in the housing market are likely to take from -15% to -33% additional loss of market prices before price and value are back in balance. That situation hurts the banks more than anybody because the extent of their write-downs will need to be much higher, putting many of the banks into a position of insolvency.

The airline industry is being taken down by high fuel costs, but at least they have the reasonable expectation that people need to fly in a commercial aircraft in the years ahead. But do the people need banks? That’s a question the bankers ought to ask the telephone companies that relied on copper wires and outrageous long-distance billing until fiber optic cable and wireless technologies leveled the playing field. Now any of you can call me in the Bahamas free.

Yes, I think the bankers are in fear that the same concerns and technological solutions will lead to a global credit union or community trust. Aha, now you are starting to think, hey why not a Cara Community Trust in the Bahamas?

Well, it just might happen.

A week ago, I made the following comments that should be extended:

… it goes without saying that the new unwritten rule on Wall Street is that no investment bank of any large size is going to be allowed to fail; that the People’s money, not the shareholders capital, will stand behind the company debts and the mistakes of executive management. That offends me because I stand up for social equity, not socialism.

This latest situation in Washington is simply mind-boggling to the owners of capital in America who once had a measure of faith in their capital market. Now it is apparent that the market will be played by Henry’s Rules, and Mr. Moral Hazard had the arrogance to not even show his face at these crucial hearings. That’s not right.

Careful planning on his part had Henry Paulson in China working on a deal that would help Wall Street investment bankers, which is the flow of funds from Chinese investors, public and private, into America, public and private, via investment bankers. I’ll say this again, once: Henry Paulson, as Secretary of the Treasury of the US, and the individual who was integral to the Bear Stearns (NYSE:BSC)-JP Morgan (NYSE:JPM)-Fed deal, had an absolute and total obligation to stand before Congress and give testimony as to what he did to save the financial system of America that others who gave testimony stated was so critical at the time.

Paulson knew that Rep. Senator Chuck Grassley wanted the moral hazard issue addressed. He knew that Rep. Congressman Dr. Ron Paul and Dem. Senator Bob Menendez were going to demand answers to the committees they are members of. Yes, the China mission was important. The Senate hearing was more important.

Life is all about choices. Had one of Paulson’s parents passed, he would not have gone to China. The gravity of the Congressional hearings was such that the Treasury Secretary had an obligation to stand there and give the full truth to the American people. He turtled.

He did it to protect the Fed and the Administration and the increased role he wants them to play in the US government. I say enough is enough from Mr. Moral Hazard. There is no need to have a Federal Reserve System, which manages the People’s money, under the control of private bankers. It was a ridiculous notion to begin with, and now is leading the capital market into an abyss that could possibly result in an economic depression and a very weak state of the union.

There is also no need for the President’s Working Group on Financial Markets (aka PPT) to have any power whatsoever other than being one of several policy study organizations within the US government.

These are not principles on which the US was founded, and the imbalance that Paulson is recommending clearly conflicts with public policy from Congress that leads to legislation with checks and balances the People need.

At the end of the day, what goes around comes around. The People whose ancestors fought for America, and those who have recently joined it for opportunity and protection, will have their needs met. If they don’t, let’s call a spade a spade; in that unlikely event, America could no longer be called a democracy, and the bankers will have won.