WASHINGTON, June 28, 2012 – This is one of those days when a pre-market opening column like ours is rendered fairly useless. By “useless,” we mean that probably sometime this morning today’s two main events—the Supreme Court’s long-awaited Obamacare decision (or non-decision) and the opening round of the latest doomed Euro-meeting—will render much of our preliminary info essentially useless as each has the capacity to be a game changer.
It’s also very possible that the markets will mainly be driven by quarter-end “window dressing” which we’ll get to anon.
Pundits have widely varying responses as they speculate about today’s announcement by the Supremes. One side of the Obamacare argument will have something to crow about by the end of the day, while the other side will not. However, as is always the case in Washington, both sides will loudly proclaim victory. The only monkey wrench here is the possibility that the Supremes won’t rule at all. Since, from a legal standpoint, no one has yet been harmed by the individual mandate clause—i.e., no one has yet been fined for refusing to buy health insurance—the court might just possibly rule that there’s no case since no one has yet been harmed.
That would be a psychologically bad outcome for all concerned, but such outcomes have happened in the past, at least in cases of lesser importance.
Whatever today’s ruling, it’ll be a little like that old TV game show, “Truth or Consequences.” As the show’s Wikipedia entry writes, “the premise of the show was to mix the original quiz element of game shows with wacky stunts.” If a contestant were able to correctly answer the host’s trivia question before “Beulah the Buzzer,” he’d be able to keep playing. If not, he’d be forced to perform one of those aforementioned wacky stunts.
Here’s a clip from a vintage 1966 T or C show hosted by a very-much-younger-than-today Bob Barker. It runs nearly 10 minutes. But if you’re a vintage TV fan or have nothing better to do, you’ll get the flavor of the era by wallowing in this clip made in the happier days of a better economy.
We’re bringing up this T or C metaphor for a purpose, however far-fetched the link might seem. As Wikimedia’s entry continues, “during Barker’s run as host, a side game, “Barker’s Box”, was played at the end of the show. Barker’s Box was a box with four drawers, and if a contestant picked all three drawers with money in it, they won a bonus prize… Barker also ended each episode with the phrase, “Hoping all your consequences are happy ones.”
Which gets us back to the Supremes. Today’s ruling is going to be a little like choosing a drawer In Chief Justice John Roberts’ box. Somebody’s going to get the money, someone’s not, and someone’s going to win a bonus prize. The only problem here is that not all the consequences are bound to be happy ones.
Obamacare was constructed, among other reasons, to aid American drug companies who didn’t want to have to deal with the possibility that the Feds might actually allow lower-priced drugs manufactured by these same companies to be imported from Canada. If the Obamacare construct is picked apart in whole or in part, this dubious protection might end up on the trash heap, the prospect of which might negatively affect pharmaceutical stocks which have been on a pretty nice tear lately even in a down market.
Also depending on the ruling, hospitals, medical devices, managed care companies, doctors, you name it, will be variously affected (or not) and their stock prices could be bolstered or eviscerated depending on how things come down.
The financial punditocracy opines that “this is all priced into the market already,” but we doubt that as no one but the machines seem to be trading currently. So we’ll have to watch and wait here to see how the Consequences of John’s Box work out. We will post a brief update to this column when the ruling comes down just to get our two cents’ worth in.
As far as the Eurocrats are concerned, we’ve been complaining all week that their “crucial” meeting, to run into the weekend, will come up with nothing of long-term consequence. If they do nothing, which is their custom, the market will probably tank on Monday. If they actually apply a short term Band-Aid, the market could actually stage a celebratory pop.
But a pair of external events could mess with even these scenarios. The first, to which we alluded earlier, is the wrap-up of the end-of-second-quarter “window dressing” this week. This is the (illegal) custom whereby fund managers big and small dump their losers and load up on perceived winning stocks just before the close of the current quarter. This way, when they print current holdings in either prospectuses or quarterly reports, they can be perceived as geniuses who held only winners over the past quarter, even if they bought those winners for top dollar and only just bought them two or three days before the end of the quarter.
Their prospectuses or quarterly reports only have to name the portfolio’s holdings as of the very end of the quarter. They don’t have to tell their customers just when those holdings were acquired. Hence, the dishonesty, described by the term “window dressing.” It’s this activity that may have been influencing the market’s fairly persistent bullish tone over the last several sessions in spite of the fact that national and world financial news has been almost uniformly lousy.
Typically, after particularly fierce window dressing, the market will tank on the first or second trading day of the new quarter because all the buying will have been done, and only the sellers will queue up to trade.
Which gets us to our second problem. There may be even less traders than usual next week, leading to further distortion. Due to the 4th of July holiday next week, the trading week is shortened. Making things worse, the holiday is smack dab in the middle of the week, so traders may just bail after the Supremes’ ruling today, given that almost no one is likely to be in the Wall Street sandbox next week. Making things still worse is the fact that, after this Friday’s close, the Euro-nutcases will still be dithering around, and who wants to make financial bets when this kind of headline uncertainty is swirling around?
So if everybody splits and heads to the beaches this weekend or early next week, trading is likely to be very thin and thus extraordinarily volatile based on fear of the news cycle.
As for us, we got killed on a couple of our short ETFs yesterday and took one (SDS) off while letting the other one (EFZ) ride. Given this morning’s numbers, we probably should have let SDS ride, but who really knows what they’re doing these days, frankly. It’s best to leave at least some hedges on. Some real game changer can always pop up in this kind of market.
Speaking of game changers—back in the early 1950s, the small resort town of Hot Springs, New Mexico answered a challenge from “Truth or Consequences’” original radio host, Ralph Edwards by renaming itself Truth or Consequences, New Mexico. Edwards rewarded them by visiting the town every year for the first weekend of May.
The town’s new name still stands. And even though Edwards is long gone, the city still parties every year during the first week of May when they celebrate “Fiesta Days.” Cute story.
But what impresses us even more is the photo below that depicts the typical bustling activity at Truth or Consequences’ hyper-frenetic City Hall. Frankly, if the Federal government were shrunk down to about this size and if it conducted about this much business, we’d all be enjoying the biggest American boom of all time right now rather than wondering which terrible economic shoe will be the next one to drop.
But alas, we still have the very best and very biggest government that taxpayer money can buy. That’s the Truth. You already know the Consequences.
We’ll be back probably some time this morning with our comments on the Supremes’ Obamacare ruling, whatever it might be.
UPDATE: We promised an update on the Obamacare legal flap and here it is: Obamacare has essentially been upheld. We’re putting together more on this over on our companion WTC site, The Prudent Man. We should have that posted at about 11 a.m. EDT.
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