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Stock Market Strategy: FINREG. Passes and GDP Revised Lower, How Will Equity Markets React?

In our last ‘Stock Market Strategy’ piece, I wrote the passing of FINREG. should be viewed as a positive by the market.  Markets often respond well to the clearing up of uncertainties. My comment is not an endorsement of the regulation and as expected the resolution was extremely watered down.  The NYSE Comp. closed up .5% today and financial stocks led the way. However, we will need to see continued strength next week for my expectations to be fulfilled.

Meanwhile, another ’sign post’ discussed on June 15th was the equity market’s reaction to bad economic news.  I explained ‘bad’ was the new ‘good’ because market participants will begin to price in another round of stimulus as well as resumed quantitative easing by the Fed. Today’s downward revision of GDP expectations did not send the markets lower. Moreover, Gold closes the week at a new high and oil trades up over 3%. Why would oil trade higher if GDP growth is headed lower? Don’t textbooks teach economic growth is needed for higher energy prices? The answer: Throw away the text books.  Oil rallies today as the US$ declines. Bad economic numbers means more Q.E. equaling weaker currency and higher commodity prices.

Briefing: The biggest headlines this morning pertain to the agreement by U.S. Congress on financial regulation, which includes some concessions for the financial sector. Under the bill, banks will still be allowed to invest in hedge funds, private equity, albeit with limits, but they must use a subsidiary to trade derivatives. Private equity and hedge funds would have to register with regulators and disclose greater information about their businesses….

Finally The Farce That Is Fin Reg Reform Passes And Wall Street Can Resume Its Rapid March To Financial Armageddon

As if anyone thought otherwise, the final shape of finreg has now been formalized and as Shahien Nasiripour at the Huffington Post notes, “many of the measures that offered the greatest chances to fundamentally reshape how the Street conducts business have been struck out, weakened, or rendered irrelevant.” Congrats, middle class, once again you get raped by Wall Street, which is off to the races to yet again rapidly blow itself up courtesy of 30x leverage, unlimited discount window usage, trillions in excess reserves, quadrillions in unregulated derivatives, a TBTF framework that has been untouched and will need a rescue in under a year, non-existent accounting rules, a culture of unmitigated greed, and all of Congress and Senate on its payroll. And, sorry, you can’t even vote some of the idiots that passed this garbage out: after all there is a retiring lame duck in charge of it all. We can only hope his annual Wall Street (i.e. taxpayer funded) annuity will satisfy his conscience for destroying any hope America could have of a credible financial system.

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The Latest Revisions Show Further Deceleration in Q1 GDP Growth - Briefing

The third estimate of Q1 2010 GDP was revised down from 3.0% to 2.7%. The move was a slight disappointment as the Briefing.com consensus estimate did not expect any revision to occur. Even though the negative revision was unexpected, the fact that GDP remained near its potential 2.8% long-term growth rate will not alter our view about the stability of the economic recovery. Since the revisions lag the current data by two months, and the changes were relatively minimal, we do not expect the market to have much reaction to the news. The drop in GDP was primarily driven by negative revisions to personal consumption and an increase in imports. The estimates were partially offset by increases in exports and private inventories. Personal consumption was revised down from 3.5% growth to 3.0% and was caused by weaker-than-expected services consumption. Imports were revised up from 10.4% to 14.8%, which removed an additional 0.5 percentage points from GDP growth. Export growth increased from 7.2% to 11.3% while private inventories were revised up $7.3 bln to $41.2 bln.



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