For Whom The Bell Rings

They say a bell never rings in the market. This is not strictly true. Every now and then one does ring - usually two or three times, as in theatre intermissions - to announce a bull or a bear run is nearing its end. Well, U.S. President Barack Obama's recent speech regarding Chrysler was just such a bell.

Before I go any further, I feel that I must make it clear that I am a supporter of Mr. Obama on most issues, but every once in a while, we seem to have irreconcilable differences.

What did Mr. Obama say? He said he stands with the unions against Wall Street, and vehemently faulted hedge fund bond investors for insisting on their legal rights in a bankruptcy.

I am not sure if you grasp how momentous this is. A U.S. president effectively said the law be damned, the sanctity of commercial contracts be damned, if such constructs cause pain to unions.

Would you buy a U.S. industrial bond in such an environment? No, and neither would I, nor would most other rational bond buyers. Thus in this one act the U.S. President nearly guaranteed that the U.S. stock and bond markets, before year-end, would plunge until the administration realizes that capital cannot be coerced, Soviet-style, into keeping unproductive enterprises going.

It is not yet Hugo Chavez nationalizing foreign oil companies, or Fidel Castro nationalizing United Fruit, or Vladimir Putin robbing BP of its assets, but it is close. From now on, bond investors who up to now could rely on the courts to stand behind their bond indentures could be forced to fight the President of the United States.

To their credit, the bondholders insisted they'd fight for their property rights - but of course they don't have much chance against the President.

When the president of the largest mercantile power on earth effectively says the sanctity of contracts is not for the courts to uphold, and the mesmerized populace (and media) meekly assent, all commercial contracts thereby become devalued, and the market for such contracts - for what are stocks and bonds but that? - must eventually tank.

Are we seeing this happen right before our very eyes? Is this the beginning of a long and painful decline? I sure hope not.

Since early March, the market, just like in 1938, would likely stage a 40- to 50-per-cent rebound from the then-6,600 Dow's fair-value level, before likely going into a two-year funk. The rebound is two-thirds there, and you can forget the "likely": Mr. Obama just ensured the funk would be upon us before year-end.

From here on, the Dow could rise another 1,000 to 1,200 points - say about 15 per cent more. Enjoy it, but don't get taken by Mr. Obama's hypnotizing rhetoric. I'd use the last few hundred Dow points to lighten up. And if you own non-government bonds, be equally wary, because Mr. Obama will have no compunction taking your money and handing it to the unions that helped elect him, forgetting temporarily, if conveniently, that the rest of us, also had something constructive to do with his election.

Can you hear the bell ringing?