The Stake of the Union - 01/27/10

If Obama commits to a renewed focus on the under/unemployment issue, a spirited rally in equities should follow. But if the President continues his tirade against the banking industry, stocks will continue to be pressured.

"To an investor, the success or failure of the President's speech hinges on how little the President discusses the banks. If he only gives them a brief mention with the typical rhetoric or even if he highlights that one firm cut the percentage payout by a third and gave the money to charity, it would be a good sign. If he makes financial reform the centerpiece of his 2010, it will not be bad because reform is bad, it will be bad because it is a sign that the President is out of touch. It is hard to think of many 'good one term presidents' who did not have a good economy."

-- Mike O'Rourke, CMT

As the lynx-eyed Mike O'Rourke writes this morning, punishing banks is not a way to improve lending activity. Nor will making bank reform (like health care reform) the center piece of the President's agenda remedy the employment situation.

Tonight's State of the Union address will be important to the U.S. stock market, and it will define whether the President will become more centrist in policy and more focused on the issue of jobs.

If Obama's message is that he is committed to a renewed focus on the under/unemployment issue, a spirited rally in equities should follow. However, if the President, having learned little from the Scott Brown win in Massachusetts, proves to be out of touch by continuing the tirade against the banking industry, we can retire our Graham and Dodd's Security Analysis in favor of Machiavelli's The Prince.

In the later case, populism will have triumphed over and trumped the macro, and stocks will continue to be pressured.