Market Breathes Sigh of "Relief" Over Political Fissures

by Steven M. Cohen  •  Mar 11, 2009 at 12:43 pm

http://www.buyselljump.com/2009/03/market-breathes-sigh-of-relief-over-political

Investors finally caught a break yesterday with a market rally of nearly 6%. Although perhaps only a brief respite from the grinding downward spiral, it was impressive in both its strength and suddenness.

The type of unexpected surge we saw yesterday naturally revs up the conjecture machine as commentators and investors struggle to explain an abrupt shift in direction. A variety of explanations poured forth, among them: Citi's Vikram Pandit's surprisingly encouraging description of the company's performance for the last two months; Ben Bernanke's comments suggesting a slight adjustment to mark-to-market asset valuation; and, perhaps most convincingly, the SEC's apparent intention to put limited restrictions on short sales and to reinstate the "uptick" rule.

There is another reason that I have not seen cited yet, so obvious that it could be found on the front page of yesterday's New York Times. The right-hand column was entitled "Obama's Budget Faces Challenge by Party Barons." It outlined a number of significant objections raised by important Democratic House and Senate members on key aspects of the budget, including tax deduction limitations, farm subsidies, Medicare/Medicaid/Social Security cuts, emissions caps, and several other proposals.

Some Democratic leaders apparently are developing a heightened sensitivity to their constituents' objections to virtually unlimited spending, represented not only in the upcoming "stimulus" package but in the "omnibus" proposed budget as well. Additional heat has been applied by Republican congressmen, who have little to lose in making loud and strenuous complaints about the level of spending being ushered in by the new administration. An additional rallying point was John McCain's amendment to strip $7 billion in earmarks from the bill, which failed for a second time but was symbolically important as a rallying cry for those in Congress looking to slam the brakes on the runaway spending locomotive.

A similar pattern of evolving objections could well accompany the fireworks that will be created over the trillion dollars in "stimulus" spending proposed by the Obama administration. The same issues and a lot more are likely to be raised, only on a much larger scale. Perhaps market participants are starting to realize that the most gigantic spending bill in the history of the planet, chock full of social reengineering mandates, is not a slam dunk after all.

The market got another piece of good news yesterday that wasn't listed among the conventional explanations for the rally. Some influential Democrats surprisingly are backing off in their support of the ironically-titled "Employee Free Choice Act," the infamous card-check legislation that would eliminate the secret ballot in union organization efforts. The objections among the business community in general to this odious bill could fill many pages, and its perhaps dimming prospects are a significant positive development for the market.

A less-dire tax-and-spend picture, along with the abating threat of anti-business legislation, is a legitimate reason for a market rally, however brief it may prove to be. Investors will continue to respond to the evolving political picture, delivering a constant real-time verdict on politicians' efforts—those both sincere and disingenuous-- to address the financial meltdown.

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