Morning Musings From Art Cashin - The Bubonic Plague And Healthcare Reform

Via UBS Financial Services

As Told To….. – I was at an all-day, offsite seminar yesterday so this is not the usual eye-witness account but is based on input from friends. The stock market opened marginally weak but quickly changed to the upside in reaction to a sharp downside move in the dollar.

Some upbeat talk from some airlines about the “return of the passenger” combined with strength in the railroads to take the Transport Index to a new 52 week high. Since the Industrials have not made a new high that sets up a Dow Theory “confirmation” challenge. If the Industrials fail to make a new 52 week high that would set up a negative divergence, hinting a meaningful pullback in stocks.

For much of the early going the Industrials looked like they might have a go at a run toward new highs. Part of the thrust came from a series of rumors that spurred trading in the likes of Fannie, Freddie, AIG and Citi. The rumor that seemed to help them all was a zany thesis that the U.S. might ban shorting of the companies that it had a large stake in. While the rumor seemed whacky and unfounded, a rumor is not responsible for who believes in it. That became evident as buyers surged into the above-named stocks, probably on the theory that a shorting ban could cause a massive short covering rally.

Citi benefitted from a couple of other rumors. Charlie Gasparino reported on Fox that the U.S. government was looking to sell its Citi stake. That might free the company up. The stock spiked 7%. Also helping was the strong demand for some preferred shares the company was issuing.

The rumor driven frenzy in those stocks swelled the volume sharply. Monday looked like the slowest day of year, followed by the highest volume in a month. All thanks to a couple of rumors.

Shortly after 1:00, the rally in the averages seemed to sputter. The initial pull back was small. They regrouped and tried to rally again shortly after 2:00. They failed to get past the earlier high and things started to turn ugly, quickly. Bids evaporated and stocks plunged in a trapdoor selloff. They shot into negative territory.

In the final hour, they circled the wagons and regained plus territory but marginally. Unfortunately, the general volume (away from the four rumor beneficiaries) accelerated on the selloff.

What caused the sudden selloff? They were several theories. First was simply technical. The failure of the S&P to surmount its earlier intra-day high, presented a double top and a failed attempt to break through Januaries highs. That, said the napkin readers, spooked the bulls.

Some friends had another theory. Shortly after 1:00, a Wall Street Journal blog run a story on a speech by a Fed official. Here’s a bit:

For some time now, Federal Reserve officials have been hesitant to put a precise time frame on when they will begin to tighten policy, except to note the action lies well into the future.

But on Monday, one of their chief lieutenants, the man charged with implementing Fed policy, offered a pretty clear take on the likely timing of a move up in interest rates. The official, New York Fed Markets Group chief Brian Sack, has no formal role in setting monetary policy. But his position elevates his importance, and he suggested in a speech some sort of rate tightening will occur by late year.

“The current configuration of yields and asset prices incorporates expectations that short-term interest rates will begin to rise around the end of this year,” Sack told a group of economists in Virginia. “The markets seem prepared for the risks toward tighter policy,” he said, adding a “decent-sized term premium” on longer-dated yields suggests low chances of a “sizable upward shift in yields’ when that tightening comes.
Why is this observation important? Sack’s speech was entitled “Preparing for a Smooth (Eventual) Exit” from the current state of very stimulative monetary policy. If the Fed wants a tranquil exit from its current stance of 0% interest rates and if it thinks market are priced for the move, then it’s reasonable to believe a late-year increase in rates is what policy makers have penciled in.

Sack’s speech also laid out a path for the unwind. He sees the Fed draining reserves on a temporary basis, then raising rates, all the while allowing the $1.7 trillion in mortgage and Treasury assets it will have purchased by end-March to mature. Any active sales will come much later. Importantly, he said the tools to drain reserves temporarily will be in place by midyear, lending additional heft to the idea the Fed can start easing rates up off 0% by year end.

That hinted tightening could come sooner than expected. Some friends claim it caused a lot of buzz and may have contributed to the selloff.

We’ll investigate more today.

Spotty Performance – My ham radio pal passed along the latest sunspot data. For the period from February 25th through March 3rd, the numbers were 30, 26, 26, 13, 36, 39, and 39. Longtime readers will recognize that for the first three days, we had basically two spots per day. Then, we dropped to one spot followed by three days of approximately three spots per day. It’s nice to see the action but we’re still below normal. Despite the recent thaw, remember where you put that sweater.

Consensus – Assaulting January highs. Stay Nimble.

Trivia Corner

Answer - If you spell "Tennis" backward, you find the last three letters spell "Net" - a piece of equipment used in Tennis.

Today's Question - Tomorrow, today will be yesterday and yesterday, today was tomorrow. When tomorrow is yesterday, today will be as close to Sunday as today was when yesterday was tomorrow. What day is it?

And here is why fixing healthcare, whether today or in the middle ages, never works when the government gets involved:

History

On this day in 1349, in the midst of the infamous Black Plague epidemic, the forces of government, science and academia came together with a plan to save the people. As you recall from earlier episodes, the Black Plague had spread from the eastern Mediterranean throughout most of Europe killing millions over the preceding three years. People searched everywhere for the source of the plague…..a heavenly curse; a burden of immigrants; the result of spices in the food. It was tough to figure however, since whenever they held a conference either the host area caught the plague or the visitors did…..so…..not too many conferences.

Then in the six months preceding this date the death rate leveled off…..or seemed to. So in castles and universities and town halls across Europe, great minds pondered the cause of the plague. And they came pretty close. The collective governmental/academic wisdom was that the source of the Black Plague was fleas - (absolutely correct). So the word went out from town to town across Europe - to stop the plague - kill the fleas -by killing all the dogs. And immediately the slaughter of all dogs began.

But like lots of well-intentioned governmental/academic ideas it was somewhat wide of the mark...and had unexpected consequences. The cause was fleas alright but not dog fleas…..it was rat fleas. And in the 1300's what was the most effective way to hold down the rat population…..you guessed it - dogs. So by suggesting that townsfolk kill their dogs, the wise authorities had unwittingly allowed the rat population to flourish and thus a new vicious rash of Black Plague began. Before it was over, three years later, nearly 1 out of 3 people in the world had died of the plague.

To mark this eventful period, take time to review your public servant’s plans for your welfare. Whether taxes or healthcare, they'll work night and day for a solution. It may not be as efficient as the way that they handled social security but - what is? Just remember that these public servants have your best interests at heart. Don't dwell on the DARK AGES. Back in those days the seat of government often was filled with rats, vermin and leeches. Thank goodness those days are over.

(Historic footnote…..Published sources say that with so many people dying, millions of estates had to be settled - result…..the fallout of the plague was a huge growth in....the number of lawyers.)

There were no carts on Wall Street with guys crying "bring out your dead" yesterday. But in mid-afternoon, the stock market looked like it needed a doctor.

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