John Bougearel

Under normal considerations, this week the market would simply focus on the FOMC statement and adv-GDP. But this week is far from normal. The Geithner hearings on Jan 27 should be the backdrop to the Bernanke reappointment which will take front and center stage.

A cloture vote to bring the debate for Bernanke’s reappointment to a quick end could come as early as Jan 27. If a cloture vote brings this debate to a swift end, I suspect it should be a brief moment of market jubilee, for there is far more angst in Washington about this reappointment than they are letting on. Of the 41 senators that have declared whether they are for or against Bernanke’s reappointment, so far 27 Senators have declared their support for Bernanke (63%), and 16 are against his reappointment. Bernanke needs 60% of the 100 votes.

20 Senators are undecided, and 37 have said nothing about Bernanke’s reappointment, according to Jim Bianco. Bianco is of the opinion that only a sharp stock market decline would sway the majority of non-committed Senators to vote in favor of Bernanke’s reappointment. Bernanke Nomination By The Numbers And What Saves Him. Bianco argues that Senators have been swayed by steep market declines during the financial crisis to vote in favor of the party line. Short of that, Senators will take a stand and vote no. Bianco does not believe last week’s scratch in the stock market is sufficient to sway a sufficient number of Senators to vote the party line.

Another equity trader opines that the big banks themselves might have been orchestrating a short term market decline last week to swing votes. “Also, I love how the MSM perpetuates the idea that a market sell off simply reflects “investor fear” over what a less bank-friendly Fed Chairman might portend. It couldn’t be that the banks themselves are doing the selling in order to create that appearance. That could never happen. Nope. Never.

Naked Capitalism’s Yves Smith commented “So the US has become a country of democracy by financial markets rather than the ballot box,Bianco believes, interestingly, that the market reaction is not over dismay at the prospect of losing Bernanke (as Matt Yglesias points out, Bernanke being replaces as chairman makes less of a difference to the Fed than one might imagine) than of the specter of the Administration floundering at the lack of a plan B.” http://www.nakedcapitalism.com/2010/01/tell-senate-no-on-bernanke-cloture.html

Given that MSM over the weekend has been trying to shore up investor confidence that Bernanke will be reappointed by declaring victory pre-emptively, that does two things. First, it makes it less likely the market will drop further on such angst in the early part of this week. Second, if Senators have been scared into voting the party line during this crisis, in part because of market free-falls, that is less likely to happen this time around since MSM is defusing the possibility. But, if the possibility heightens towards the end of the week, this could easily more than offset whatever bullish soundbite the financial markets might derive from a friendly Q4 GDP report. Again, if the cloture vote which could come as early as Wed Jan 27 does not go Bernanke’s way, the angst will begin to set in, and this will likely create downside risks into the beginning of Feb, the following week, which presumably would align well with some of my downside correlation models. We might dismiss the downside correlation models without further market angst surrounding Bernanke.

So, stay tuned into the Bernanke reappointment this week, more than anything else. It could go awry badly without a successful cloture vote needed to bring the debate to a swift end.