Saturday, June 26, 2010

Be Careful What You Wish For!

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By Mike Conlon | June 25, 2010

Overnight, the US Congress unexpectedly came to a deal and has agreed on bill regarding financial reform and regulation.  The uncertainty surrounding this bill has been weighing on the markets, as it was unclear what the outcome might be.

As news trickles out of the 2000+ page document and what it means for the banks and the market in general, at least the uncertainty has been removed.  Uncertainty= volatility.  Now, whether or not this bill will actually accomplish what it is intended to remains to be seen.  What my experience tells me is that no matter what is in the bill; Wall St. has already prepared for likely scenarios and has already devised ways to circumvent regulation.  In addition, enacting legislation of this magnitude always comes at a cost, and the brunt of that cost is likely to be paid for by consumers, and not the banks themselves.  Banks will simply pass through the new cost so that executives can still buy beach houses.  If you don’t believe this will happen, take a look at bank stocks that are trading higher in the pre-market.

This comes ahead of this weekend’s G-20 meeting, where the US will push other nations to consider enacting similar reform.

Economic data is out showing that US GDP grew 2.7%, vs. an expectation of 3% and personal consumption figures were at 3% vs. an expectation of 3.5%.  This falls in line with what the Fed said the other day that we are seeing growth, albeit moderate.

Overnight, Japanese CPI figures came in at -.9% vs. -1.1% showing signs that deflation may be subsiding.

The market started out in risk taking mode, but it appears that may be reversing.

In the forex market:

Aussie (AUD):  New Australian PM Gillard has backed away from the mining tax that was the eventual downfall of her predecessor and is open to discussion and negotiation.  The tax was largely seen as anti-investment in one of Australia’s biggest industries.

Kiwi (NZD):   The Kiwi is lower despite a widening trade balance surplus but the market is concerned about a potential Chinese slowdown which could hamper demand for exports.   However, this figure fell short of expectations (814M vs. 850M).

Loonie (CAD):  The Loonie is higher this morning as its major trading partner (the US) appears to be the only country not entertaining the idea of reduced spending.  Unlike the other commodity currencies which are more tied to China, expect the Loonie to benefit as long as the US maintains its spending spree.

Euro (EUR):  The Euro is lower continuing the trend of heightened fear from the debt crisis.  Today marks the fourth day in a row that European stocks are lower as we head into the G-20 weekend.

Pound (GBP):  The Pound is mixed this morning and it will be interesting to see what (if anything) comes out of the G-20 meeting.  The UK “tax and axe” strategy is diametrically opposed to the US strategy of “spend, extend, and pretend”.

Dollar (USD):    The Dollar is somewhat mixed today as the market figures out exactly what this new financial regulation means.  In addition, GDP figures were lower than expectations, but showed that growth, while moderate, is occurring.

Yen (JPY):  The Yen is higher this morning, as CPI data showed that deflation came in less than expected.  In addition, minutes from the rate policy meeting showed that there was actually talk of inflation.  The Nikkei was down overnight, and speculation that the G-20 will not come to a consensus over global economic policy has strengthened demand for the safe-haven of the Yen.

All of my years on Wall St. have taught me one thing:  that politicians in Washington DC cannot compete with the brainpower of Wall St.   Today, champagne is flowing as the uncertainty over the worst-case scenario from financial regulation has been lifted.  True, this isn’t a “home-run” for Wall St.; but I can tell you that they have been prepared for EVERY possible scenario to come out of this and already have plans in place to line their pockets at the expense of the general public.

While regulation is good in theory, it always brings about unintended consequences and in the end it is always the consumer that gets hurt.  Now that this is out of the way, the G-20 meeting will be the focus of the weekend but don’t expect anything of substance to come out of it.

The major problem here in the US is jobs.  Period.  Next week’s Non-Farm Payrolls report will show if we are gaining any jobs in the private sector.  If this is a bad number, look out below.

So there is potential for risk over the weekend, but my guess is the G-20 will be a non-event.

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