Thursday, September 11, 2008

Government Bottoms and Bailouts

All climactic US stock market bottoms have involved government intervention thus far:

Aug 16/07: Fed cuts
discount rate, telegraphs rate cuts (follows up with 50 basis pts in Sept)

Jan 22/08: Socgen bottom: Fed cuts emergency 75 & telegraphs more (another 50 next week)
S&P 1270

Mar 17//08:
Bear Stearns bailout bottom/new lending facilities S&P 1256
July 15/08: Fannie Mae/Freddie Mac announcement of future bailout
S&P 1200
Sep 8/08: Fannie Mae/Freddie Mac takeover S&P 1217 (Friday before)

Every major bottom has been in the 1200-1270 range and every rally has ultimately failed (we are still waiting for July and Sept bottoms to be breached however).

This tells me that market is not bottoming naturally (ie prices low/sellers exhausted/buyers bargain hunting). Perhaps one of the signs that a new bull will be here is when the market bottoms naturally.

What happens on the next Bailout Monday, this week (September 15th)? Washington Mutual (WaMu) and Lehman?

Since the Bear Stearns bailout (with the incessant bottom calling...a financial failed, market bottom- that is so 1998) I have been waiting for a period where more than one bank/broker goes under in the same week and then you get some type of climactic bottom that leads to a multi-month bear market rally (similar to September 2001-January 2002).

We had Fannie & Freddie last weekend and it looks like WaMu and Lehman won't make it much longer. That would be 4 in 1/2 weeks. Weirdly, that would qualify but I don't think these 4 will cut it. It may take a few more bankruptcies or bailouts plus weakness in other sectors (retail? as commodities have already crashed) to cause that type of washout.

Here is my list of candidates once LEH and WaMu are done. I have no special insight, just the way that they are trading:

Bear Stearns



Very Likely and soon?



National City





Eventually? Some type of takeunder/breakup?



Morgan Stanley

Full Disclosure: Puts on MER, C, AIG, MBI, SKF and SKF equity

No comments: