Stocks stormed higher today as investors welcomed confirmation that the economy did not slip into a new recession in the 3Q. The Commerce Department reported that GDP grew at a 2.5% annual rate in the 3Q, up from 1.3% in the 2Q. Much of the increase was due to a 2.4% rise in consumer spending in the 3Q. It was the strongest GDP report in a year (if you call 2.5% strong).
Today’s “advance” GDP estimate is the first of three, so it is likely to be revised up or down in the weeks ahead. Stocks surged following the report and the Dow closed up 340 points, the S&P up 42 and the Nasdaq up 88. It was one of the strongest days this year.
Stocks had already opened higher before the GDP report came out on news from Europe. Eurozone leaders reportedly agreed that bondholders of Greek debt, including the big banks, will take a 50% haircut on the Greek debt they hold. The leaders also agreed to increase the size of the EFSF bailout fund from 400 billion euros to €1 trillion ($1.4 trillion). French President Nicolas Sarkozy said the bailout fund will be leveraged by four to five times.
While this news sent stocks higher, the reality is that the announcement was a disappointment. Most agree that Greek bondholders will have to take more than a 50% haircut. Some believe that the haircut will have to total 60-70% or more for Greece to avoid default. As I have written often recently, it is also widely believed that the bailout fund will have to expand to at least €2 trillion, especially if Italy and/or Spain require a serious bailout which is looking increasingly likely.
The European agreement, which came after a 10-hour meeting in Brussels, included a recapitalization of Eurozone banks and a potentially bigger role for the International Monetary Fund in strengthening the bailout package. Some analysts concluded that today’s Eurozone agreement, even though not a permanent solution, will likely mean that the European debt crisis will no longer be a big negative in the equity markets just ahead. Don’t count on it!
Obama Resorts to Executive Orders on Jobs Bill
President Obama’s recent $450 billion jobs plan was dead-on-arrival when it reached the Congress. Even Harry Reid couldn’t get it passed in the Democrat-controlled Senate. So late last week, Obama and his senior advisers decided they would pass as much of it as they legally can by use of Executive Orders which don’t require a vote of Congress.
Obama’s first executive action was to put in place new rules for federally guaranteed mortgages so that more homeowners, those with little or no equity in their homes, can refinance and avert foreclosure. Hmm…. Isn’t that what got us in this mess in the first place?
On Wednesday, he reportedly issued an Executive Order to change the rules on how college graduates must repay their student loans. Obama’s new plan would cap student loan payments at 10% of discretionary income and forgive the debt after 20 years, compared to the previous program where payments were 15% of discretionary income and forgiven after 25 years.
Obama’s aides say that he plans to issue at least one Executive Order per week until the end of the year. All presidents in modern times have used Executive Orders. But for them to implement a jobs program that Congress wouldn’t even vote on (read: a NO vote) is the height of arrogance!
I am reminded of a quote by Paul Begala, a senior adviser to President Clinton, on the subject of Executive Orders: “Stroke of the pen, law of the land, kinda cool.” No, I’d say it’s kinda sad!
Here’s a good article on the subject of student loans by one of my favorite writers, Bill Freeza, entitled Can the Youth Vote Be Bought For a Trillion Dollars? Very interesting.
Have a great weekend everyone!