Monday, September 22, 2008

UNBELIEVABLE WEEK PART 2



Last week felt like a month compressed into a week!! Exhausting to say the least...

I wrote as of last Wednesday that it had been an unbelievable week. Little did I know...

Let's add to the list I compiled:

  • SEC TEMPORARILY BANS SHORTING FINANCIALS
  • $700 BILLION BAILOUT FUND
  • TREASURY TO INSURE MONEY MARKET FUNDS
  • WACHOVIA/MORGAN MERGER?
  • GOLDMAN/MORGAN AND OTHERS DOWN 50% MIDDAY THURSDAY; THEN UP 100%+ OFF LOWS
  • DOW IS UP 700 IN A FEW HOURS THURSDAY; UP 1000 POINTS IN ABOUT 9 TRADING HOURS BY FRIDAY
  • THE FED & TREASURY HAVE SAVED THE DAY AGAIN; A NEW BULL MARKET (ACCORDING TO THE BULLS)

And then on Monday

  • Oil hits $130 (up $40 in a few trading days)
  • Market falls sharply and financials lead the way down (guess they can't blame the short sellers now)
  • Morgan Stanley gets money from Japan, maybe

Stepping back for a minute, it is difficult to draw conclusions just yet. Why?

1) The bailout fund proposed is huge at $700 billion. However, the Treasury can buy more than $700 billion over the lifespan of the “line of credit” since they can buy and resell as much as they wish, provided that it does not exceed $700 billion. However, what is to stop Treasury from asking for more at a later date.
2) Is it big enough? That depends on what the final resting point for the US housing market is and what happens to the credit and equity markets from here. Who really knows?
3) Will the legislation really pass?
4) It also depends on the structure of the bailout. Does Treasury pay a premium for the toxic waste paper and thereby allow banks to recapitalize or does it pay the current market price (as I would assume that the banks would not take a discount)? If it pays the market price, then can the banks raise capital to offset the huge losses. Does the government allow the banks to disregard their capital ratios?
5) What do the currency and treasury markets think of the bailout? Monday’s verdict was not very promising in that regard as the US dollar and bond markets tanked, along with soaring oil and sinking stocks.
6) Can the Treasury really manage all this junk? Even if it outsources this, can it be done in a timely manner?

7) I believe that the US in probably midway through its recession. That recession has not even fully been priced in to the stock market (crazy since it probably started late in 2007!). These measures MIGHT prevent the recession from worsening but it will not save the US economy from a long and protracted recession.

In my opinion, there is no free lunch. The market (what’s left of it anyway) is bigger than the government. Now that short selling financials has been banned, a layer of future demand has been removed. Today’s vicious selling in financials can not be blamed on short sellers. Therefore, longs probably came in and felt that they got a nice gift here (thanks to massive short covering and expiration hangover) and decided to sell.

I still believe that we are in a bear market (unless otherwise proved wrong) and I will operate for the time being with the winter outlook previously described.

One thing is clear: The US government confirmed on Thursday that a crash was likely by taking the action that it did as these were last resort desperation measures.

Therefore, if these measures do not work, a crash is still likely AND perhaps EVEN MORE likely than pre-bailout Thursday as all hope is lost by the bailout bulls and there is less short covering to lessen the crash.

While I don’t doubt that “they” have something else up their sleeve (perhaps banning all short selling, reinstating the uptick rule, 200 basis points of Fed Funds cuts, 225 basis points of the discount rate, etc…), I believe that this was likely the Big One that they used on Thursday.

I plan to keep my shorts on for the time being and wait and see....

1 comment:

Anonymous said...

Nice posts. And yes, that was a most exhausting week. The new headlines coming out every 2 or 3 hours made my jaw drop each time. That was hands down the most INSANE week on Wallstreet that I've ever witnessed!

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