MORNING BID – The Forty Thieves Await

Sep 19, 2014 12:21 UTC

Reading the tea leaves on what’s likely to happen with the debut of Alibaba Group Holdings isn’t an easy task given a few of the weird quirks of this IPO that come into play. Shares will start trading in an hour or so after the open of trading on the New York Stock Exchange, and while it’s tempting to think the various wrinkles that come with the stock will prevent it from being as volatile as first-day activity is in hot deals, it’s hard to see how it doesn’t turn out any other way than the usual crazy way.

The company has made a show of saying it wants most of the shares to end up allocated to the fewest of large shareholders possible – the big active managers (since index funds can’t get in there just yet) and sovereign wealth funds that see this as a long-term play to appreciate over a period of time. Fund managers are in the midst of finding out how well they did (and with about 40 institutions requesting $1 billion allocations on a $22 billion deal, a lot of people are going to walk away from the table hungry), and the dynamic it creates after the open is sure to create a lot of activity.

Finance professor Jay Ritter laid it out pretty well in a Reuters story, pointing out that those that don’t get what they want and instead get a heck of a lot less – say, 1000 shares instead of 15000 – might turn into sellers rather than buyers, especially if the early anticipation for the stock among hedge funds, retail investors and other types who won’t get much of the first bite of the deal dive in for a chance at the company on its first day. If that happens, as one event-driven manager put it, it changes the calculus. A $68 stock that trades at $68.50 stays in an investor’s portfolio; a stock that jumps to $90 a share is another story, and institutions that don’t get what they want might take their gains and go home, thankyouverymuch. In addition, as Alibaba is selling 320 million shares along with an additional 128 million or so that could hit the tape as a result of not being restricted through lockup predictions, it’s hard to expect anything but a heck of a lot of trading in its debut.

Twitter’s first day of trading was 117 million shares in the fourth quarter of 2013, and Visa’s first day volume was 177 million shares. General Motors, in its return to the market after restructuring, had 458 million shares traded in its first day. The infamous Facebook IPO saw 580 million shares of trading on its first day, but some of that has to be attributed to the epic snafu that accompanied that offering and the inability of investors, market-makers and traders to make heads or tails out of what was going on (it’s not a record Alibaba wants to emulate…but of course Facebook debuted on the Nasdaq, not the NYSE). There were a number of other big deals that opened up with volume of 40 to 50 million shares in the first day, but Alibaba seems assured to exceed that.

Uber, but for lawsuits

Jordan Fraade
Sep 18, 2014 21:14 UTC

Uber is still on a roll. The car-share service may have faced more than its share of controversy and legal challenges, but the company continues to do well — both in terms of its $18.2 billion valuation, and as a convenient metaphor for all the promises of the sharing economy. That doesn’t mean all its problems are over, though. As Kevin Roose points out, startups like Uber, which hire independent contractors to do work traditionally done by full-time employees, may yet be forced to change their practices.

This arrangement, which Roose calls the 1099 economy, means that companies don’t have to worry about paying for things like health insurance or workers comp for injuries. Lydia DePillis, reporting on the home-cleaning service Homejoy, explains the business model as follows: “Theoretically, Homejoy is just organizing the masses of people who already offer their cleaning services independently…and taking a cut in exchange for access to an attractive marketing platform.” But in several states, legal challenges to the 1099 economy model are mounting, hinging on the definition of what counts as an “employee.”

Roose asks:

“Does the worker have a schedule set by the company? Does the company require the worker to wear a uniform, receive job training, or use tools provided by the company? If so, that 1099 worker might be properly classified as a W-2 employee — and the company might be on the hook for thousands of dollars in back payroll taxes.”

Nicholas Carlson says that this isn’t just legal minutiae: Being forced to reclassify employees “could seriously spike costs for many startups — at a time when prominent VCs are already worried about how much money startups are spending.”

Outside the courts, Uber employees are also taking ground-level action. Last week in New York, Uber drivers threatened to go on strike or move to rival company Lyft after Uber tried to require drivers to accept lower-paying fares. Uber agreed to the drivers’ demands, which Alison Griswold says is a sign that the landscape is shifting: “Riders are only one half of Uber’s platform. And in a market brimming with competition, aggravated drivers have other companies they can choose to work with.” Nicole Dieker points to Uber’s iffy auto-insurance rules as further evidence that people should think twice before using the service.

Still, it would be unwise to count out ridesharing — and the sharing economy more broadly. Just this week, Uber and Airbnb kissed and made up with regulators in Germany and San Francisco, respectively. Veteran NYC taxi regulators are flocking to Uber and Lyft to become consultants. And Emily Badger throws the coldest water of all on the anti-Uber crowd: In the last two and a half years, trips taken with the San Francisco taxi fleet have declined by about two-thirds.  — Jordan Fraade

On to today’s links:

A brief explanation of roughly 400 years of English-Scottish history – The Guardian

Buy now; pay later
Germans’ #disruptive payment system: Use cash – Matt Phillips

Data Points
America’s transit riders: “Disproportionately young, members of ethnic minorities, and…in relatively dense neighborhoods” – Sarah Goodyear

Kids Today
Wealthy parents are following their children to boarding school – Penelope Green

The Fed
Neglecting monetary policy has been Obama’s biggest economic mistake – Matt Yglesias

Data Points
Everybody is suing everybody, brokerage edition – Susan Antilla

MORNING BID – Apres Fed, le Deluge

Sep 18, 2014 13:34 UTC

The Kremlinologists turned out to be right, and the Federal Reserve left its “considerable time” language in its statement to assure the markets that it would be around for a while longer with rock bottom rates. It’s the divergent (to a point) reaction out of the markets themselves that is interesting to parse, and will be key to watch in coming weeks and months. The action in the stock market was to suggest the entire exercise was a snooze-fest, with stocks ending marginally higher (yes, the Dow at a new record) but not too far from where the major averages were trading just before the news. Which is to say the equity market, always the most optimistic of U.S. markets, has it in mind that low rates stay for now, and until “now” is “then,” it’s time to party.

Bond markets, inflation-protected securities and the currency markets saw things differently, and it’s those markets that may be more instructive to watch as the days and months go on and on. The five-year TIPS note saw its yield break above zero for the first time in ages, a sign that investors are starting to worry more about inflation, or higher Fed rates, which is interesting as consumer price data showed year-over-year inflation fall to a 1.7 percent rate earlier in the day. The dollar put together another strong rally, meanwhile, with the dollar index hitting highs not seen in 14 months and big rises against its main companions, the euro and the yen. And this is where the dot matrix comes in.

The dots, of course, are not an array of Janet Yellen’s prowess (or lack thereof) at the firing range, but the expectation from Fed officials on where they see rates in coming years. With 2017′s dots all suggesting rates at greater than 3 percent – and closer to 4 percent – the currency market has taken the hawkish outlook here, as Jens Nordvig, strategist at Nomura, said in an email to Reuters. There were two dissenters – the usual suspects, Charles Plosser of Philly and Richard Fisher of Dallas – who were not thrilled to see the statement so dovish, and so Nordvig takes all this and says that this should be “enough to sustain USD uptrend vs G10″ currencies, so, against the yen, euro, Swiss franc, pound and all the others.

He does warn, however, that the kind of uncertainty that would drive significant outperformance against the emerging markets currencies is not yet present, given rates are going to be low for some time, so that firm is closing some call options outstanding against the peso and ringgit while sticking with long bets against the yen and euro. “It will also soon be time to ask new questions on the Dollar. What will be the pace of tightening the US economy can cope with? What is the strength of capital flows into the US? Answers to these questions will determine whether the relatively sharp Dollar move in the last 2-3 months can be extrapolated over the next 3-6 months,” he wrote in late commentary Wednesday. There’s also the possibility, of course, that markets overreacted to the Fed – another soft jobs report would undo a lot of the recent gains in the dollar, or even a couple of other second-tier indicators reinforcing the notion that the outlook from individual Fed members on rates is just that – an outlook – and as a result cannot be trusted insomuch as the data will tell them what to do, dots and dollar strength and models be damned.

The dollar strength may be temporarily interrupted as investors await the overnight results of the Scottish referendum to decide whether the movie Braveheart was all for nothing (I think that’s what the vote is for, anyway). Varying polls have swung the pound wildly in recent days, but the latest set of polling seems to suggest a modest win for those who want to maintain the current situation, where Scotland remains the northern part of the United Kingdom rather than strike out on its own and force the English to build a 700-foot wall to keep them out (again, not sure if that question is on the ballot or not).

Economies of scale

Sep 17, 2014 22:35 UTC

For the economically nerdy among us (probably you, if you’re reading Counterparties) the key question in Thursday’s Scottish referendum is the economic viability of an independent Scotland. That’s probably not what most Scots are thinking about this week, but it’s an important question for the nation’s future, should they decide to go it alone.

Scale is a big deal for Scotland, with its 5.2 million people (out of the UK’s 64 million). Politically, “the creation of the EU created a safe space for small independent countries, especially after the Cold War ended,” say Felix Salmon. However, he writes, “in terms of economics, bigger is nearly always better.”

Justin Fox says that in the last few decades, small-but-affluent countries have done quite well — that is, until the financial crisis. Greece, Ireland, Portugal, and Iceland suffered substantially more than larger countries. Still, Fox doesn’t think Scotland is doomed. “What has made small countries so economically successful over the past few decades is less their smallness than the ways they’ve taken advantage of it,” he says. He quotes from a paper by small-country consultant (that’s a thing!) David Skilling, who thinks small countries can be successful because they are cohesive and can make good, realistic policy decisions very quickly.

While Chris Bertram likes small countries, he doesn’t love sovereign small countries. “What we need is less-than-sovereign entities embedded in larger structures … like the UK or the EU … Scotland won’t necessarily find a place in the EU easily (given what other states such as Spain want) and it makes EU exit for the rUK and the rise of a nasty English nationalism more likely.”

Yet, after crunching the numbers, economist Dan Gay actually quite likes Scotland’s chance at being a successful independent country. He says that many of the projections focus too much on last year’s numbers (pinched by austerity), rather than the longer term trend. He writes, “in many ways the naysayers fall victim to the austerian hype that’s pervaded Britain since the crisis. There’d be wiggle room. Scotland could distribute the pie how it wanted even if the overall sum stayed similar.” — Shane Ferro

On to today’s links:

Flexible repayment options for debt: Is liquidity or solvency the issue? – Nick Bunker
Why political science belongs in political journalism – Ezra Klein

On the Internet
The self vs the narrator – Elizabeth Spiers

The Fed
Here’s your Fed statement tracker – WSJ

Primary Sources
“Considerable time” stays in the FOMC statement – Federal Reserve

The gender pay gap is the narrowest since the Great Recession began – WSJ

Don’t insider trade like this guy – Matt Levine

MORNING BID — Breaking it down, Fed style

Sep 17, 2014 14:58 UTC

It’s all over but the dissection of the Fed statement, due later today, which will follow with a Janet Yellen press conference after the U.S. markets get word of whether the Fed did or did not eliminate the “considerable time” bit from its statement that saw markets go into a tizzy all of Tuesday. At this point the market believes that phrase now may *not* be eliminated, which marks the second reversal in about a week on this point. No matter what, somebody is going to be caught leaning in the wrong direction, but if the latest intelligence is that the Fed’s statement won’t change materially until the October meeting, then the freshest bets are probably in the direction of those betting on that much. So if the statement does cut out that language or modifies it in any way, you could see a selloff in equities, the dollar and bonds.

The meeting also brings with it the update on the Fed’s “central tendencies,” that is, its sure-to-be-incorrect projections on where the economy is going. Given the rebound in the second quarter that seems to have at least been somewhat sustained in the third quarter, it wouldn’t be surprising to see the Fed outlook for GDP bumped up for 2014 (currently 2.1 to 2.3 pct) and 2015 (at 3.0 to 3.2 pct – the Fed will predict 3 percent growth for the year-out period until we’re all Morlocks), and the unemployment rate expectations are projected to drop to maybe 5.7 to 5.8 percent from the current 6 to 6.1 percent expected at year-end. Which is all well and good, but it doesn’t give us a good sense, really, of what’s to happen going past the meeting.

What we may be looking for over a longer time frame is an elevation in volatility. Richard Leong, in a story last week, pointed out that the market is starting to see more options-related buying that suggest rising rates in the federal funds and eurodollar markets. In a Tuesday story he noted that various measures of volatility – including the Merrill Lynch MOVE Index, a measure of fixed-income volatility, is at levels not seen since mid-summer. The dollar is showing similar activity, with volatility in the currency markets finally picking up after being stagnant (ok, about as exciting as watching grass grow) for a good long period of months now. Nomura strategists are anticipating a further pickup in volatility post-Fed meeting among currencies, judging by options positioning.

The equity market isn’t quite there yet – the VIX still remains low, trading below 13, but volatility would be expected to pick up in other risk markets if the interest-rate arena begins to exhibit more gyrations. That’s because the moves in that market make it more difficult to fund carry trades to buy other assets – the dollar remains a cheap source of funds right now, but the cost of carrying such bets increases as rates rise and more importantly as the market gets more volatile. Where that leaves investors is unclear – Bank of America/Merrill Lynch notes that credit investors are going with shorter durations (which adjust more quickly as rates rise) and leveraged loans as the best choices over the next 12 months, and are a bit less sunny on high yield, which has the potential for some ups and downs in coming months.

Trimming the hedge funds

Jordan Fraade
Sep 16, 2014 22:08 UTC

The California Public Employees Retirement System is getting out of hedge funds. Calpers’ decision to divest the $4 billion it had in hedge funds (of about $300 billion total) isn’t exactly a surprise, since members of the organization openly expressed doubts about the investment strategy last year. But Calpers’ reputation as the gold standard among public-employee pension funds may portend changes in the way smaller pension funds invest their money.

It’s not that Calpers’ investments with hedge funds were performing badly; it’s just that they weren’t performing well enough to make the extra costs worth it. Hedge fund management fees cost Calpers $135 million in the last fiscal year, according to Bloomberg. Hedge fund investments earned it a return of 7.1 percent (below the target of 7.5 percent) and massively underperformed the fund as a whole, which earned 18.4 percent. Dan McCrum writes that “the more hedge funds that are added to the [Calpers] portfolio, the closer returns will be to that of the average hedge fund, which has failed to beat a simple mixture of stocks and bonds for many years.”

Matt Levine says this is, in part, about Calpers’ position as the largest U.S. public pension fund: “Calpers is the market. If you’re getting something pretty close to the market return anyway, then indexing is going to be cheaper and easier…” than putting a lot of money into hedge funds trying to eke out a slightly higher return. Chris Flood thinks that other pension funds are not as likely as Calpers to divest from hedge funds because they aren’t as large.

Other writers are more convinced that the gravy train for hedge funds is about to come to an end. Tadas Viskanta predicts that hedge funds won’t go out of fashion entirely, but rather, the last ones standing will be those who are really, really good at what they do. Barry Ritholtz thinks that Calpers has the power to put a serious dent in hedge funds’ high-performance aura (an aura that, he says, already “has proven to be a myth”). And Yves Smith thinks the age of the hedge fund is over: “There aren’t enough dumb enough rich investors to go around once the hedgies have lost the pension fund business. Short yachts, watch markers, GT cars, and Greenwich real estate.” — Jordan Fraade

On to today’s links:

Damn Kids
He gets by “through various freelance gigs and his wife’s income as a barista. This is typical of many Portlanders” – Claire Cain Miller

If you are going to be an academic, be an economist – Tyler Cowen

One way to get incomes growing again is to pay women more – Ben Walsh

What’s the world’s next poor, cool city? – Thomas Rogers

Stanford to offer a class on this weird thing called “startups” – Kyle Russell

Sobering Reminders
“It’s actually people with the least money who get the least sleep” – Olga Khazan

2013 data: Yep, we’ve still got a gender wage gap – Bryce Covert

Beyond unlimited breadsticks

Sep 15, 2014 21:55 UTC

“Is there something going on with Olive Garden?” a friend asked me on gchat earlier today. There is, indeed, something going on with Olive Garden. Last week, hedge fund Starboard Value — which owns almost 9 percent of Olive Garden — released a 294-page slide deck on what’s wrong with the chain restaurant’s operations (it’s “the mother of all food reviews,” says Jordan Weissman). Matt Levine helpfully indexed the good slides: “The breadsticks are slides 104 and 105, the pasta water is slide 164, and don’t miss slides 142 to 149, on alcohol, or slides 167 to 169, comparing dishes on Olive Garden’s website to pictures in the actual restaurants.”

One of the sticking points that got the most attention was Olive Garden’s signature unlimited breadstick deal. It isn’t that Starboard wants Olive Garden to ditch its deal, as many (including us, originally) reported, but just that the company would save money by waiting for customers to ask for more breadsticks, rather than bringing extra out that will just go to waste. “Starboard likes the unlimited breadsticks marketing, it just doesn’t like the way they’re delivered,” says Joe Weisenthal.

Vauhini Vara finds Starboard’s deck amusing, but isn’t sure its plan is actually practical. “While the Olive Garden section of the presentation focuses on making meals more Italian, in part by using more traditional Italian ingredients, another portion of the plan urges Olive Garden to lower food costs,” she writes. Those two things, she says, seem to be contradictory. That said, it’s clear that Olive Garden is lagging behind. Three of the top five chain restaurants saw sales rise last year, says Vara. Olive Garden’s, meanwhile, fell by four percent, to $3.61 billion last year from $3.78 billion in 2012.

Darden released its own slide deck today, noting, among other things, that “the Olive Garden brand renaissance is underway and delivering results.”  It also says that a fiscal year 2014 simplification project has saved the company over $30 million. However, the Business Insider staff decided to go to an actual Olive Garden restaurant today. It was not a fine dining experience. Just two years after Marilyn Hagerty’s viral rave review, things on the ground look pretty dismal for Darden these days.  — Shane Ferro

On to today’s links:

“Why frustrated second sons and medieval Anglo-Scottish border violence (partly) explain US healthcare costs” – Matthew Klein

McKinsey’s airy platitudes bode ill for its next half-century – Lucy Kellaway

Why the gender gap will eventually close – Tyler Cowen

“If Marriott wants its housekeepers to earn more, it should pay them more” – NY Mag

Important Wine News
There is no great stagnation – Annie Lowrey

Strange Bloomberg Headlines
“Is Everybody Single?” – Rich Miller

How the rich and the poor spend money – Derek Thompson

Dollar Days

Jordan Fraade
Sep 12, 2014 21:49 UTC
The U.S. dollar is on a roll. As global crises and conflicts worsen around the world, the value of the greenback against the yen, euro, and pound is rising steadily, fuelled by investor speculation that the Federal Reserve will send firmer signals on higher interest rates next week.Joe Wiesenthal says that this should embarrass those who assumed the Federal Reserve’s quantitative easing program would devalue the dollar. The Fed is expected to raise interest rates as soon as next year, and Wiesenthal notes, “When U.S. interest rates rise (especially when they’re rising to rates in other countries), holding the dollar becomes more compelling, because basically you’re getting paid to carry them.” Anticipation of that event has made the U.S. currency a safer bet than ever.The real reasons for the dollar’s winning streak, though, may lie abroad, where a perfect storm of events has helped the greenback outperform its biggest competitors. Last week, European Central Bank chair Mario Draghi cut interest rates in the euro zone, sending the value of the euro down to its lowest level in more than a year. The yen is at a six-year low compared to the dollar. And the pound has been sinking after Bank of England Governor Mark Carney announced that a rate hike was not in the UK’s near future (as Alan Mattich writes, uncertainty over next week’s Scottish independence referendum hasn’t helped either).

Writing with Mattich, Michael J. Casey says Japanese leaders may even welcome the falling yen after watching “some of the energy drain from the economy’s response to Prime Minister Shinzo Abe’s reforms.” A weaker yen may help resolve the country’s trade deficit “because its all-important exporters have struggled to sustain competitiveness.” But in and of itself, the Financial Times says, a falling yen won’t be enough to pull Japan out of its economic doldrums.

Martin Wolf makes a similar observation about the euro zone: Draghi’s asset-buying program is a good start, but it won’t be nearly enough. “Ideally,” Wolf says, “there should be a mixture of higher public investments and lower taxes, particularly in countries with room for fiscal manoeuvre.” In any event, Antonio Fatas says, the coming divergence between the U.S., which is likely to raise interest rates in the next year or so, and the euro zone, which will keep them low, could have unexpected consequences. The value of the euro relative to the dollar may or may not drop long-term as predicted. The only thing we can expect for sure is more volatility in the currency markets.

And this, Mohamed El-Erian says, is what we should really fear: “There are various ways that higher currency volatility can spill into other financial markets. It can alter the risk and reward profiles of cross-border investments. It can lead to losses in unhedged international equity exposures.”  (El-Erian made a similar point in the FT last month.) Amid all this volatility, Slate’s Jeremy Quittner says, there is one silver lining to the surging dollar: Americans can finally take that European vacation they’ve been thinking about. —Jordan Fraade

On to today’s links:

Graduates from tech schools and military academies have the highest starting salaries – Wonkblog

Uber, But For…
“Clients don’t have to interact with the cleaner if they don’t want to, which makes it feel as though they’re ordering a product, not human labor.” – Lydia DePillis

Peter Thiel passes Go, collects $200, and channels his inner Rockefeller – Wall Street Journal

Reaganomics should not be a straitjacket – James Pethokoukis

Vultures, Vultures Everywhere
Argentina’s Congress passed a bill to reroute its bond payments through local banks – Bloomberg News

Cost-cutting hedge fund hates fun, advises Olive Garden that unlimited breadsticks are inefficient – Business Insider

Why Stockholm is the hardest place in the world to rent an apartment – Tali Trigg

Pay phones

Jordan Fraade
Sep 11, 2014 22:16 UTC
The Apple Watch has gotten the lion’s share of the breathless tech coverage from Tuesday’s mega-event. But in the more immediate future, Apple will release two products that they hope will fundamentally change the way its customers spend money. The iPhone 6, an attempt to eat into Samsung’s success with large-screen smartphones, will debut next Friday. And Apple Pay, a mobile payment system whose goal is to make the checkout process faster, take the place of credit cards, and eventually replace physical wallets, will come in October.Walt Mossberg thinks that this is a sign the company truly belongs to Tim Cook now. Compared to predecessor Steve Jobs, who “liked to say that Apple lived at the intersection of technology and liberal arts … Tim Cook’s Apple appears headed to some different street corners — the intersections of technology and fashion, and technology and banking.” Danny Yadron agrees, noting that Apple Pay seems to have found a way to address the security issues that its new platform presents: “Corporate security experts, credit card companies and privacy hawks said Apple’s plan for consumers to tap their phones or smartwatches against a reader, instead of swiping a plastic card, appears to be more secure than traditional payments systems.” Another security feature to ease fears after a recent leak of nude celebrity photos: the devices will require a thumbprint scan on the new iPhone 6 smartphone to make the tap-and-go payments.

Apple’s decision to insert itself into transactions as a middleman isn’t sitting well with a number of businesses. The technology required for Apple Pay, according to the Wall Street Journal, is expensive and often burdensome, and several of the nation’s largest retailers have already announced that they’re not planning to opt in. In Europe, which is far ahead of the U.S. in this type of payment technology and where an estimated one in five cards is already contactless, the Financial Times points out that Apple hasn’t been able to sign up enough banks to distribute the platform.

On a more day-to-day level, Neil Irwin isn’t convinced that using a credit card is that hard in the first place. Apple’s promotional video showing the inconvenience of plastic credit cards, he says, “had a lot in common with those infomercials in which actors manage to horribly bungle the most basic tasks until some new product solves a nonproblem.” And Cass Sunstein is worried that Apple Pay customers might become careless, because “when consumers don’t use cash, and when payment is simple, they often end up spending a lot more than they otherwise would — and regretting it later.”

All of these speculations about Apple Pay’s utility take for granted that the product will be commercially successful. But Josh Brown sounds a note of caution amid all the celebrations. Pointing out that Apple’s stock took a dive immediately after the products were announced — and that the iPad was widely expected to be a flop when it first premiered four years ago — he says: “Snap judgments and table-pounding predictions about something totally new like iPad, ApplePay, the iWatch, the iMac, the iPod, the smartphone etc are utterly ridiculous. Make a few of these calls and then find out how little you know. I sure have.” That might prove true for other commentators too. — Jordan Fraade

On to today’s links:

Newest Scotland independence poll has No at 52, Yes at 48 – FT

Americans continue to work longer, weirder hours than everyone else – Jordan Weissmann

Your annual roundup of large corporations trying to tweet about 9/11 – Gothamist

A staple of the American diet is in cereous trouble – Stephanie Strom

Pays to Be Rich
This One Chart shows you just how miserable your flying experience will be unless you are very, very wealthy – Danielle Kurtzleben

Uh Oh 
RBS to Scotland: If you leave the UK, we’re leaving you – Jason Karaian

In Memoriam
“Where does the Moment of Silence come from?” – Eileen Shim

MORNING BID – He’s an importer-exporter

Sep 11, 2014 12:49 UTC

The stock market has, over time, gotten somewhat more used to the idea that U.S. federal government activities add to market consternation and volatility, not reduce it. In the 1990s, there used to be a catchphrase that “gridlock was good for equities,” but that came during a long period of economic growth and on the back of policies that Wall Street generally supported – financial services reform, welfare reform, and not much else. That’s no longer the case. We’ve already seen the detrimental effects on the markets of the U.S. debt ceiling fiasco that led to the first-ever downgrade of the U.S. credit rating in 2010 and subsequent fights about the debt ceiling (though that has abated somewhat).

The talk about “uncertainty” coming out of Washington is a somewhat overstated game – be it tax policy and the like, there’s always uncertainty in life – but the latest cause for volatility has been specifically related to the renewal of the Export-Import Bank, currently being batted around in Washington with the idea that Congress will end up renewing its charter for a few months (right now mid-2015 looks like the best bet) before invariably taking up the issue again.

It’s not unprecedented for this to be a political football (votes have been close in the past and it has been used as a poster child for Washington-related excess), but this year’s battle is more heated than most in its past. Ex-Im head Fred Hochberg, who spoke at a Reuters summit Wednesday, said the bank was at par with what others were doing and eliminating it would tilt the balance against U.S. exporters, threatening 205,000 jobs.

About one-fifth of its $37 billion in annual loans are for small businesses, but many in the GOP are unmoved. With the idea of an on-again, off-again situation emerging similar to the now-annual debt ceiling extension back-and-forth, some investors believe companies using the Ex-Im bank may head elsewhere for more secure sources of funding that are sure to be around for more than a few months before having to face another annoying fight about its future.

For evidence that the market is keeping this mind, look no further than shares of Boeing. That stock dropped 3.7 percent in the two days following the primary loss by Eric Cantor, one of the steadier supporters among the GOP of Ex-Im, and it took another hit later in the month, losing 2.9 percent in three days, after several other Republican leaders announced their opposition to the bank.

The ongoing attacks from the right, opposed to the idea of any kind of government-related financing device, pushed Boeing shares to a 10-month low in mid-August before shares started to recover. Of course, the aerospace giant is nobody’s idea of an aggrieved party, so there’s that, but they, and some of the other names that benefit from exports, might have to start dealing with more equity-market volatility if their future is to be thrown into question every few months.