We are approaching a pivotal time in the US financial markets, where things that have gone before will be forgotten and the future will become more clear.
Between April 27 ans May 4 — the time of a long road trip in the new baseball season — we will learn the following;
–1: Third quarter 09 GDP initial estimate;
–2; Federal Reserve interest rate decision and economic outloook;
–3: Chrysler bankruptcy, merger or both;
–4: Bank stress test results — first the leaks and then the real thing;
–5: April unemployment.
The key dates are Thursday, April 30 for items 1, 2 and 3, and Friday May 4 for items 4 and 5. But the dates are not nearly so important as the numbers and the directions to the economy and national policy that will be revealed.
And the market action may be more volatile and frantic in the days immediately preceding and following the official announcements.
What will be the difference between good results for the markets and bad one– or as the Las Vegas traders might say, what is the “over-under”?
(1) On the Q1 GDP: bearing in mind that the first estimate reflects merely an educted guess about the March contribution, any number “less” than a negative 5% (ie, -4.7%) would probably be considered a “win” for the economy, and a negative 6% or worse would doubtless be viewed negatively. Here is definitely a case where “lesss is more” — so let’s go with -5% as the tipping point.
(2) The Fed is surely going to leave interest rates unchanged, so the swing issue is how they will characterize the economy. Will the statement cite anything positive about the housing, credit or consumer markets (forget anything positive about the job market for now)? Noting the very recent drop in new home inventory would be good for starters. For once, the Fed’s statement will come after the GDP estimate is released earlier that morning, and they can craft their post-meeting words acordingly. Our bet — some reference to the Fed’s continuing commitment to do “whatever it takes” to restore the economy to health while inflation risks remain subdued.
(3) Chrysler: many are betting on a bankruptcy filing before Thursday — it could even be a “trial ballon” of sorts to scare the wits our of GM’s unsecured creditors and unions. Chrysler’s creditors are in the main secured, so they may even figure to fare better in a bankruptcy, even if their TARP-lender friends at the Us Treasury, which is also trying to resolve Chrysler, disagree. The US Government would seem to have more conflicts of interest in this situation than a rating agency back in the old days (say, 2006). But the truth is that the secured creditors are in the drivers seat here more so than Fiat or Geithner, so a deal will have to be made because the Treasury will not risk pulling their TARP out from under them or exercizing its inchoate equity voting rights to the detriment of other shareholders’ best interests (although that apparently was not the case last December with Bank of America and Merrill Lynch). Bet on a structured dismemberment of our generation’s Studebaker, with Fiat getting a reasonalby good deal.
(4) Stress test results are best kept between you and your cardiologist, but these results are going to be shared with the victims’ (oops, patients’) creditors. This would be like your primary health insuance carrier having a direct feed from you EKG and adjusting your premium rates accordingly. Since no one expects that any bank fingered for having serious capital adequacy problems would ever be able to raise it in the public or private markets, look for a couple of forced dismemberments or forced marriages (somewhat like Bank of America/Merrill, but without the subterfuge, since the results would be thoroughly disclosed). And some bank heads will roll in the process (the over-under is 1.5, like an NFL point-spread).
(5): Unemployment above another 600,000 for the month would be a clear negative to the markets, and less than 500,000 something of a positive, so let’s go with this range as the margin of the moment for the markets by next Friday, if all this has not been drowned out by the latest swine flu news — one enemy we can all agree on how to fight.
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