On his CNBC TV show today, Larry Kudlow congratulated Citigroup for raising $3 billion in a common stock offering. However, he neglected to mention why Citi needs the money.
Earlier in the day, the Wall Street Journal reported that Citi had two internal hedge funds lose 75% of their value – hundreds of millions of dollars, maybe more.
Even worse, the WSJ reported that Citi pitched the funds to retail investors as ideal for a conservative retirement strategy. And those investors are now suing Citi. Today, Jim Cramer called for an SEC investigation of Citi, while Larry Kudlow complimented Citi.
Note to Kudlow’s loved ones: It’s time for an intervention. Larry can’t be left to run around lose during an election year any more.
It was absolutely absurd to see Larry Kudlow and Brian Wesbury on Friday popping champaign corks over the fact that GDP for the first quarter might come in barely positive. In 2001, GDP was barely positive at 0.8%. Was that cause for celebration? Was that a catalyst for higher stock prices? I don’t think so.
I have not missed an episode of Kudlow’s show for years; going back to when it was Kudlow & Cramer. And I know perfectly well that Larry’s mantra is “buy stocks for the long run.” So, I know what to expect. But with Friday’s episode, Kudlow has come very close to throwing away his credibility with his hard-core fans. The show was almost a self-parody.
Earlier in the week, Kudlow ranted that the Wall Street Journal was being too negative. You might think that Rupert Murdoch would try to sugar-coat the bad news to give the Republicans a boost, but he has not. Kudos to Murdoch for maintaining credibility amongst his readers.
Now that Kudlow has gone into full-blown political-propaganda mode, people interested in objective economic discussion don’t need to tune in until after the presidential election.
The Wall Street Journal reported Thursday that commercial banks have increased their begging at the Federal Reserve Bank’s “Discount Window”:
“Average daily borrowings were $10.73 billion, the highest since after the Sept. 11, 2001, terrorist attacks.”
Why did this happen? Because the banks that blew all their depositor’s cash in real-estate speculation can’t get loans from other, more sensible banks to refill their vaults. Actually, they probably could get inter-bank loans, but they would have to pay the Libor rate that bankers use amongst themselves.
Since the Libor rate is now 3.07%, which is 36.4% higher than what the Fed is charging, you now have a stampede to the Fed.
The Fed did not want this. Their plan was to lower interest rates and let the strong banks lend to the stupid banks. But the strong banks aren’t playing ball; they would rather stuff their cash into a mattress than loan it out to fools.
As “Higher Interest Rate Euphoria” breaks out in the financial world, let’s not get confused about what is really happening here. By hinting at a possible end to rate cuts, the Fed is trying to make a virtue of necessity. The market has over-ruled the Fed’s rate cuts, and now the Fed is pretending that that was their idea all along. Any way you slice it, credit is contracting and the economy will continue to suffer for it.
Could be. The market closed with improved momentum and volume today. And if the dollar keeps moving up (dollar vs. euro chart), the rotation from commodities into financials that surprised everybody today will likely continue.
The last three times the market came up to 1400, it could only hang there for a day or two before falling back. This time, it has been hanging around for five days. So, I think the chances for a breakout are much better this time.
But will it be a false breakout? Maybe. A close above 1400 will be nice, but the S&P 500 will need to close above 1440 or so in the next few days to confirm the breakout. During that time, we will no doubt be getting lots more bad economic news, so a close above 1400 tomorrow won’t be cause for celebration just yet.
The S&P 500 is attempting to break-out again today on a massive rally in the financials. As the G7 talks of a stronger dollar policy, and the Fed hints at a cessation of interest-rate cuts, money is coming out of commodities and looking for a new home.
A lot of that money has gone into financials. Are higher interest rates good for financials? Not a chance. So, you could call this rally “dumb” as Jim Cramer did today. However, if an abnormal amount of money left the financials to go play in commodities and is now simply returning, it might not be so dumb.
The dumb part would be that the idea of higher interest rates will be good for an economy in recession. That’s really dumb, and a higher dollar will hurt one of our only strong sectors: exports.
Maybe we have to take a deeper recession to kill off inflation, but that doesn’t sound like a catalyst for higher stock prices to me.