Small Business Philippines

Two weeks ago, I outlined two scenarios for how financial regulation could affect the stock market for the rest of 2010:  1) the politicians play ball and pass something, or 2) they play hardball so that nothing gets passed before the election.

The Senate’s approval of the financial reform package this past week bodes well for the first scenario.  Given the anti-Washington insider results in the congressional primaries last Tuesday, that’s not surprising since both parties risk facing voter discontent if they haven’t passed financial reform by the mid-term elections in November.

What’s also becoming clear—and may be contributing to the recent market turbulence—is that strong skeptical voices are still bellowing that the U.S. financial reform being considered is not enough.  Notably, NYU economist Nouriel Roubini, in a speech at my alma mater the London School of Economics last Tuesday, declared that the financial reforms are “cosmetic” and called for more radical measures. ¹ Then on Friday he predicted the possibility of stocks dropping another 20% if sovereign debt levels don’t go down. ²

This quandary creates a quandary for markets.  Just when equities are reeling form the European crisis, is there is seemingly no room to escape on the U.S. side.  The Democrats are control of both houses of Congress and the White House—so the U.S. reforms are not likely to get more rigorous than what is currently moving to passage.  Business is not happy because they think the reforms are too tough, and influential skeptic Roubini is not happy because he thinks they are too weak.

This is not to say all is lost.  After the reforms become law market players and commentators will closely monitor their implementation.  Surprises in this process could occur in either direction.  Strong implementation by the Democratic executive branch could placate influential cynics.  Healthy earnings, and the prospect of Republicans capturing congressional seats in November, could appease business once it’s clear that financial reform will not end healthy profits.   Of course it’s hard to predict which if either of these forces would prevail.  My point is that while the legislation is weaving it’s final path to passage we’re in a standoff that will beat up the market, providing long-term investors with a good opportunity to add to their equity positions while the politicians duke it out.

by:Thoughtsworththinking.net